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ABOVENET INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis should be read together with the Company's
consolidated financial statements and related notes appearing in this Quarterly
Report on Form 10-Q and in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2011.
Business
Overview
AboveNet, Inc. (which together with its subsidiaries is sometimes hereinafter
referred to as the "Company," "AboveNet," "we," "us," "our" or "our Company")
provides high-bandwidth connectivity solutions primarily to large corporate
enterprise clients and communication carriers, including Fortune 1000 and FTSE
500 companies, in the United States ("U.S.") and the United Kingdom ("U.K.").
Our communications infrastructure and global Internet protocol ("IP") network
are used by a broad range of companies such as commercial banks, brokerage
houses, insurance companies, investment banks, media companies, social
networking companies, web-centric companies, law firms and medical and health
care institutions. Our customers rely on our high speed, private optical network
for electronic commerce and other mission-critical services, such as business
Internet and cloud applications, regulatory compliance, disaster recovery and
business continuity. We provide lit broadband services over our metro networks,
long haul network and global IP network utilizing equipment that we own and in
some cases, lease and operate. In addition, we also provide dark fiber services
to selected customers. Unlike competitive local exchange carriers ("CLECs"), we
do not provide voice services, services to residential customers or a wide range
of lower-bandwidth services. We also sometimes resell equipment and provide
certain other services to customers, which are sold at our cost, plus a margin.
We are a facilities-based provider of high-bandwidth connectivity solutions that
provides services in 17 markets in the U.S. and four markets in Europe through
our fiber-optic networks in metro markets, our long haul network connecting
those markets and our IP network. Our metro market networks have significant
reach and breadth and span over 2.3 million fiber miles across over 9,000 cable
route miles. Our long haul fiber-optic communications network spans over 13,000
cable route miles and interconnects each of our U.S. metro networks and each of
our European markets. We operate DWDM equipment over this fiber to provide large
amounts of bandwidth capability between our metro networks for our customer
needs and for our IP network. We use undersea capacity on the Japan-US Cable
Network ("JUS") to provide connectivity between the U.S. and Japan and capacity
on the Trans-Atlantic undersea telecommunications network ("TAT-14") and other
trans-Atlantic cables to provide connectivity from the U.S. to Europe and from
London to continental Europe.
We operate a Tier 1 IP network over our metro and long haul networks with
connectivity to the U.S., Europe and Japan. Our IP network operates using
advanced routers and switches that facilitate the delivery of IP transit
services and IP-based virtual private network ("VPN") services. A hallmark of
our IP network is that we have direct connectivity to a large number of IP
networks operated by others through peering agreements and to many of the most
important bandwidth centers and peering exchanges.
We opened the Denver, Paris, Amsterdam and Frankfurt markets in early 2011. Our
metro and long haul market metrics discussed herein are as of March 31, 2012 and
do not include additions to the networks made in those or other markets since
that date. We intend to open Toronto as a market and to substantially expand
operations in Atlanta in 2012.
Merger Agreement with Zayo Group, LLC
On March 18, 2012, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Zayo Group, LLC, a Delaware limited liability company
("Parent"), and Voila Sub, Inc., a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), providing for the merger of Merger Sub with
and into the Company (the "Merger"), with the Company surviving the Merger as a
wholly owned subsidiary of Parent. The Merger Agreement was unanimously approved
by the Company's Board of Directors. For more information regarding the Merger
Agreement, see Note 14, "Merger Agreement with Zayo Group, LLC," to the
accompanying consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.
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Business Strategy
Our primary strategy is to become the preferred provider of high-bandwidth
connectivity solutions in our target markets. Specifically, we are focused on
the sale of high-bandwidth transport solutions to enterprise and carrier
customers. The following are the key elements of our strategy:
· Use the depth and breadth of our metro networks to provide our solutions, not
only in central business districts, but also into the suburbs where many data
centers, office parks and back office data center operations reside.
· Leverage our excellent relationships with our customers and our strong balance
sheet to invest in customers in ways our competition may find difficult.
· Provide connectivity in Tier 1 markets with a density of enterprise and carrier
customers and third party data centers, where many potential customers locate
their IT infrastructure.
· Connect to data centers where many enterprise customers locate their
information technology infrastructure.
· When needed, differentiate ourselves by providing a high level of customization
of our services designed to meet our customer's requirements.
· Deliver the services we offer over our metro networks, which often provide our
customers with a dedicated pair of fibers. This use of dedicated fiber is a
low latency, physically secure, flexible and scalable communications solution,
which we believe is difficult for many of our competitors to replicate.
· Use our metro fiber assets to drive the adoption of leading edge inter-city
wide area network (WAN) services such as IP VPN services and long haul
connectivity solutions.
· Intensify our focus on sales to media companies with high-bandwidth
requirements.
· Provide the infrastructure services that our customers need as their networks
expand through the use of virtualization and cloud services.
· Fulfill the needs of customers that are required to comply with financial and
other regulations related to data availability, disaster recovery and business
continuity.
· Target Internet connectivity customers that can leverage the scalability and
flexibility of fiber access to their premises to drive their electronic
commerce and other high-bandwidth applications, such as social networking,
gaming and digital media transmission.
· Provide telecommunications carriers, also referred to as carriers, that lack a
last mile solution for their customers with a broad array of lit solution
alternatives.
· Develop and use independent sales agents as a means to provide our services to
a wider array of potential customers.
We are able to provide high quality, customized services at competitive prices
as a result of a number of factors, including:
· Our significant experience in providing high-end customized network solutions
(such as DWDM) for enterprises and telecommunications carriers.
· Our focus on providing certain core optical and Ethernet-based services rather
than the full range of more complex legacy telecommunications services.
· Our metro networks typically include fiber cables with 432, and in some cases
864, fibers in each cable, which is substantially more fiber than we believe
most of our competitors have installed. This provides us with sufficient fiber
inventory to supply dedicated fiber services to customers, as appropriate.
· Our modern networks with advanced fiber-optic technology are less costly to
operate and maintain than older copper-based networks.
· Our use of state-of-the-art technology in all elements of our networks, from
fiber to optical and IP equipment, provides leading edge solutions to
customers.
· The architecture of our metro networks, which facilitates high performance
solutions in terms of loss and latency.
· The spare conduit we install, where practical, allows us to install additional
fiber-optic cables on many routes without the need for additional
rights-of-way. This use of the depth and breadth of our network reduces
expansion and upgrade costs in the future, and provides significant capacity
for future growth.
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Our Networks and Technology
Service Coverage
Through our metro, long haul and IP networks, we provide services in and between
the following markets:
· Boston
· New York City metro
· Philadelphia
· Baltimore
· Washington, D.C./Northern Virginia corridor
· Atlanta
· Miami
· Houston
· Dallas
· Austin
· Denver
· Phoenix
· Los Angeles
· San Francisco Bay area
· Portland
· Seattle
· Chicago
· London
· Paris
· Amsterdam
· Frankfurt
We operate metro networks in each of these markets, except Miami. We offer a
limited number of WAN services in a number of other markets. Including fiber we
own, fiber acquired by us through leases and indefeasible rights-of-use
("IRUs"), as well as fiber provided by us to others through leases and IRUs, our
metro networks consist of over 2.3 million fiber miles and over 9,000 cable
route miles. Our network footprint typically allows us to serve data centers,
enterprise locations, network POPs, central offices, carrier hotels and traffic
aggregation points, not just in the central business district but across the
entire metropolitan area in each market. Within our metro networks, our
infrastructure provides ample opportunity to access many additional buildings by
virtue of its extensive footprint coverage and over 7,000 network access points
that can be utilized to build laterals or connect to other networks, thereby
providing access to additional locations. In Miami, we provide services over our
long haul and IP networks. In Paris, Amsterdam and Frankfurt, we provide
services over a shared network operating on leased fiber as well as over our
long haul and IP networks.
Key Metro Network Attributes
· Network Density - Our metro networks typically contain 432 and up to 864 fiber
strands in each cable. We believe that this fiber density is significantly
greater than that of most of our competitors. This high fiber count allows us
to add new customers in a timely and cost effective manner by focusing
incremental construction and capital expenditures on the laterals that serve
customer premises, as opposed to fiber and capacity upgrades in our core
networks. Thus, we have spare network capacity available for future growth to
connect an increasing number of customers.
· Modern Fiber - We have deployed modern, high quality optical fiber that can be
used for a wide range of network applications. Standard single mode fiber is
typically included on most cables while longer routes also contain non-zero
dispersion shifted fiber that is optimized for longer distance applications
operating in the 1550 nm range. Much of our network is well positioned to
support the more stringent requirements of transport at rates of 40 Gbps and
above.
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· High Performance Architecture - We design customer networks with direct,
optimum routing between key areas and in a manner that minimizes the number of
POP locations, which enables us to deliver our services at a high level of
performance. Because many of our metro lit services are delivered over
dedicated fibers not shared with other customers, a customer's private network
can be optimized for its specific application. Further, by using dedicated
fiber, we can deliver our services without the need to transition between
various shared or legacy networks. As a result, our customers experience
enhanced performance in terms of parameters such as latency and jitter, which
can be caused by equipment interface transitions. The use of dedicated fibers
for customers also permits us to address future technology changes that may
take place on a customer specific basis.
· Extensive Reach - Our metro markets typically have significant footprints and
cover a wide geography. For example, the New York market includes a significant
Manhattan presence and extends from Stamford, CT in the north through Delaware
in the south, covering a large part of New Jersey. Similarly, the San Francisco
market extends through to San Jose and the Dallas network incorporates the Fort
Worth area.
On-Net Buildings
Our metro networks connect to over 3,200 buildings in the U.S. and Europe
through our lateral cables, which cover approximately 1,500 cable route miles
and over 160,000 fiber miles (which are part of the 2.3 million fiber miles
previously described). These connected buildings are referred to as on-net
buildings.
· Enterprise Buildings - Our network extends to over 2,600 enterprise locations,
many of which house some of the biggest corporate users of network services in
the world. These locations also include many private data centers and hub
locations that are mission-critical for our customers.
· Network POPs - We operate over 120 network POPs with functionality ranging from
simple, passive cross-connect locations to sites that offer interconnectivity
to other service providers and co-location facilities for customer equipment,
including over 20 Type 1 POPs. These POPs are typically larger presences
located in major carrier hotels complete with network co-location and
interconnectivity services.
· Central Offices, Carrier Hotels and Data Centers - Our network connects to over
200 central offices in the markets that we serve. The network also has a
presence in most significant carrier hotels within our active markets. We
currently connect to buildings containing over 500 data centers, of which over
350 are third party data center locations.
· Additional Buildings - In addition to the on-net buildings that we connect to
with our own fiber laterals, we have access to additional buildings through
other network providers with which we have agreements to provide fiber
connectivity to our customers.
Long Haul Network
We operate a nationwide long haul network interconnecting each of our markets
that spans over 13,000 cable route miles. With the exception of the route
between New York and Washington, D.C., which we constructed and own, the
overland portion of our long haul network is based on fiber either leased or
acquired, typically under long-term agreements. We have deployed DWDM equipment
along this network that provides significant bandwidth capability between our
metro networks. This network is based on ultra long haul technology that
requires fewer intermediate regeneration points to deliver our services between
major cities and expands our high-bandwidth service capability between our metro
markets. We are currently in the process of updating most of the network to at
least 40 Gbps capacity from 10 Gbps capacity. We connect the U.S. and European
portions of our long haul network with undersea capacity, including capacity on
the TAT-14 cable. We also connect our U.S. markets to Tokyo on the JUS cable.
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IP Network
We operate a global Tier 1 IP network with connectivity in the U.S., Europe and
Japan. In the U.S., most of our metro networks have multiple IP hubs where we
can provide Internet connectivity. We peer and provide connectivity in
high-bandwidth data centers and Internet exchange locations, including many of
those operated by the major providers, such as Equinix. We have extended our
ability to provide IP connectivity through our metro networks by using our fiber
to bring our services to a wider set of customers. In addition to the U.S., the
IP network has a presence in each of Tokyo, London, Paris, Amsterdam and
Frankfurt, including the major exchanges in these markets such as LINX, AMS-IX
and JPIX.
The core portion of our IP backbone network is based on multiple 10 Gbps long
haul links and utilizes advanced Juniper and Cisco routers and switches to
direct traffic to appropriate destinations. Our IP core infrastructure is based
on next generation equipment that supports advanced IP services such as VPNs and
is optimized to support high-bandwidth customers.
As a Tier 1 IP network provider, we have peering arrangements with most other
providers which allow us to exchange traffic with these other IP networks. We
have devoted a substantial amount of time and resources to building our
substantial peering infrastructure and relationships and we believe that this
extensive peering fabric, combined with our advanced network, produces a
positive customer experience.
Network Management
Our global network management center ("NMC") is located in Herndon, Virginia and
provides round-the-clock network surveillance, provisioning and customer
service. Our metro networks, long haul network, IP network and the private
networks we set up for our customers, which link together two or more of their
locations, are constantly monitored in order to respond to any degrading network
conditions or network outages. The NMC's staff serves as the focal point for
managing our service level agreements, or SLAs, with our customers and
coordinating network maintenance activities. Our NMC also serves as our focal
point for provisioning new services on our optical network. We work closely with
our customers to ensure that all services are turned up in a timely and error
free manner.
Rights-of-Way
We obtain right-of-way agreements and governmental authorizations to enable us
to install, operate, access and maintain our networks, which are located on both
public and private property. In some jurisdictions, a construction permit from
the local municipality is all that is required for us to install and operate
that portion of the network. In other jurisdictions, a license agreement, permit
or franchise may also be required. These licenses, permits and franchises are
generally for a term of limited duration. Where necessary, we enter into
right-of-way agreements for use of private property, often under multi-year
agreements. We lease underground conduit and overhead pole space and license
rights-of-way from entities such as incumbent local exchange carriers ("ILECs"),
utilities, railroads, state highway authorities, local governments and transit
authorities. We strive to obtain rights-of-way that afford us the opportunity to
expand our networks as our business further develops.
Services
We provide high-bandwidth connectivity solutions, primarily in three service
groups: fiber infrastructure services, metro services and WAN services. We also
resell equipment and provide technical services to customers, which are sold at
our cost, plus a margin. Unlike CLECs, we do not provide voice services,
services to residential customers or a wide range of lower-bandwidth services.
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Fiber Infrastructure Services
Our fiber infrastructure services focus on the lease of dedicated dark fiber to
telecommunications carriers, enterprises, Internet and web-centric businesses
and other customers that operate their own networks independent of the incumbent
telecom companies. In addition to leasing dark fiber, we offer maintenance of
dark fiber networks, the provisioning of co-location and in-building
interconnection services, typically at our POP locations, and also provide
certain telecommunication services on a time and materials basis.
Our fiber infrastructure services feature:
· An extensive network footprint that extends well beyond the central business
district in most markets.
· The expertise and capability to add off-net locations to the network in a cost
competitive manner.
· Modern, high quality fiber that meets stringent technical requirements.
· Customized ring configurations and redundancy requirements in a private
dedicated service.
· 7x24 monitoring of the network by our NMC.
Demand for fiber services is driven by key business initiatives including
business continuity and disaster recovery, network consolidation and
convergence, growth of wireless communications, and industry-specific
applications such as high definition video transport and patient record
management. Typically, Fortune 1000 and FTSE 500 enterprises with data intensive
needs in industries such as financial services, social networking, technology,
media, retail, energy and healthcare comprise the target customer base for our
fiber optic infrastructure offerings.
Metro Services
We offer a number of high-bandwidth metro service offerings in our active metro
markets ranging from 100 Mbps to 40 Gbps connectivity. These services range from
simple point-to-point Ethernet connectivity to complex multi-node
wavelength-division multiplexing ("WDM") solutions. Our metro services have a
number of important features that differentiate us from many of our competitors:
· A substantial portion of our metro services are deployed over dedicated fiber
from end-to-end, or out from a shared router.
· This dedicated fiber provides customers with significant scalability for any
increasing traffic demand.
· A service based on dedicated fiber provides a high level of security, a key
concern for many high-bandwidth customers across a range of industries.
· Our network architecture is not based on routing through central offices, which
reduces network distances between customer locations and the resulting latency.
· Some of our metro services are offered without the need for the customer to
provide space and power, which may be difficult or expensive to obtain in many
data centers.
· A significant portion of our service offerings are Ethernet-based, not older
TDM-based services.
We offer private, customized optical network deployments that we build for our
largest customers with very specific needs. These customers are typically large
enterprise companies that have significant bandwidth requirements and value a
completely private solution. These solutions often involve extensive network
construction to specific critical customer locations such as private data
centers and trading platforms with dedicated WDM equipment configured in
accordance with the customer's needs.
In the past several years, we have expanded our metro services capability beyond
customers with very high-bandwidth (multiple wave) requirements by offering a
number of wave and Ethernet products aimed to serve more moderate
bandwidth/circuit requirements. These offerings include basic and enhanced wave
services, which are based on dedicated, private fiber and equipment
infrastructure from end-to-end and provide a solution for customers looking for
a WDM-based service between two metro locations. The Basic Wave offering
provides our lowest cost wave service, while our Enhanced Wave service has a
slightly higher initial cost, but provides the customer substantial ability to
expand its service capabilities.
We have also expanded our WDM solutions in a number of markets through our Core
Wave offering, which provides wave services through pre-positioned equipment and
allows faster turn up of services and greater flexibility of use.
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We also offer a full range of Metro Ethernet services including point-to-point
and multi-point service configurations at speeds from 100 Mbps to 10 Gbps (10000
Mbps) speeds. We offer three different classes of our Metro Ethernet services
with three different price points (higher, middle and lower) based upon the
level of service provided: (1) Private Metro Ethernet which utilizes customer
dedicated equipment and fiber to deliver a completely private service with all
of the associated operational, performance and security benefits; (2) Dedicated
Metro Ethernet which utilizes shared equipment with reserved/guaranteed
capacity, delivered to the customer location through dedicated fiber; and (3)
Standard Metro Ethernet which utilizes shared equipment on a shared capacity
basis, delivered to the customer location through dedicated fiber.
WAN Services
We offer a number of wave, Ethernet and IP-based services within our WAN
Services offering. Most of these services provide connectivity solutions between
our metro markets and target high-bandwidth customers requiring transmission
speeds of at least 100 Mbps. In addition, we provide high-speed Internet
connectivity to our customers including high-end enterprise, web-centric and
carrier/cable companies. Each of our WAN services is differentiated by our
significant metro fiber resources that allow us to extend the capability of our
core networks to the customer in a secure and cost-effective manner.
Our long haul services provide inter-city connectivity between our metro markets
on our ultra long haul network at a variety of speeds ranging from 1 Gbps to 10
Gbps. Our service offerings require a minimum of regeneration sites, which
improves our ability to be competitive from both a price and speed of
installation perspective while reducing the number of equipment interfaces
required to deliver our service.
The attractiveness of our long haul services to our customers is further
enhanced by our ability to extend the service from our long haul POP to the
customer's premises through our metro networks, thereby providing an end-to-end
solution. This flexibility and reach enables us to provide our long haul
services on a differentiated basis.
We operate a Tier 1 IP network that provides high quality Internet connectivity
for enterprise, web-centric, Internet and cable companies. We offer connectivity
to the Internet at 100 Mbps, 1 Gbps and 10 Gbps port levels in most of our
active metro markets in the U.S. and Europe. We believe our extensive number of
peering partners, global reach and uncongested network approach produces a
positive experience for our customers. In addition to selling IP connectivity at
data centers and other major IP exchanges, we offer our Metro IP service where
we combine our metro fiber reach to deliver Internet connectivity to customer
premises. This service offering extends our significant IP capability, without
the dilutive impact of traditional, shared access methods, to the customer
location over dedicated fiber that will support full port speeds.
We also offer a suite of advanced Ethernet and IP VPN services that provide
connectivity between multiple locations in different cities for our customers.
These services provide flexibility such as the ability to prioritize different
traffic streams and the ability to converge multiple services across the same
infrastructure. These advanced VPN services, which include VPLS services, offer
point-to-point and multipoint connectivity solutions based on MPLS technologies
with the same high-bandwidth scalability that our IP connectivity service
allows. Unlike most of our competitors, these services can be extended from our
POPs to customer locations within one of our metro markets through dedicated
fiber, thereby avoiding transitions through shared or legacy networks thatcan
reduce performance quality.
Sales and Marketing
Our sales force is based across most of our current U.S. and European service
markets, is comprised of approximately 110 sales professionals and is supported
by a team of sales engineers who provide technical support during the sales
process. Our sales force primarily focuses on enterprise customers, including
Fortune 1000 companies in the U.S. and FTSE 500 companies in Europe, that have
large bandwidth requirements. We also sell through independent third party
agents to reach specific geographic and vertical markets.
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Our sales strategy includes:
· Positioning ourselves as a premier provider of high-bandwidth connectivity
solutions.
· Focusing on Fortune 1000 enterprises as well as content rich data companies
(i.e. media, healthcare and financial services) that require customized private
optical solutions.
· Expanding our sales reach through independent sales agents who specialize in
specific geographic and vertical markets.
· Emphasizing the high quality, cost effective, secure and scalable nature of our
private optical solutions.
· Communicating our capabilities through targeted marketing communication
campaigns aimed at specific vertical markets to increase our brand awareness in
a cost effective manner.
· Providing last mile lit solutions to long haul carriers who lack the capability
to provide this to their customers.
· Capitalizing on our presence in over 500 data center locations, which house IT
infrastructure for many enterprises and cloud computing capabilities. · Leveraging our strong balance sheet with a willingness to invest capital to
grow with our customers.
Customers
We serve a broad array of customers including leading companies in the financial
services, web-centric, media/entertainment and telecommunications sectors, as
well as certain local, state and federal government entities, in some cases
through third party integrators. Our networks meet the requirements of many
large enterprise customers with high data transfer and storage needs and
stringent security demands. Major web-centric companies similarly have needs for
significant bandwidth and reliable networks. Media and entertainment companies
that deliver bandwidth-intensive video and multimedia applications over their
networks are also a growing component of our customer base. Telecommunications
service providers continue to utilize our networks to connect to their
customers, as well as to data centers and other traffic aggregation points. Key
drivers for growth in the consumption of telecommunications and bandwidth
services include the increasing demand for disaster recovery and business
continuity solutions, the expansion of cloud computing service offerings, the
fast paced growth of social networking and gaming, compliance requirements under
complex regulations such as the Sarbanes-Oxley Act and the Health Insurance
Portability and Accountability Act (HIPAA) and exponential growth in data
transmissions due to new modalities for communications, media distributionand
commerce.
Executive Summary
Overview
The components of our operating income are revenue, costs of revenue, selling,
general and administrative expenses and depreciation and amortization. Below is
a description of these components. We are reporting operating income for the
three months ended March 31, 2012 and 2011, as shown in our unaudited
consolidated statements of operations included elsewhere in this Quarterly
Report on Form 10-Q.
The demand for high-bandwidth data transport services continues to increase. We
believe that our experience in the provision of these services, our customer
base and our robust and extensive network should enable us to take advantage of
this growing demand. Although the competitive landscape in our industry is
challenging and constantly shifting, we believe that we continue to be well
positioned for continued growth in the future.
Key Performance Indicators
Our senior management reviews a group of financial and non-financial performance
metrics in connection with the management of our business. These metrics
facilitate timely and effective communication of results and key decisions,
allowing management to react quickly to changing requirements and changes in our
key performance indicators. Some of the key financial indicators we use include
cash flow, monthly expense analysis, new customer installations, net new revenue
booked, capital committed and expended and net revenue attrition. We define net
revenue attrition as the reduction in monthly recurring revenue ("MRR") for
customers with net decreases in MRR (as a result of terminations, price declines
and other decreases, which are offset by any increases) divided by total revenue
(excluding contract termination revenue) over a given period.
Some of the most important non-financial performance metrics measure headcount,
IP traffic growth, installation intervals and network service performance
levels. We manage our employee headcount changes to ensure sufficient resources
are available to service our customers and control expenses. All employees have
been categorized into, and are managed within, integrated groups such as sales,
operations, engineering, finance, legal and human resources. Our worldwide
headcount was 713 employees as of March 31, 2012, 616 of which were employed in
the U.S., 93 in the U.K. and one each in the Netherlands, Germany, France and
Japan.
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First Quarter 2012 Highlights
Our consolidated revenue increased by $13.3 million, or 11.6%, from $114.4
million for the three months ended March 31, 2011 to $127.7 million for the
three months ended March 31, 2012, which reflected a $7.5 million increase in
our domestic WAN services. Additionally, in the U.S., our revenue from metro
services and fiber infrastructure services increased by $3.8 million and $1.4
million, respectively, for the three months ended March 31, 2012 compared to the
three months ended March 31, 2011. Consolidated other revenue, which includes
contract termination revenue of $0.7 million and equipment sales of $2.5
million, was $3.3 million for the three months ended March 31, 2012, compared to
$4.7 million for the three months ended March 31, 2011. Revenue from our foreign
operations, primarily in the U.K., increased by $2.0 million for the three
months ended March 31, 2012 compared to the three months ended March 31, 2011.
For the three months ended March 31, 2012, we generated operating income of
$31.1 million, compared to operating income of $26.1 million for the three
months ended March 31, 2011 and net income of $18.4 million for the three months
ended March 31, 2012, compared to net income of $14.5 million for the three
months ended March 31, 2011. At March 31, 2012, we had $120.7 million of
unrestricted cash, compared to $118.4 million of unrestricted cash at December
31, 2011, an increase in liquidity of $2.3 million. The increase in cash at
March 31, 2012 was primarily attributable to the cash generated by operating
activities of $44.0 million less cash used to purchase property and equipment of
$41.0 million adjusted for the changes in working capital components.
For the three months ended March 31, 2012, our cash flow generated by operating
activities increased compared to the three months ended March 31, 2011 as a
result of the improvement in operating results described above. We believe,
based on our business plan, that our existing cash, cash from our operating
activities and funds available under our $250 Million Secured Revolving Credit
Facility will be sufficient to fund our operations, planned capital expenditures
and other liquidity requirements at least through June 30, 2013.
2012 Outlook
We believe that based upon our contracted projects awaiting delivery to
customers and our sales pipeline, we will continue to add to our revenue base in
2012. We have access to financing through our $250 Million Secured Revolving
Credit Facility, if needed. Sales orders for the three months ended March 31,
2012 were higher than sales orders for the three months ended March 31, 2011 but
slightly below our internal 2012 sales target. Churn, which is comprised of
terminations and downgrades of orders, was slightly lower in the three months
ended March 31, 2012 than our 2012 internal target. Net revenue attrition, as
previously defined, for the three months ended March 31, 2012, was in line with
net revenue attrition for the three months ended March 31, 2011 as a percentage
of revenue. We cannot predict our net revenue attrition, sales orders or churn
for 2012. While most of our revenue is derived from fixed term customer
contracts, a meaningful portion of our revenue is generated from orders that are
past their contractual expiration date for which we provide services that are
billed on a month-to-month basis. To the extent that our fixed term contractual
revenue is not renewed or our month-to-month revenue is not extended or put
under a new fixed term contract, or new sales orders do not replace the revenue
loss from churn, our revenue growth rate may be lower than our historical
revenue growth rate and our cash flow may be negatively affected.
In early 2011, we connected Miami to our long haul network, opened the Denver
metro market and began providing certain services over leased fiber in Paris,
Amsterdam and Frankfurt. In 2012, we plan to commence operations in Toronto and
significantly expand operations in Atlanta.
For 2012, we will continue to make investments in customer capital and
infrastructure to increase the reach of our networks.
On December 7, 2011, our Board of Directors authorized the Repurchase Program
for the purchase of up to $200.0 million of our Common Stock through December
31, 2012. Through March 31, 2012, we purchased 41,157 shares at a total cost of
$2.7 million, under the Repurchase Program.
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Revenue
Revenue derived from leasing fiber optic data transport infrastructure and the
provision of data transport and co-location services is recognized as services
are provided. Non-refundable payments received from customers before the
relevant criteria for revenue recognition are satisfied are included in deferred
revenue in the accompanying consolidated balance sheets and are subsequently
amortized into income over the fixed contract term.
A substantial portion of our revenue is derived from multi-year contracts for
services we provide. We are often required to make an initial outlay of capital
to extend our network and purchase equipment for the provision of services to
our customers. Under the terms of most contracts, the customer is required to
pay a termination fee or contractual damages (which decline over the contract
term) if the contract were terminated by the customer without basis before its
expiration to ensure that we recover our initial capital investment, plus an
acceptable return. We also derive revenues from annual and month-to-month
contracts.
Costs of revenue
Costs of revenue primarily include the following: (i) real estate expenses for
all operational sites; (ii) costs incurred to operate our networks, such as
licenses, rights-of-way, permit fees and professional fees related to our
networks; (iii) third party telecommunications, fiber and conduit expenses;
(iv) repairs and maintenance costs incurred in connection with our networks; and
(v) employee-related costs relating to the operation of our networks.
Selling, General and Administrative Expenses ("SG&A")
SG&A primarily consist of (i) employee-related costs such as salaries and
benefits for employees not directly attributable to the operation of our
networks, in addition to stock-based compensation expenses and incentive bonus
expenses for all employees; (ii) real estate expenses for all administrative
sites; (iii) professional, consulting and audit fees; (iv) certain taxes (other
than income taxes), including property taxes and trust fund-related taxes not
passed through to customers; and (v) regulatory costs, insurance,
telecommunications costs, professional fees, and license and maintenance fees
for internal software and hardware.
Depreciation and amortization
Depreciation and amortization consists of the ratable measurement of the use of
property and equipment. Depreciation and amortization for network assets
commences when such assets are placed in service and is provided on a
straight-line basis over the estimated useful lives of the assets, with the
exception of leasehold improvements, which are amortized over the lesser of the
estimated useful lives or the term of the lease.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the U.S. ("U.S.
GAAP"). The preparation of these financial statements in conformity with U.S.
GAAP requires management to make judgments, estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenue and expenses during the reporting
period. Management continually evaluates its judgments, estimates and
assumptions based on historical experience and available information. The
following is a discussion of the items within our consolidated financial
statements that involve significant judgments, assumptions, uncertainties and
estimates. The estimates involved in these areas are considered critical because
they require high levels of subjectivity and judgment to account for highly
uncertain matters, and if actual results or events differ materially from those
contemplated by management in making these estimates, the impact on our
consolidated financial statements could be material. For a full description of
our significant accounting policies, see Note 2, "Basis of Presentation and
Significant Accounting Policies," to the accompanying consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
43
Fresh Start Accounting
Our emergence from bankruptcy resulted in a new reporting entity with no
retained earnings or accumulated losses, effective as of September 8,
2003. Although the effective date of the amended bankruptcy plan of
reorganization of Metromedia Fiber Network, Inc. ("MFN") and substantially all
of its domestic subsidiaries (the "Plan of Reorganization") was September 8,
2003 (the "Effective Date"), we accounted for the consummation of the Plan of
Reorganization as if it occurred on August 31, 2003 and implemented fresh start
accounting as of that date. There were no significant transactions during the
period from August 31, 2003 to September 8, 2003. Fresh start accounting
requires us to allocate the reorganization value of our assets and liabilities
based upon their estimated fair values, in accordance with FASB ASC 852-10. We
developed a set of financial projections, which were utilized by an expert to
assist us in estimating the fair value of our assets and liabilities. The expert
utilized various valuation methodologies, including (1) a comparison of the
Company and our projected performance to that of comparable companies; (2) a
review and analysis of several recent transactions of companies in similar
industries to ours; and (3) a calculation of the enterprise value based upon the
future cash flows of our projections.
Adopting fresh start accounting resulted in material adjustments to the
historical carrying values of our assets and liabilities. The reorganization
value was allocated to our assets and liabilities based upon their fair
values. We engaged an independent appraiser to assist us in determining the fair
market value of our property and equipment. The determination of fair values of
assets and liabilities was subject to significant estimates and assumptions. The
unaudited fresh start adjustments reflected at September 8, 2003 consisted of
the following: (i) reduction of property and equipment; (ii) reduction of
indebtedness; (iii) reduction of vendor payables; (iv) reduction of the carrying
value of deferred revenue; (v) increase of deferred rent to fair market value;
(vi) cancellation of MFN's common stock and additional paid-in capital, in
accordance with the Plan of Reorganization; (vii) issuance of new AboveNet, Inc.
common stock and additional paid-in capital; and (viii) elimination of the
comprehensive loss and accumulated deficit accounts.
Revenue Recognition
We follow SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," (now known as FASB ASC 605-10), as amended by SEC SAB No.
104, "Revenue Recognition," (also now known as FASB ASC 605-10).
Revenue derived from leasing fiber optic telecommunications infrastructure and
the provision of telecommunications and co-location services is recognized as
services are provided. Non-refundable payments received from customers before
the relevant criteria for revenue recognition are satisfied are included in
deferred revenue in the accompanying consolidated balance sheets and are
subsequently amortized into income over the fixed contract term.
Prior to October 1, 2009, we generally amortized revenue related to installation
services on a straight-line basis over the contracted customer relationship (two
to twenty years). In the fourth quarter of 2009, we completed a study of our
historic customer relationship period. As a result, commencing October 1, 2009,
we began amortizing revenue related to installation services on a straight-line
basis generally over the estimated customer relationship period (generally
ranging from three to twenty years).
Contract termination revenue is recognized when a customer discontinues service
prior to the end of the contract period for which we had previously received
consideration and for which revenue recognition was deferred. Contract
termination revenue is also recognized when customers have made early
termination payments to us to settle contractually committed purchase amounts
that the customer no longer expects to meet or when we renegotiate or
discontinue a contract with a customer and as a result are no longer obligated
to provide services for consideration previously received and for which revenue
recognition has been deferred. Additionally, we include receipts of bankruptcy
claim settlements from former customers as contract termination revenue when
received. Contract termination revenue amounted to $0.7 million and $2.1 million
in the three months ended March 31, 2012 and 2011, respectively.
44
Accounts Receivable Reserves
Sales Credit Reserves
During each reporting period, we make estimates for potential future sales
credits to be issued in respect of current revenue, related to service
interruptions and customer disputes, which are recorded as a reduction in
revenue. We analyze historical credit activity and changes in customer demand
related to current billing and service interruptions when evaluating our credit
reserve requirements. We reserve for known service interruptions as incurred. We
review customer disputes and reserve against those we believe to be valid
claims. We also estimate a sales credit reserve related to unknown billing
errors and disputes based on such historical credit activity. The determination
of the general sales credit and customer dispute credit reserve requirements
involves significant estimations and assumptions.
Allowance for Doubtful Accounts
During each reporting period, we make estimates for potential losses resulting
from the inability of our customers to make required payments. We analyze our
reserve requirements using several factors, including the length of time a
particular customer's receivables are past due, changes in the customer's
creditworthiness, the customer's payment history, the length of the customer's
relationship with us, the current economic climate and current industry trends.
A specific reserve requirement review is performed on customer accounts with
larger balances. A reserve analysis is also performed on accounts not subject to
specific review utilizing the factors previously mentioned. Changes in the
financial viability of significant customers, worsening of economic conditions
and changes in our ability to meet service level requirements may require
changes to our estimate of the recoverability of the receivables. Revenue
previously unrecognized, which is recovered through litigation, negotiations,
settlements and judgments, is recognized as termination revenue in the period
collected. The determination of both the specific and general allowance for
doubtful accounts reserve requirements involves significant estimations andassumptions.
Property and Equipment
Property and equipment owned at the Effective Date are stated at their estimated
fair values as of the Effective Date based on our reorganization value, net of
accumulated depreciation and amortization incurred since the Effective
Date. Purchases of property and equipment subsequent to the Effective Date are
stated at cost, net of depreciation and amortization. Major improvements are
capitalized, while expenditures for repairs and maintenance are expensed when
incurred. Costs incurred prior to a capital project's completion are reflected
as construction in progress and are part of network infrastructure assets, as
described below and included in property and equipment on the respective balance
sheets. At March 31, 2012 and December 31, 2011, we had $54.0 million and $57.8
million, respectively, of construction in progress. Certain internal direct
labor costs of constructing or installing property and equipment are
capitalized. Capitalized direct labor is determined based upon a core group of
project managers, field engineers, network infrastructure engineers and
equipment engineers. Capitalized direct labor is based upon time spent on
capitalized projects and consists of salary, plus certain related
benefits. These individuals' capitalized labor costs are directly associated
with the construction and installation of network infrastructure and equipment
and customer installations. The salaries and related benefits of non-engineers
and supporting staff that are part of the operations and engineering departments
are not considered part of the pool subject to capitalization. Capitalized
direct labor amounted to $2.7 million and $2.5 million for the three months
ended March 31, 2012 and 2011, respectively. Depreciation and amortization is
provided on a straight-line basis over the estimated useful lives of the assets,
with the exception of leasehold improvements, which are amortized over the
lesser of the estimated useful life of the improvement or the term of the lease.
45
Estimated useful lives of our property and equipment are as follows:
Network infrastructure assets and storage huts
(except for risers and certain project
installation costs, which are 5 years) 20years
HVAC and power equipment 12 to 20 years
Transmission and IP equipment 5 to 7years
Furniture, fixtures and equipment 4 to 7years
Software and computer equipment 3 to 5years
Leasehold improvements Lesser of the estimated
useful life of the
improvement or the term of
the lease
When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation is removed from the accounts, and resulting gains or
losses are reflected in net income.
From time to time, we are required to replace or re-route existing fiber due to
structural changes such as construction and highway expansions, which is defined
as "relocation." In such instances, we fully depreciate the remaining carrying
value of network infrastructure removed or rendered unusable and capitalize the
costs of the new infrastructure placed into service. In certain circumstances,
the local municipality or agency is responsible for some or all of such amounts.
We record our share of relocation costs in property and equipment and record the
third party portion of such costs as accounts receivable. We capitalized
relocation costs amounting to $0.3 million and $0.5 million for the three months
ended March 31, 2012 and 2011, respectively. We fully depreciated the remaining
carrying value of the network infrastructure rendered unusable, which on an
original cost basis, totaled $0.05 million and $0.09 million ($0.02 million and
$0.04 million on a net book value basis) for the three months ended March 31,
2012 and 2011, respectively. To the extent that relocation is temporary in
nature, or requires only the movement of existing network infrastructure to
another location or construction for an insignificant portion of the entire
segment, the related costs are included in our results of operations.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 34,
"Capitalization of Interest Cost," (now known as FASB ASC 835-20), interest on
certain construction projects would be capitalized. Such amounts were considered
immaterial, and accordingly, no such amounts were capitalized during each of the
three months ended March 31, 2012 and 2011.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," (now known as FASB ASC 360-10-35), we periodically evaluate
the recoverability of our long-lived assets and evaluate such assets for
impairment whenever events or circumstances indicate that the carrying amount of
such assets (or group of assets) may not be recoverable. Impairment is
determined to exist if the estimated future undiscounted cash flows are less
than the carrying value of such assets. We consider various factors to
determine if an impairment test is necessary. The factors include: consideration
of the overall economic climate, technological advances with respect to
equipment, our strategy, capital planning and certain operational issues. Since
June 30, 2006, no event has occurred nor has the business environment changed to
trigger an impairment test for assets in revenue service and operations. We also
consider the removal of assets from the network as a triggering event for
performing an impairment test. Once an item is removed from service, unless it
is to be redeployed, it may have little or no future cash flows related to
it. We performed annual physical counts of such assets that are not in revenue
service or operations at or around September 30 of each year. With the
assistance of a valuation report of the assets that are not in revenue
service, prepared by an independent third party on a basis consistent with SFAS
No. 157, "Fair Value Measurements," (now known as FASB ASC 820-10), and pursuant
to FASB ASC 360-10-35, we determined that the fair value of certain of these
assets was less than the carrying value and accordingly, recorded a provision
for impairment totaling $1.2 million for the year ended December 31, 2011. We
provided allowances for impairment of $0.1 million in the three months ended
March 31, 2012. There were no provisions for impairment recorded in the three
months ended March 31, 2011.
46
Asset Retirement Obligations
In accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations,"
(now known as FASB ASC 410-20), we recognize the fair value of a liability for
an asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. We have asset retirement
obligations related to the de-commissioning and removal of equipment,
restoration of leased facilities and the removal of certain fiber and conduit
systems. Considerable management judgment is required in estimating these
obligations. Important assumptions include estimates of asset retirement costs,
the timing of future asset retirement activities and the likelihood of
contractual asset retirement provisions being enforced. Changes in these
assumptions based on future information could result in adjustments to these
estimated liabilities.
Asset retirement obligations are generally recorded as "other long-term
liabilities," are capitalized as part of the carrying amount of the related
long-lived assets included in property and equipment, net, and are depreciated
over the life of the associated asset. Asset retirement obligations aggregated
$8.2 million and $8.1 million at March 31, 2012 and December 31, 2011,
respectively, of which $4.3 million and $4.5 million, respectively, was included
in "Accrued expenses," and $3.9 million and $3.6 million, respectively, was
included in "Other long-term liabilities" at such dates. Accretion expense,
which is included in "Interest expense," amounted to $0.14 million and $0.07
million for the three months ended March 31, 2012 and 2011, respectively.
Derivative Financial Instruments
We have utilized and may, from time to time in the future, utilize derivative
financial instruments known as interest rate swaps ("derivatives") to mitigate
our exposure to interest rate risk. We purchased the first interest rate swap on
August 4, 2008 to hedge the interest rate on the initial $24.0 million (original
principal) term loan under the Secured Credit Facility and we purchased a second
interest rate swap on November 14, 2008 to hedge the interest rate on the
additional $12.0 million (original principal) term loan under the Secured Credit
Facility provided by SunTrust Bank. (See Note 4, "Note Payable," to the
accompanying consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.) We accounted for the derivatives under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," (now known
as FASB ASC 815). FASB ASC 815 requires that all derivatives be recognized in
the financial statements and measured at fair value regardless of the purpose or
intent for holding them. By policy, we have not historically entered into
derivatives for trading purposes or for speculation. Based on criteria defined
in FASB ASC 815, the interest rate swaps were considered cash flow hedges and
were 100% effective. Accordingly, changes in the fair value of derivatives were
recorded each period in accumulated other comprehensive loss. Changes in the
fair value of the derivatives reported in accumulated other comprehensive loss
were reclassified into earnings in the period in which earnings were impacted by
the variability of the cash flows of the hedged item. The ineffective portion of
all hedges, if any, is recognized in current period earnings. The unrealized net
loss recorded in accumulated other comprehensive loss at December 31, 2010 was
$0.6 million for the interest rate swaps. The mark-to-market value of the cash
flow hedges was recorded in current assets, current liabilities, other
non-current assets or other long-term liabilities, as applicable, and the
offsetting gains or losses in accumulated other comprehensive loss. Both
interest rate swaps were settled in January 2011.
On January 1, 2009, we adopted SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133,"
(now known as FASB ASC 815-10). FASB ASC 815-10 changes the disclosure
requirements for derivatives and hedging activities. Entities are required to
provide enhanced disclosures about (i) how and why an entity uses derivatives;
(ii) how derivatives and related hedged items are accounted for under FASB ASC
815-10; and (iii) how derivatives and related hedged items affect an entity's
financial position and cash flows.
We have, when applicable, minimized our credit risk relating to counterparties
of our derivatives by transacting with multiple, high quality counterparties,
thereby limiting exposure to individual counterparties, and by monitoring the
financial condition of our counterparties.
All derivatives have been recorded in our consolidated balance sheets at fair
value. Accounting for the gains and losses resulting from changes in the fair
value of derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting in accordance with FASB ASC 815-10.
The swap agreements were settled in January 2011 in connection with the
repayment of the term loans under the Secured Credit Facility and the closing of
the $250 Million Secured Revolving Credit Facility. The cost of $0.5 million to
settle the swap agreements was included in "Other income (expense), net" in our
consolidated statement of operations for the three months ended March 31, 2011.
47
Fair Value of Financial Instruments
We adopted SFAS No. 157, "Fair Value Measurements," ("SFAS No. 157") (now known
as FASB ASC 820-10), for our financial assets and liabilities effective January
1, 2008. This pronouncement defines fair value, establishes a framework for
measuring fair value, and requires expanded disclosures about fair value
measurements. FASB ASC 820-10 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement, and defines fair value as the
price that would be received to sell an asset or transfer a liability in an
orderly transaction between market participants at the measurement date. FASB
ASC 820-10 discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value of future income
or cash flow) and the cost approach (cost to replace the service capacity of an
asset or replacement cost), which are each based upon observable and
unobservable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect our market
assumptions. FASB ASC 820-10 utilizes a fair value hierarchy that prioritizes
inputs to fair value measurement techniques into three broad levels:
Level 1: Observable inputs such as quoted prices for identical assets or
liabilities in active markets.
Level 2: Observable inputs other than quoted prices that are directly or
indirectly observable for the asset or liability, including quoted
prices for similar assets or liabilities in active markets; quoted
prices for similar or identical assets or liabilities in markets that
are not active; and model-derived valuations whose inputs are
observable or whose significant value drivers are observable.
Level 3: Unobservable inputs that reflect the reporting entity's own
assumptions.
Our investment in overnight money market institutional funds, which amounted to
$108.9 million and $110.0 million at March 31, 2012 and December 31, 2011,
respectively, is included in cash and cash equivalents on the accompanying
balance sheets and is classified as a Level 1 asset.
We were party to two interest rate swaps, which were utilized to modify our
interest rate risk. We recorded the mark-to-market value of the interest rate
swap contracts of $0.6 million (which was included in "Accrued expenses") in our
consolidated balance sheet at December 31, 2010. At December 31, 2010, we used
third parties, as well as our own market analysis to determine the fair value of
each of the interest rate swap agreements. The fair value of the interest rate
swap contracts are classified as Level 2 liabilities. The swap agreements were
settled in January 2011 in connection with the repayment of the term loans under
the Secured Credit Facility and the closing of the $250 Million Secured
Revolving Credit Facility. The cost of $0.5 million to settle the swap
agreements was included in "Other income (expense), net" in our consolidated
statement of operations for the three months ended March 31, 2011.
Our consolidated balance sheets include the following financial instruments:
short-term cash investments, trade accounts receivable, trade accounts payable
and note payable. We believe the carrying amounts in the financial statements
approximate the fair value of these financial instruments due to the relatively
short period of time between the origination of the instruments and their
expected realization or the interest rates which approximate current marketrates.
Concentration of Credit Risk
Financial instruments, which potentially subject us to concentration of credit
risk, consist principally of short-term cash investments and accounts
receivable. We do not enter into financial instruments for trading or
speculative purposes. Our cash and cash equivalents are invested in
investment-grade, short-term investment instruments with high quality financial
institutions. Our trade receivables, which are unsecured, are geographically
dispersed, and no single customer accounts for greater than 10% of consolidated
revenue or accounts receivable, net. We perform ongoing credit evaluations of
our customers' financial condition. The allowance for non-collection of accounts
receivable is based upon the expected collectability of all accounts receivable.
We place our cash and cash equivalents primarily in commercial bank accounts in
the U.S. Account balances generally exceed federally insured limits.
48
Foreign Currency Translation and Transactions
Our reporting currency is the U.S. dollar. For those subsidiaries not using the
U.S. dollar as their functional currency, assets and liabilities are translated
at exchange rates in effect at the applicable balance sheet date and income and
expense transactions are translated at average exchange rates during the
period. Resulting translation adjustments are recorded directly to a separate
component of shareholders' equity and are reflected in the accompanying
consolidated statements of comprehensive income. Our foreign exchange
transaction gains (losses) are generally included in "Other income (expense),
net" in the consolidated statements of operations.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes," (now known as FASB ASC 740). Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between financial statement carrying amounts of existing assets and liabilities
and their respective tax basis and net operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
We are subject to audits by various taxing authorities, and these audits may
result in proposed assessments where the ultimate resolution results in us owing
additional taxes. We are required to establish reserves under FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," (now known
as FASB ASC 740-10), when we believe there is uncertainty with respect to
certain positions and we may not succeed in realizing the tax benefit. We
believe that our tax return positions are appropriate and supportable under
relevant tax law. We believe the estimates and assumptions used to support our
evaluation of tax benefit realization are reasonable. Accordingly, no
adjustments have been made to the consolidated financial statements for the
three months ended March 31, 2012 and 2011.
Deferred Taxes
Our current and deferred income taxes, and associated valuation allowances, are
impacted by events and transactions arising in the normal course of business as
well as by both special and non-recurring items. Assessment of the appropriate
amount and classification of income taxes is dependent on several factors,
including estimates of the timing and realization of deferred income tax on
income and deductions. Actual realization of deferred tax assets and liabilities
may materially differ from these estimates as a result of changes in tax laws as
well as unanticipated future transactions impacting related income tax balances.
The assessment of a valuation allowance on deferred tax assets is based on the
likelihood that a portion of our deferred tax assets will be realized in future
periods. The weight of all available evidence is considered in determining
realizability of our deferred tax assets. Deferred tax liabilities are first
applied to the deferred tax assets reducing the need for a valuation allowance.
As part of our evaluation of deferred tax assets in the fourth quarters of 2011
and 2010, we recognized tax benefits of $9.2 million and $7.3 million reported
at December 31, 2011 and 2010, respectively, relating to the reduction of
certain valuation allowances established in the U.K. As part of our evaluation
of deferred tax assets in the fourth quarter of 2009, we recognized a tax
benefit of $183.0 million at December 31, 2009 relating to the reduction of
certain valuation allowances previously established in the U.S. and the U.K. We
believe it is more likely than not that we will utilize these deferred tax
assets to reduce or eliminate tax payments in future periods. This reduction in
valuation allowances had the effect of increasing net income by $9.2 million,
$7.3 million and $183.0 million for the years ended December 31, 2011, 2010 and
2009, respectively. Our evaluations encompassed (i) reviews of our recent
history of profitability in the U.S. and the U.K. for the past three years; and
(ii) reviews of internal financial forecasts demonstrating our expected capacity
to utilize deferred tax assets. We review our deferred tax assets and
liabilities on a quarterly basis as part of our FASB ASC 740 review. Significant
and continuous judgment of management is required in determining the provision
for income tax, deferred tax assets and liabilities, and related valuation
allowances established against the deferred tax assets. It is possible that the
valuation allowances could be further adjusted, as necessary.
49
Stock-Based Compensation
On September 8, 2003, we adopted the fair value provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation Transition and Disclosure," ("SFAS
No. 148"), (now known as FASB ASC 718-10). SFAS No. 148 amended SFAS No. 123,
"Accounting for Stock-Based Compensation," ("SFAS No. 123"), (also now known as
FASB ASC 718-10), to provide alternative methods of transition to SFAS No. 123's
fair value method of accounting for stock-based employee compensation. See Note
7, "Stock-Based Compensation," to the accompanying consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
Under the fair value provisions of FASB ASC 718-10, the fair value of each
stock-based compensation award is estimated at the date of grant, using the
Black-Scholes option pricing model for stock option awards. We did not have a
historical basis for determining the volatility and expected life assumptions in
the model due to our limited market trading history; therefore, the assumptions
used for these amounts are an average of those used by a select group of related
industry companies. Most stock-based awards have graded vesting (i.e. portions
of the award vest at different dates during the vesting period). We recognize
the related stock-based compensation expense of such awards on a straight-line
basis over the vesting period for each tranche in an award. Upon consummation of
our Plan of Reorganization, all then outstanding stock options were cancelled.
Effective January 1, 2006, we adopted SFAS No. 123(R), "Share-Based Payment,"
("SFAS No. 123(R)"), (now known as FASB ASC 718), using the modified prospective
method. SFAS No. 123(R) requires all share-based awards granted to employees to
be recognized as compensation expense over the vesting period, based on fair
value of the award. The fair value method under SFAS No. 123(R) is similar to
the fair value method under SFAS No. 123 with respect to measurement and
recognition of stock-based compensation expense except that SFAS No. 123(R)
requires an estimate of future forfeitures, whereas SFAS No. 123 permitted
companies to estimate forfeitures or recognize the impact of forfeitures as they
occurred. As we had recognized the impact of forfeitures as they occurred under
SFAS No. 123, the adoption of SFAS No. 123(R) resulted in a change in our
accounting treatment, but it did not have a material impact on our consolidated
financial statements.
For a description of our stock-based compensation programs, see Note 7,
"Stock-Based Compensation," to the accompanying consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
There were no options to purchase shares of Common Stock granted during each of
the three months ended March 31, 2012 and 2011.
50
Results of Operations for the Three Months Ended March 31, 2012 Compared to the
Three Months Ended March 31, 2011
Consolidated Results (dollars in millions for the table set forth below):
Three Months Ended March 31,
$ Increase/ % Increase/
2012 2011 (Decrease) (Decrease)
Revenue $ 127.7 $ 114.4 $ 13.3 11.6 %
Costs of revenue (excluding depreciation and
amortization, shown separately below, and
including provisions for impairment of $0.1
for the three months ended March 31, 2012) 43.9 40.2 3.7 9.2 %
Selling, general and administrative expenses 32.0 29.8 2.2 7.4 %
Depreciation and amortization 20.7 18.3 2.4 13.1 %
Operating income 31.1 26.1 5.0 19.2 %
Other income (expense):
Interest expense (1.1 ) (1.2 ) (0.1 ) (8.3 )%
Other income (expense), net 0.8 (0.7 ) (1.5 ) NM
Income from continuing operations, before
income taxes 30.8 24.2 6.6 27.3 %
Provision for income taxes 12.4 9.7 2.7 27.8 %
Net income $ 18.4 $ 14.5 $ 3.9 26.9 %
We use the term "consolidated" below to describe the total results of our two
geographic segments, the U.S. and the U.K. and others. Throughout this document,
unless otherwise noted, amounts discussed are consolidated amounts.
Net Income. Our net income for the three months ended March 31, 2012 was $18.4
million, compared to $14.5 million for the three months ended March 31, 2011, an
increase of $3.9 million. The primary reason for the increase in net income was
the increase in revenue of $13.3 million, which was partially offset by the
increases in costs of revenue of $3.7 million, selling, general and
administrative expenses of $2.2 million, depreciation and amortization of $2.4
million, a change (decrease) in other income (expense), net, of $1.5 million,
and provision for income taxes of $2.7 million. These changes are discussedmore
fully below.
Revenue. Consolidated revenue was $127.7 million for the three months ended
March 31, 2012, compared to $114.4 million for the three months ended March 31,
2011, an increase of $13.3 million, or 11.6%. Revenue from our U.S. operations
increased by $11.3 million, or 10.9%, from $103.8 million for the three months
ended March 31, 2011 to $115.1 million for the three months ended March 31,
2012. The principal reason for this increase was the continued growth in each of
our metro, fiber infrastructure and WAN services. This continued growth in
revenue for each of these services is attributable principally to revenue from
new service installations exceeding reductions in revenue from contract
terminations and price declines from renewals. U.S. revenue from WAN services
increased by $7.5 million, or 33.2%, from $22.6 million for the three months
ended March 31, 2011 to $30.1 million for the three months ended March 31, 2012,
U.S. revenue from metro services increased by $3.8 million, or 12.1%, from $31.4
million for the three months ended March 31, 2011 to $35.2 million for the three
months ended March 31, 2012 and U.S. revenue from fiber infrastructure services
increased by $1.4 million, or 3.1%, from $45.1 million for the three months
ended March 31, 2011 to $46.5 million for the three months ended March 31, 2012.
Other revenue decreased by $1.4 million from $4.7 million for the three months
ended March 31, 2011 to $3.3 million for the three months ended March 31, 2012,
primarily due to a decrease of $1.4 million in domestic contract termination
revenue. Revenue from our foreign operations, primarily in the U.K., increased
by $2.0 million, or 18.9%, from $10.6 million for the three months ended March
31, 2011 to $12.6 million for the three months ended March 31, 2012. The primary
reason for this increase was due to an increase in provisioning of services in
the U.K., which was partially offset by a 1.9% decrease in the translation rate
due to the strengthening of the U.S. dollar against the British pound in the
three months ended March 31, 2012 compared to the three months ended March31,
2011.
51
Costs of revenue. Consolidated costs of revenue for the three months ended March
31, 2012 was $43.9 million, compared to $40.2 million for the three months ended
March 31, 2011, an increase of $3.7 million, or 9.2%. Consolidated costs of
revenue as a percentage of revenue was 34.4% for the three months ended March
31, 2012, compared to 35.1% for the three months ended March 31, 2011, resulting
in consolidated gross profit margin of 65.6% and 64.9% for the three months
ended March 31, 2012 and 2011, respectively. The costs of revenue for our U.S.
operations was $40.0 million and $35.7 million for the three months ended March
31, 2012 and 2011, respectively, an increase of $4.3 million, or 12.0%. The
increase in the domestic costs of revenue for the three months ended March 31,
2012 compared to the three months ended March 31, 2011 was attributable
principally to (i) an increase of $1.1 million for expenses associated with
third party network costs; (ii) an increase of $1.1 million in co-location
expenses, to support our IP network services and increase our presence in third
party data centers; (iii) an increase of $0.7 million in payroll-related
expenses due to headcount added since the three months ended March 31, 2011;
(iv) an increase of $0.6 million in installation costs; (v) an increase of $0.3
million for right-of-way expenses; and (vi) an increase of $0.2 million in long
haul expenses from 2011 levels. The costs of revenue for our foreign operations
was $3.9 million for the three months ended March 31, 2012, compared to $4.5
million for the three months ended March 31, 2011, a decrease of $0.6 million,
or 13.3%. The decrease was primarily due to a decrease in repairs and
maintenance charges and the fact that the prior year quarter included some
overaccruals that were reversed in the third and fourth quarters of 2011. In
addition, the results for the three months ended March 31, 2012 compared to the
three months ended March 31, 2011 reflect a 1.9% decrease in the translation
rate due to the strengthening of the U.S. dollar against the British pound.
Selling, General and Administrative Expenses ("SG&A"). Consolidated SG&A for the
three months ended March 31, 2012 was $32.0 million, compared to $29.8 million
for the three months ended March 31, 2011, an increase of $2.2 million, or
7.4%. SG&A as a percentage of revenue was 25.1% for the three months ended March
31, 2012, compared to 26.0% for the three months ended March 31, 2011. In the
U.S., SG&A was $28.1 million for the three months ended March 31, 2012, compared
to $26.4 million for the three months ended March 31, 2011, an increase of $1.7
million, or 6.4%. SG&A for our U.S. operations for the three months ended March
31, 2012 compared to the three months ended March 31, 2011 increased primarily
due to (i) an increase of $0.9 million in professional fees (primarily
attributable to the Merger Agreement discussed in Note 14, "Merger Agreement
with Zayo Group, LLC," to the accompanying consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q); (ii) an increase of
$0.6 million in commissions paid to third party sales agents; and (iii) an
increase of $0.2 million in computer maintenance expenses. SG&A from our foreign
operations was $3.9 million for the three months ended March 31, 2012, compared
to $3.4 million for the three months ended March 31, 2011, a net increase of
$0.5 million, or 14.7%. Our foreign operations reported increases in salaries
and benefits of $0.6 million, primarily related to an increase in headcount and
an increase in sales commissions due to the year over year increase in sales.
Depreciation and amortization. Consolidated depreciation and amortization was
$20.7 millionfor the three months ended March 31, 2012, compared to
$18.3 million for the three months ended March 31, 2011, an increase of $2.4
million, or 13.1%. Consolidated depreciation and amortization as a percentage of
revenue was 16.2% for the three months ended March 31, 2012, compared to 16.0%
for the three months ended March 31, 2011. The increase in consolidated
depreciation and amortization was primarily attributable to additions of
property and equipment for the three months ended March 31, 2012 and the full
period effect of depreciation on property and equipment placed into servicein
2011.
Interest income. Interest income, substantially all of which was earned in the
U.S., was immaterial for the three months ended March 31, 2012 and 2011 as a
result of relatively low interest rates and the Company's conservative
investment strategy.
Interest expense. Interest expense, substantially all of which was incurred in
the U.S., includes interest expense on borrowed amounts under the $250 Million
Secured Revolving Credit Facility (which commenced January 28, 2011) and the
Secured Credit Facility, which was repaid simultaneously, availability fees on
the unused portion of both credit facilities, the amortization of debt
acquisition costs (including upfront fees) related to both credit facilities,
interest expense related to a capital lease obligation, interest accrued on
certain tax liabilities, interest on the outstanding balance of the deferred
fair value rent liabilities established at fresh start and interest accretion
relating to asset retirement obligations. Interest expense was $1.1 million for
the three months ended March 31, 2012, compared to $1.2 million for the three
months ended March 31, 2011, a decrease of $0.1 million, or 8.3%.
52
Other income (expense), net. Other income (expense), net is composed primarily
of income or expense from non-recurring transactions and is not comparative from
a trend perspective. Consolidated other income (expense), net was other income,
net of $0.8 million for the three months ended March 31, 2012, compared to a net
expense of $(0.7) million for the three months ended March 31, 2011, a change
(decrease) of $1.5 million. In the U.S., other expense, net was immaterial for
the three months ended March 31, 2012, compared to a net expense of $1.5 million
for the three months ended March 31, 2011. For our foreign operations, other
income, net was $0.8 million for each of the three months ended March 31, 2012
and 2011. For the three months ended March 31, 2012, consolidated other income
(expense), net was comprised of a net gain on foreign currency of $0.8
million. For the three months ended March 31, 2011, consolidated other income
(expense), net was comprised of the write-off of unamortized debt acquisition
costs of $(1.1) million and the settlement of the two interest rate swaps at a
total cost of $(0.5) million, both of which were associated with the Secured
Credit Facility (which were recorded in connection with the Company's closing of
the $250 Million Secured Revolving Credit Facility on January 28, 2011); offset
by a net gain on foreign currency of $0.8 million and other gains of $0.1
million.
Provision for income taxes. We recorded a provision for income taxes of $12.4
million for the three months ended March 31, 2012, compared to $9.7 million for
the three months ended March 31, 2011. The provision for income taxes for each
of the three months ended March 31, 2012 and 2011 was calculated at our
effective tax rate based upon our pre-tax book income (adjusted for permanent
differences in both the U.S. and the U.K.), plus a provision for certain
capital-based state taxes of $0.5 million.
Liquidity and Capital Resources
We had working capital of $68.5 million at March 31, 2012, compared to working
capital of $55.5 million at December 31, 2011, an increase in working capital of
$13.0 million. This increase was primarily attributable to the increase in
unrestricted cash of $2.3 million, plus the increase in accounts receivable of
$6.7 million and prepaid costs and other current assets of $4.7 million.
Net cash provided by operating activities was $44.0 million during the three
months ended March 31, 2012, compared to $41.3 million during the three months
ended March 31, 2011, an increase of $2.7 million. Net cash provided by
operating activities during the three months ended March 31, 2012 represents net
income, plus the add back to net income of non-cash items deducted in the
determination of net income, principally depreciation and amortization of $20.7
million, the change in deferred tax assets of $11.9 million and non-cash
stock-based compensation expense of $6.7 million, less the changes in working
capital components. Net cash provided by operating activities during the three
months ended March 31, 2011 represents net income, plus the add back to net
income of non-cash items deducted in the determination of net income,
principally depreciation and amortization of $18.3 million, the change in
deferred tax assets of $9.5 million and non-cash stock-based compensation
expense of $7.1 million, less the changes in working capital components. The
three months over three months increase in net cash provided by operating
activities is primarily due to the increase in net income adjusted for non-cash
activities (depreciation and amortization, change in deferred tax assets and
non-cash stock-based compensation expense), and the change (use) in working
capital components in the March 31, 2012 period, compared to the March 31,2011
period.
53
Net cash used in investing activities was $41.0 million during the three months
ended March 31, 2012, compared to $31.1 million during the three months ended
March 31, 2011, an increase of $9.9 million. Net cash used in investing
activities during the three months ended March 31, 2012 was attributable to the
purchases of property and equipment of $41.2 million, partially offset by the
proceeds generated from sales of property and equipment of $0.2 million. Net
cash used in investing activities during the three months ended March 31, 2011
was attributable to the purchases of property and equipment of $31.1 million.
The increase in capital expenditures during the three months ended March 31,
2012 compared to the three months ended March 31, 2011 was attributable to the
continued investment in our network during the three months ended March 31, 2012
and a higher level of orders implemented, which resulted in higher capital
expenditures needed to provide service.
Net cash used in financing activities was $0.1 million during the three months
ended March 31, 2012, which is comprised of the purchase of treasury stock of
$0.9 million and the principal payment on our capital lease obligation of $0.2
million, offset by the release of restricted cash and cash equivalents of $0.9
million and the proceeds from the exercise of options to purchase shares of
Common Stock of $0.1 million. Net cash used in financing activities was $1.1
million during the three months ended March 31, 2011, which is comprised of the
payoff of the outstanding principal of the Secured Credit Facility of $49.7
million, the change in restricted cash and cash equivalents of $1.0 million, the
purchase of treasury stock of $0.3 million and the principal payment on our
capital lease obligation of $0.2 million, offset by the net proceeds from our
borrowing under the $250 Million Secured Revolving Credit Facility of $50.0
million and the proceeds from the exercise of options to purchase shares of
Common Stock of $0.1 million.
The $250 Million Secured Revolving Credit Facility closed on January 28, 2011.
We drew down $55.0 million at closing, of which $49.9 million was used to repay
the outstanding Secured Credit Facility (including accrued interest of $0.2
million), $5.0 million was used to pay bank fees and related expenses associated
with the $250 Million Secured Revolving Credit Facility and the balance was used
for general corporate purposes.
On December 7, 2011, our Board of Directors authorized the Repurchase Program
for the purchase of up to $200.0 million of our Common Stock through December
31, 2012. Through March 31, 2012, we purchased 41,157 shares under the
Repurchase Program at a total cost of $2.7 million, of which 11,700 shares were
purchased during the three months ended March 31, 2012 at an aggregate costof
$0.8 million.
During the three months ended March 31, 2012, we generated cash from operating
activities that was sufficient to fund our operating expenses, debt service and
expenditures for property and equipment. We paid a Special Cash Dividend in
December 2010 totaling $129.0 million, which reduced liquidity. In January
2011, we repaid our Secured Credit Facility, comprised of term loans with $49.7
million outstanding and closed the $250 Million Secured Revolving Credit
Facility. The new facility provides us with the flexibility and capability to
fund operations, as required. See Note 4, Note Payable," to the accompanying
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q. We expect that our cash from operations will continue to exceed our
operating expenses and plan to continue to use, as needed, our net cash from
operations, cash reserves and the $250 Million Secured Revolving Credit Facility
to fund our operating expenses, future capital projects and the Repurchase
Program.
We, from time to time, commit capital for, among other things, (i) customer
capital (to connect customers to the network); (ii) expansion and improvement of
infrastructure; and (iii) equipment. We also commit capital for investments in
selected markets. In 2010 through January 2011, we opened up Denver as a market
and expanded into Paris, Amsterdam and Frankfurt in Europe. Additionally, we
connected Miami to our long haul network and received a favorable ruling from
the Canadian authorities regarding our ability to lease and light fiber for our
operations in Toronto. Based on our success in these markets, we may increase
our presence in these markets or we may develop other markets in the U.S. or
internationally. We believe we have sufficient financial resources to execute
these plans.
We believe that our existing cash, cash from operating activities and funds
available under the $250 Million Secured Revolving Credit Facility will be
sufficient to fund operating expenses, planned capital expenditures and other
liquidity requirements including the Repurchase Program at least through June
30, 2013.
Additionally, in the future we may consider making acquisitions of other
companies or product lines to support our growth. We may finance any such
acquisition of other companies or product lines from existing cash balances and
borrowings under our $250 Million Secured Revolving Credit Facility, through
additional borrowings from banks or other institutional lenders, and/or the
public or private offerings of debt and/or equity securities. We cannot provide
assurances that any such additional funds will be available to us on favorable
terms, or at all.
54
Segment Results (dollars in millions for the tables set forth below)
Our results (excluding intercompany activity) are segmented according to
groupings based on geography.
United States:
Three Months Ended March 31, $ Increase / % Increase /
2012 2011 (Decrease) (Decrease)
Revenue $ 115.1 $ 103.8 $ 11.3 10.9 %
Costs of revenue (excluding depreciation and
amortization, shown separately below) 40.0 35.7 4.3 12.0 %
Selling, general and administrative expenses 28.1 26.4 1.7 6.4 %
Depreciation and amortization 18.5 16.1 2.4 14.9 %
Operating income 28.5 25.6 2.9 11.3 %
Other income (expense):
Interest expense (1.1 ) (1.2 ) (0.1 ) (8.3 )%
Other expense, net - (1.5 ) (1.5 ) NM
Income before income taxes 27.4 22.9 4.5 19.7 %
Provision for income taxes 11.5 9.0 2.5 27.8 %
Net income $ 15.9 $ 13.9 $ 2.0 14.4 %
United Kingdom and others:
Three Months Ended March 31, $ Increase / % Increase /
2012 2011 (Decrease) (Decrease)
Revenue $ 12.6 $ 10.6 $ 2.0 18.9 %
Costs of revenue (excluding depreciation and
amortization, shown separately below) 3.9 4.5 (0.6 ) (13.3 )%
Selling, general and administrative expenses 3.9 3.4 0.5 (14.7 )%
Depreciation and amortization 2.2 2.2 - -
Operating income 2.6 0.5 2.1 NM
Other income (expense):
Other income, net 0.8 0.8 - -Income before income taxes 3.4 1.3 2.1 NM
Provision for income taxes 0.9 0.7 0.2 28.6 %
Net income $ 2.5 $ 0.6 $ 1.9 NM
NM-not meaningful
The segment results for the three months ended March 31, 2012 and 2011 (above)
reflect the elimination of any intercompany sales or charges.
55
Credit Risk
Financial instruments which potentially subject us to a concentration of credit
risk, consist principally of temporary cash investments and accounts
receivable. We do not enter into financial instruments for trading or
speculative purposes and do not own auction rate notes. We place our cash and
cash equivalents in short-term investment instruments with high quality
financial institutions (primarily commercial banks) in the U.S. and the
U.K. Domestic account balances generally exceed federally insured limits. Our
trade receivables, which are unsecured, are geographically dispersed throughout
the U.S. and the U.K. and include both large and small corporate entities
spanning numerous industries. We perform ongoing credit evaluations of our
customers' financial condition.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements other than our operating
leases. We do not participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities (SPEs), which
would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
Inflation
We believe that our business is impacted by inflation to the same degree as the
general economy.
Certain Factors That May Affect Future Results
Information contained or incorporated by reference in this Quarterly Report on
Form 10-Q, in other SEC filings by the Company, in press releases and in
presentations by the Company or its management that are not historical by nature
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "believes," "expects," "plans," "intends,"
"estimates," "projects," "could," "may," "will," "should," or "anticipates" or
the negatives thereof, other variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that future results
expressed or implied by the forward-looking statements will be achieved. Such
statements are based on management's current expectations and beliefs and are
subject to a number of risks and uncertainties that could cause actual results
to differ materially from those expressed or implied by the forward-looking
statements. These risks and uncertainties include, but are not limited to, those
relating to the Company's financial and operating prospects, strength of
competition and pricing, negative economic trends, rapid technology changes,
ability to retain existing customers and attract new ones, outlook of customers,
the Company's acquisition strategy and ability to integrate acquired companies
and assets. In addition, these risks and uncertainties also include the
following factors relating to the Merger:
· the occurrence of any event, change or other circumstances that could give rise
to the termination of the Merger Agreement, including a termination under
circumstances that could require us to pay a termination fee;
· the inability to complete the Merger due to Parent's failure to obtain the
necessary debt and equity financing in connection with the Merger;
· the inability to complete the Merger due to the failure to obtain stockholder
approval or the failure to satisfy other conditions to completion of the
Merger, including required regulatory approvals;
· the failure of the Merger to close for any other reason;
· risks that the proposed transaction disrupts our current plans and operations
and the potential difficulties in employee retention as a result of the Merger;
· the outcome of legal proceedings instituted against the Company and/or others
relating to the Merger Agreement;
· diversion of management's attention from ongoing business concerns;
· the effect of the announcement of the Merger on our business relationships,
operating results and business generally; and
· the amount of the costs, fees, expenses and charges related to the Merger.
Other factors and risks that may affect the Company's business and future
financial results are detailed in the Company's SEC filings, including, but not
limited to, those described under "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in
this Quarterly Report on Form 10-Q. The Company's business could be materially
adversely affected and the trading price of the Common Stock could decline if
any such risks and uncertainties develop into actual events. The Company
cautions you not to place undue reliance on these forward-looking statements,
which speak only as of their respective dates. The Company undertakes no
obligation to publicly update or revise forward-looking statements to reflect
events or circumstances after the date of this Quarterly Report on Form 10-Q or
to reflect the occurrence of unanticipated events.
56
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