10-K 1 v127150_10k.htm Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2007
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 000-23269

AboveNet, Inc.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
 
11-3168327
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
360 HAMILTON AVENUE
WHITE PLAINS, NY 10601
(Address of Principal Executive Offices)
 
(914) 421-6700
(Registrant’s Telephone Number, Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act: None.
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, par value $0.01 per share
Title of Class

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ¨   No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨
Accelerated filer  x
Non-accelerated filer  ¨
(Do not check if a small reporting company)
Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ¨    No  x

The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant as of June 30, 2007 was approximately $427.8 million.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ¨   No  x

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of August 31, 2008, was 10,974,760.

DOCUMENTS INCORPORATED BY REFERENCE: NOT APPLICABLE
 


Table of Contents
ABOVENET, INC.
 
For The Year Ended December 31, 2007
 
INDEX
       
Page
Part I.
  
 
  
 
 
 
 
   
Item 1.
  
Business
  
1
Item 1A.
  
Risk Factors
  
10
Item 1B.
  
Unresolved Staff Comments
  
14
Item 2.
  
Properties
  
14
Item 3.
  
Legal Proceedings
  
14
Item 4.
  
Submission of Matters to a Vote of Security Holders
  
15
 
 
     
Part II.
  
 
  
 
 
 
     
Item 5.
  
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  
16
Item 6.
  
Selected Financial Data
  
19
Item 7.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
20
Item 7A.
  
Quantitative and Qualitative Disclosures about Market Risk
  
32
Item 8.
  
Financial Statements and Supplementary Data
  
33
Item 9.
  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
60
Item 9A.
  
Controls and Procedures
  
61
Item 9B.
  
Other Information
  
62
 
 
     
Part III.
  
 
  
 
 
 
     
Item 10.
  
Directors, Executive Officers and Corporate Governance
  
63
Item 11.
  
Executive Compensation
  
66
Item 12.
  
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
78
Item 13.
  
Certain Relationships and Related Transactions, and Director Independence
  
80
Item 14.
  
Principal Accountant Fees and Services
  
81
 
 
     
Part IV.
  
 
  
 
 
 
     
Item 15.
  
Exhibits and Financial Statement Schedules
  
82
 
       
   
Signatures
  
87



PART I
EXPLANATORY NOTE
 
This Annual Report on Form 10-K is for the fiscal year ended December 31, 2007. The information included in this Annual Report on Form 10-K is as of the applicable date or period described. Where no date or period is specified, the information speaks as of the date of this filing. Although we are required by the rules of the Securities and Exchange Commission to include selected financial information in Item 6 below for the period from January 1 to September 7, 2003, we are unable to do so because of a lack of historical records. As discussed further in this report, we emerged from protection under Chapter 11 of the U.S. Bankruptcy Code effective September 8, 2003.

ITEM 1. 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 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 operate. In addition, we also provide dark fiber services to selected customers. We have included a Glossary of Terms beginning on page 8 to explain the many technical terms that are commonly used in our industry to assist you to better understand our business. We recommend that you refer to this Glossary as you review the description of our business.

Metro networks. We are a facilities-based provider that operates fiber-optic networks in 14 major markets in the U.S. and one in the U.K. (London). We refer to these networks as our metro networks. These metro networks have significant reach and breadth. They consist of approximately 1.8 million fiber miles across approximately 4,500 cable route miles in the U.S. and in London. In addition, we have built an inter-city fiber network between New York and Washington D.C. of over 177,000 fiber miles across approximately 230 cable route miles.

Long haul network. Through construction, acquisition and leasing activities, we have created a nationwide fiber-optic communications network spanning 10,000 cable route miles that connects each of our 14 U.S. metro networks. We run advanced dense wavelength-division multiplexing (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 are also members of the Japan-US Cable Network (JUS) and Trans-Atlantic undersea telecommunications consortia (TAT-14) that provide connectivity between the U.S. and Japan and the U.S. and Europe, respectively. We refer to this network as our long haul network.

IP network. 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.
 
Corporate History
 
We were formed as National Fiber Network, Inc. on April 8, 1993 and our name was changed to Metromedia Fiber Network, Inc. (also referred to as “MFN”) on August 12, 1997. Initially, we focused on providing dark fiber to carrier customers in the U.S. and later, as we expanded, in Europe. In September 1999, we acquired AboveNet Communications, Inc., a data center facility and Internet connectivity provider as well as PAIX.net, Inc., an AboveNet Communications, Inc. subsidiary that operated Internet peering exchanges. In February 2001, we acquired SiteSmith, Inc., a provider of managed web-hosting services. The combined entity was focused on providing a range of services for the growing Internet market. Customers could use our metro networks, data centers and IP network with our professional services to satisfy their demand for Internet connectivity.

Along with a number of other telecommunications providers, in 2001 we experienced significant liquidity and other financial problems. As a result, substantially all of our U.S. entities filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code on May 20, 2002. During the bankruptcy period, we sold or disposed of certain assets including most of our European operations and a number of our data centers (including those operated by PAIX.net, Inc.) and also significantly reduced our managed services operations. We changed the name of our parent company to AboveNet, Inc. on August 29, 2003 and emerged from bankruptcy on September 8, 2003.

Since emerging from bankruptcy, our management team has transformed us from a carrier-centric provider of dark fiber, Internet connectivity and co-location facilities to a company focused on taking advantage of our extensive fiber-optic assets to sell high bandwidth solutions, primarily to enterprise customers. As a result, we have sold or disposed of businesses and assets not deemed central to this focus, including our managed web-hosting services business and data center business. We also terminated our participation in non-core alliances.

In April 2002, MFN announced that it would need to restate its financial statements for the first three quarters of 2001. At the same time, MFN suspended the filing of annual and quarterly reports with the Securities and Exchange Commission (the “SEC”). Following such announcement, in June 2002, the SEC initiated a formal investigation of MFN. On December 15, 2006, we received a “Wells” notice from the SEC staff in connection with such investigation indicating that the SEC staff was considering recommending that the SEC bring a civil injunctive action against us alleging that we had violated various provisions of the federal securities laws. In response to the Wells notice, we made a written submission to the SEC staff setting forth reasons why a civil injunctive action should not be authorized by the SEC. On March 19, 2007, we received a notice from the SEC staff stating that the investigation of MFN had been terminated and that no enforcement action against us had been recommended to the SEC. Such notice was provided to us under the guidelines of the final paragraph of Securities Act Release No. 5310 which states, among other things, that “[such notice] must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff’s investigation of that particular matter. All that such a communication means is that the staff has completed its investigation and that at that time no enforcement action has been recommended to the SEC.” While there have been no further actions to date, we cannot assure you that there will not be any further action on this or other matters by the SEC.
 
1


In July 2006, we determined that as a result of a lack of certain accounting records, we did not expect to be able to produce or have management provide the required certifications for the financial statements for the year ended December 31, 2002 and the period from January 1, 2003 to September 7, 2003 (the last day prior to our emergence from bankruptcy) that could be prepared in accordance with generally accepted accounting principles or audited in accordance with generally accepted auditing standards as promulgated by the Public Company Accounting Oversight Board. We had previously reported that as a result of a lack of certain accounting records necessary for the preparation of the 2001 consolidated financial statements, we could not complete our financial statements for the year ended December 31, 2001. We made these determinations only after spending considerable time and resources attempting to produce financial statements for these periods. As a result, we focused our resources on completing the consolidated financial statements for the period from September 8, 2003 through December 31, 2003, and for each of the years ended December 31, 2004, 2005, 2006 and 2007.

In August 2006, following our dismissal of KPMG LLP, BDO Seidman, LLP (“BDO Seidman”) was engaged as our independent registered public accountants to audit our financial statements as of September 8, 2003 and for the period from September 8, 2003 to December 31, 2003, and as of and for each of the years ended December 31, 2006, 2005 and 2004. BDO Seidman delivered its audit report on our financial statements as of December 31, 2003, 2004 and 2005, and for the period from September 8, 2003 to December 31, 2003 and for the years ended December 31, 2004 and 2005 (collectively, the “Audited Historical Financial Statements”) in August 2007. On February 29, 2008, BDO Seidman delivered its audit report on our financial statements as of December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004, which was included in our Annual Report on Form 10-K, for the year ended December 31, 2006, filed May 13, 2008.

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 customers. The following are the key elements of our strategy:

 
·
Target broadband communications infrastructure customers who have significant bandwidth requirements and high security needs.
 
·
Provide a high level of customization of our services in order to meet our customers’ 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 because most of their networks do not have comparable fiber density.
 
·
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.
 
·
Capitalize on our strength in the financial services sector to focus on meeting the ever increasing needs of this bandwidth intensive customer group.
 
·
Intensify our focus on sales to media companies with high bandwidth requirements.
 
·
Fulfill the needs of customers that are required to comply with recent 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.

We are able to provide high quality, customized services at competitive prices as a result of a number of factors, including:

 
·
Our significant experience providing high-end customized network solutions for enterprises and telecommunications carriers (also referred to as carriers).
 
·
Our focus on providing certain core optical services rather than the full range of 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, and provide us with sufficient fiber inventory to supply dedicated fiber services to customers.
 
·
Our modern networks with advanced fiber-optic technology are less costly to operate and maintain than older networks.
 
·
Our employment 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, among other measures.
 
·
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, which reduces expansion and upgrade costs in the future, and provides significant capacity for future growth.

Our Networks and Technology
 
Metro Networks
 
The foundation of our business is our metro fiber optic networks. These networks currently consist of approximately 1.8 million fiber miles across over 4,500 cable route miles primarily in the following U.S. metropolitan areas and also in London in the U.K.

 
·
Boston
 
·
New York City metro
 
·
Philadelphia
 
·
Baltimore
 
·
Washington, D.C./Northern Virginia corridor
 
·
Atlanta
 
·
Houston
 
·
Dallas
 
·
Phoenix
 
·
Los Angeles
 
·
San Francisco Bay area
 
·
Portland
 
·
Seattle
 
·
Chicago

Our network has access to over 3,000 buildings in the U.S. and London. The network footprint typically allows us to serve central offices, carrier hotels, network POPs, data centers, enterprise locations and traffic aggregation points, not just in the central business district but across the entire metropolitan area in each market. Within our 15 metro networks, our infrastructure provides ample opportunity to access many additional buildings by virtue of its extensive footprint coverage and over 4,000 network access points that can be utilized to build laterals or connect to other networks, thereby providing access to additional locations.
 
2

 
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 (NZDSF) that is optimized for longer distance applications operating in the 1550 nm range. Our network is well positioned to support the more stringent requirements of transport at rates faster than 10 Gbps.

· High Performance Architecture – We are able to design customer networks with a minimum number of POP locations and direct, optimum routing between key areas which enables us to deliver our services at a high level of performance. Because most of our metro lit services are delivered over dedicated fibers not shared with other customers, each 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 15 active 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 extend to a large number of buildings. In addition to the large scale of our core network, we have over 1,800 lateral cables in the U.S. that connect key locations in our metro networks covering over 750 route miles and over 100,000 fiber miles.

· Enterprise Buildings - Our network extends to over 1,000 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 & 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 and data centers within our active markets.
 
· Additional Buildings - In addition to the over 1,400 on-net buildings that we connect to with our own fiber laterals, we have access to over 1,000 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 metro networks that spans over 10,000 route miles. With the exception of the route between New York and Washington, D.C. network, which we constructed and own, our long haul network is based on fiber either leased or acquired, typically under long-term agreements. We have deployed dense wavelength-division multiplexing (DWDM) equipment along this network that provides it with significant capacity. In 2007, we upgraded the equipment used along substantially all of our long haul routes to next-generation technology that has dramatically improved the long haul network’s capabilities. This new platform is optimized for 10 Gbps circuit speeds, supporting a large number of wavelengths and positioning us to support future transmission speed increases.

In addition to our U.S. based facilities, we are a member of the TAT-14 consortium, which provides us with undersea capacity between the U.S. and Europe. We are also currently a member of the JUS consortium which provides us with undersea capacity between the U.S. and Japan. We use leased circuit capacity in continental Europe to provide connectivity among our key IP presence locations. We also operate lit networks in the U.S. connecting to certain key undersea cable landing stations including Manasquan and Tuckerton in New Jersey to connect to the TAT-14 and have leased capacity to Morrow Bay, California to connect to the JUS. In the U.K., we have leased fiber between the TAT-14 landing stations in Bude and London over which we operate a high-capacity DWDM system. Together, these networks provide us high bandwidth capability among our metro networks and certain key markets in Europe and Japan.

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 14 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 and Switch & Data. 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 London, Amsterdam, Tokyo, Paris, Frankfurt and Vienna, 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 OC-48 and OC-192 long haul links and utilizes advanced Juniper and Cisco routers and switches to direct traffic to appropriate destinations. In 2007, we completed an upgrade of our core router network at major hubs to Juniper’s flagship T-Series platform, and we are currently upgrading our edge network to a next generation, high density ethernet services router architecture.

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. This extensive peering fabric combined with our advanced network results in a positive customer experience.
 
3


Network Management
 
Our network management center (“NMC”) is located in Herndon, Virginia and provides round-the-clock 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 and network outages. Our NMC responds to all customer network inquiries via a trouble ticketing system. 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.

Rights-of-Way
 
We have obtained the necessary 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. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations.”

Services
 
Historically, our primary business was to lease dark fiber to telecommunications carriers, enterprises, Internet and web-centric businesses and other customers that wanted to operate their own networks. Over the past several years, we have been focused on evolving our business by leveraging our extensive fiber footprint and deploying incremental capital in order to increase our lit metro transport services product line. With the completion of the upgrade of our long haul network and our core IP upgrade, we also intend to take advantage of the significant increase in WAN and Internet connectivity demand.

Fiber Services
 
Our fiber services offering involves 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 the leasing and maintenance of dark fiber networks, the fiber services product line also includes the provisioning of network co-location and in-building interconnection services, typically at our POP locations.

Fiber 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 with direct routing that meets stringent technical requirements.
· Customized ring configurations and redundancy requirements in a private dedicated service.

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 telecom intensive needs in industries such as financial services, Internet, technology, media, retail, energy and healthcare comprise the core customer base for our fiber services.

Metro Transport Services
 
We offer a number of high bandwidth metro transport service offerings in our active metro markets ranging from 100 Mbps to 10 Gbps connectivity. These services range from simple point-to-point ethernet connectivity to complex multi-node WDM solutions. Our metro transport services have a number of important features that differentiate us from many of our competitors:

· A substantial portion of our metro transport services are deployed over dedicated fiber from end-to-end, representing a private network for each customer;
· This dedicated fiber provides customers with significant scalability for any increasing traffic demands;
· 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; and
· The absence of a shared network eliminates many of the equipment interfaces of most other networks that can impact performance and cause service interruptions.

The most established product within our metro transport services is our custom WDM solutions. We offer private, customized optical network deployments that we build for our largest customers with very specific needs. These solutions often involve extensive network construction to specific critical customer locations such as private data centers and trading platforms. Customers for custom metro transport services are typically large enterprise companies that have significant bandwidth requirements.
 
In the past several years, we have made an effort to extend our metro transport services capabilities beyond customers with very high bandwidth requirements by offering a number of WDM and ethernet offerings aimed to serve more modest initial bandwidth/circuit requirements. These offerings include Basic and Enhanced Wave services, which are based on a dedicated, private fiber infrastructure from end-to-end and provide lower cost and lower capacity solutions to customers. We also offered a range of Metro Ethernet services including private Metro Ethernet (which utilizes customer dedicated equipment and fiber), dedicated Metro Ethernet (which utilizes shared equipment and dedicated fiber, but provides guaranteed capacity) and standard Metro Ethernet (which utilizes shared equipment and dedicated fiber on a shared capacity basis).

We also provide metro transport services on a shared platform basis (not using fibers dedicated to the customer) on a limited basis through our dcXchange service. dcXchange provides high capacity connections (such as 10 Gbps, 2.5 Gbps, 1 Gbps, OC-12) between key carrier hotels and data centers in certain markets in the U.S.  This service is engineered for rapid installation over a shared rather than a private network infrastructure and is appealing to customers that value speed of installation and low prices more than the additional security and flexibility of dedicated fiber.

Long Haul Services
 
Our long haul services provide inter-city connectivity between our 15 metro markets and provides for connectivity at a variety of speeds ranging from 1 Gbps to 10 Gbps. We have deployed a next generation ultra long haul network that takes advantage of significant capacity and distance improvements available in next generation networks. As a result, 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. Moreover, having fewer regeneration sites and equipment interfaces results in an improved speed and service for our customers.
 
4


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 highly differentiated basis.

IP Services
 
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 in London. In addition, we offer IP connectivity in Amsterdam, Frankfurt, Paris and Vienna through resale partners. While we have seen significant increases in IP volume over the last several years, IP connectivity pricing has declined significantly during this period, largely offsetting the growth in volume. 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 has been a significant contributor to the bandwidth growth experienced on our IP network.

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. This capability is a direct result of the significant technological investment we have made in our IP infrastructure.

Sales and Marketing
 
Our sales force is based across most of our 14 U.S. metro markets and London. Our U.S. sales force is comprised of approximately 50 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 London, that have large bandwidth requirements. This represents a change from our focus on wholesale sales to carrier customers in previous years. Since 2004, the vast majority of our new sales have been to enterprise customers.

Our sales strategy includes:
 
· Positioning ourselves as a premier provider of private fiber optic transport solutions and Internet connectivity services.
· Focusing on Fortune 1000 enterprises as well as content rich data companies (i.e. media, health care, 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.

Customers
 
We serve a broad array of customers including leading companies in the financial services, web-centric, media/entertainment, and telecommunications sectors. 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 high 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 metro fiber 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, compliance requirements under complex regulations such as the Sarbanes-Oxley Act or HIPAA and exponential growth in data transmissions due to new modalities for communications, media distribution and commerce.

Segments
 
We operate our business as one operating segment and include segmented results based on geography.

Below is our revenue based on the location of our entity providing the service. Long-lived assets are based on the physical location of the assets. The following table presents revenue and long-lived asset information for geographic areas:
 
   
Years Ended December 31,
 
 
 
2007
 
2006
 
2005
 
Revenue
                   
United States
 
$
227.8
 
$
217.6
 
$
204.1
 
United Kingdom
   
29.4
   
20.3
   
16.4
 
Other
   
   
0.5
   
0.7
 
Eliminations
   
(3.6
)
 
(1.7
)
 
(1.5
)
Consolidated Worldwide
 
$
253.6
 
$
236.7
 
$
219.7
 

   
December 31,
 
 
 
2007
 
2006
 
Long-lived assets
             
United States
 
$
317.3
 
$
272.0
 
United Kingdom
   
30.3
   
27.0
 
Other
   
0.1
   
0.2
 
Consolidated Worldwide
 
$
347.7
 
$
299.2
 
 
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Segment Results,” and Note 15, “Segment Reporting,” to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
 
Research and Development
We depend upon our equipment vendors for technology developments in telecommunications equipment. We test, combine and implement these technology developments to provide the highest level of services to our customers.
 
5


Competition
 
The telecom industry is intensely competitive and has undergone significant consolidation over the past few years. Although there are multiple reasons for this consolidation, among the most prominent is the need to rationalize capacity created as a result of the telecommunications investment boom which occurred in the late 1990s. With respect to our larger competitors, Verizon and AT&T (formerly SBC) have accounted for most of the consolidation through their purchases of MCI and AT&T, respectively. In the mid-market, Level 3 has been responsible for most of the consolidation by acquiring a large number of facilities-based telecommunications providers. At the same time, recent regulatory rulings have reduced the obligations of the ILECs to provide portions of their networks, referred to as unbundled network elements (UNEs), at historical cost prices making it more difficult for non-facilities-based operators to continue to provide services by utilizing UNEs from the ILECs.
 
We face competition from local exchange carriers (CLECs) and other facilities-based telecommunications providers including the ILECs who currently have a large share of the local markets and are aggressively deploying their own fiber. Like us, a number of our competitors survived the downturn of the early 2000s by going through a restructuring process that significantly improved their financial condition and efficiency of their operations. CLECs generally offer a much broader array of services than we do and tend to compete more directly with each other and the ILECs across a larger segment of customers.

The Internet connectivity business is intensely competitive and includes many providers such as AT&T, Verizon, Level 3 and Cogent. As a result of this competition, while Internet traffic has continued to grow at a substantial rate over the past five years, pricing has generally declined, which has negatively affected revenue growth.

In the London market, we compete with a number of other telecommunications companies, including British Telecom, Cable & Wireless, Colt Telecom and Global Crossing.

Personnel
 
Our workforce levels have been relatively constant over the last three years with an increase to our optical solutions staff, offsetting the reductions related to business lines we have sold or eliminated. As of December 31, 2007, we had a total of 549 employees, 482 of which were employed in the U.S., 65 in the U.K., one in the Netherlands and one in Japan. As of December 31, 2006, we had a total of 502 employees, 441 of which were employed in the U.S., 59 in the U.K., one in the Netherlands and one in Japan. As of December 31, 2005, we had a total of 519 employees, 454 of which were employed in the U.S., 63 in the U.K., one in the Netherlands and one in Japan. We consider our relations with our workforce to be good. None of our employees is represented by a union.

Sale of Data Center Businesses
 
Our data centers provided customers with web-centric services. While our U.S. subsidiaries were operating under bankruptcy protection, we sold or disposed of certain data center assets, and upon emergence from bankruptcy protection, we continued to operate data centers in New York City, San Jose, Seattle, Northern Virginia, London (U.K.), Frankfurt (Germany) and Vienna (Austria). Our Frankfurt and Vienna data centers were sold in 2003 and 2004, respectively. We vacated one of the Northern Virginia facilities in 2004 and our Seattle facility in 2005 and sold one of our San Jose facilities in 2005.

In October 2006, we sold our data centers located at facilities in New York City and Northern Virginia to a wholly-owned subsidiary of Digital Realty Trust, Inc. In November 2006, we sold our two remaining data centers in San Jose and London, to DataPipe, Inc. and BIS Limited, respectively. While each of Digital Realty, DataPipe and BIS took over the provision of co-location services at their respective acquired facilities, including space, power, cabinets, and cross-connects, we continue to offer and provide customers in these facilities with metro transport, long haul and IP services.

The 2006 sales of the domestic data centers generated proceeds of $43.1 million, which resulted in a net gain of $48.2 million, of which $28.0 million and $6.0 million represented the reversal of deferred fair value rent liability established in accordance with Statement of Position 90-7, “Financial Reporting by Entity in Reorganization Under the Bankruptcy Code,” (“SOP 90-7”), and the deferred rent liability established in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases,” respectively.

Additionally, in 2006, as described above, we sold all of the issued and outstanding stock of AboveNet (UK) Limited, which operated the data centers in London, to an unaffiliated third party for £1.35 million ($2.6 million based upon the exchange rate at the time of sale), of which £0.675 million ($1.3 million based upon the exchange rate at the time of sale) was received at closing and £0.675 million ($1.3 million based upon the exchange rate at the time of sale) was received in January 2007. The operating results of AboveNet (UK) through November 15, 2006, the date of sale, were included in discontinued operations in our consolidated statements of operations.

Discontinued Operations
 
Upon our emergence from bankruptcy in September 2003, we decided to sell or dispose of certain European entities. In addition, as described above, AboveNet (UK) was sold on November 15, 2006. The assets and liabilities of these entities, and their operating results and cash flows were reported as discontinued operations as of and for the years ended December 31, 2006 and 2005. See Note 7, “Discontinued Operations and Dispositions,” to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 
In the U.S., the Federal Communications Commission, which we refer to as the FCC, and various state regulatory bodies regulate some aspects of certain of our services. In some local jurisdictions, we must obtain approval to operate or construct our networks. In the U.K., we are subject to regulations by the agencies having jurisdiction over the provision of transmission services. In addition, we are subject to numerous federal, state and local taxes, fees or surcharges on our products and services.

Federal
 
In the U.S., federal telecommunications law directly shapes the market in which we compete. We offer two types of services that fall under the jurisdiction of the FCC—the leasing of dark fiber and the provision of telecommunications transmission services—that are subject to varying degrees of regulation by the FCC pursuant to the provisions of the Communications Act of 1934, as amended by the Telecommunications Act of 1996, which we refer to as the 1996 Communications Act, and by FCC regulations implementing and interpreting the 1996 Communications Act.

Dark fiber leasing. The FCC considers dark fiber a "network element" and not a “telecommunications service.” As a result, we believe that our provision of dark fiber is not subject to many of the legal requirements imposed on the sale of telecommunications services.
 
6


Telecommunication services. For most of our telecommunications services offerings, we are not required to provide such services on a common carrier basis (i.e., the provision of services to all customers on uniform terms and conditions). Our revenue from transmission services, whether or not provided as a common carrier, are subject to FCC Universal Service Fund assessments to the extent that these services are purchased by end users (i.e., not by wholesale providers or resellers). Being regulated as a "telecommunications carrier" gives us certain legal benefits. In particular, state and local governments have the obligation to manage access to the public rights-of-way in a competitively neutral nondiscriminatory manner to telecommunications carriers. In addition, we are entitled to access existing telecommunications infrastructure by interconnecting our fiber-optic networks with the ILECs’ central offices and other facilities. Under the 1996 Communications Act, ILECs must, among other things: (1) allow interconnection at any technically feasible point and provide service equal in quality to that provided to others, and (2) provide access to their poles, ducts, conduits and other rights-of-way.

The FCC exercises jurisdiction over the rates that many power utilities and ILECs charge to other companies to lease space on their telephone poles or electrical towers in order to string fiber optic cable. While the FCC shares this jurisdiction with some state regulatory commissions, in the majority of the country, the FCC either directly regulates these “pole attachment” rates, or has established regulations that have been adopted by the states. The pole attachment law was first promulgated in Section 224 of the Federal Communications Act of 1978, and was later expanded in the 1996 Communications Act. The purpose of the law is to make it easier for cable companies and competitive telecommunications providers to build out their own networks. We have many pole attachment agreements with ILECs and power utilities - some of these agreements reflect rates that were voluntarily negotiated, but many reflect rates established pursuant to the FCC’s regulations. In recent years, some utilities have interpreted the regulations in a way that can impose what we believe to be excessive costs on competitive carriers, including us. To the extent utilities are successful in maintaining these interpretations of the rules they can increase our cost of doing business. In late 2007, the FCC initiated rulemaking proceedings to examine the pole attachment rate formula, specifically, whether a single rate should apply to all attachers and whether incumbent local exchange carriers should be entitled to the same rate as other telecommunications service providers, among other matters.

Internet access services, including IP connectivity services that we provide, are treated as unregulated “information services” under Title I of the 1996 Communications Act, and are not subject to regulatory fees. The FCC has recently issued orders confirming that other forms of IP bandwidth services, including Digital Subscriber Line service, Cable Modem service and Broadband Over Powerline service, are defined as “information services” and so are not subject to regulatory fees. However, the dramatic growth of VoIP services has caused intense focus on the regulatory status of IP services. The FCC recently required that providers of interconnected VoIP service must provide access to emergency 911 services, must comply with federal law enforcement and “wiretap” statutes, and must pay regulatory fees. Some of these FCC decisions are under appeal before federal courts of appeals. While these decisions have focused on providers of interconnected VoIP service, which we do not provide, there is nevertheless substantial uncertainty concerning the regulatory status of IP-based services generally. This general uncertainty raises the concern that the FCC may extend other traditional telecommunications regulation to VoIP and/or other IP-based services, including the IP connectivity services that we offer. If this occurs, it could lead to an increase in the regulatory fees required to be paid by us related to such services.

State
 
The 1996 Communications Act prohibits state and local governments from enforcing any law, rule or legal requirement that prohibits, or has the effect of prohibiting, any person from providing any interstate or intrastate telecommunications service. This provision of the 1996 Communications Act enables us to provide telecommunications services in states that previously prohibited competitive entry.

Under the 1996 Communications Act, states retain jurisdiction, on a competitively neutral basis, to adopt regulations necessary to preserve universal service, protect public safety and welfare, manage public rights-of-way, ensure the continued quality of intrastate communications services and safeguard the rights of consumers.

States are responsible for mediating and arbitrating interconnection agreements between ILECs and other carriers if voluntary agreements are not reached. Accordingly, state involvement in local telecommunications services is substantial.

Each state (and the District of Columbia) has its own statutory scheme for regulating providers of intrastate telecommunications services if they are "common carriers" or "public utilities." As with the federal regulatory scheme, we believe that our leasing of dark fiber facilities does not render us a common carrier or public utility such that we would be subject to this type of regulation in the provision of dark fiber in most jurisdictions in which we currently have facilities. Our offering of transmission services (as distinct from leasing dark fiber capacity), however, is subject to regulation in each of these jurisdictions to the extent that these services are offered for intrastate use. Under current FCC policies, any dedicated transmission service or facility that is used more than 10% of the time for the purpose of interstate or foreign communication is subject to federal tariffs and rates, which fall under FCC jurisdiction to the exclusion of state regulation.

State regulation of the telecommunications industry is changing rapidly, and the regulatory environment varies substantially from state to state. We are currently authorized to provide intrastate telecommunications services in Arizona, California, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Virginia, Washington and West Virginia. At present, we do not anticipate that the regulatory requirements to which we will be subject in the states in which we currently operate or intend to operate will have any material adverse effect on our operations. These regulations may require, among other things, that we maintain certifications to operate and utilize the public rights-of-way, that we obtain certain environmental approvals before we construct new facilities, and that we provide notification of, or obtain authorization for, specified corporate transactions, such as incurring debt or encumbering our telecommunications assets. We will incur costs to comply with these and other regulatory requirements, such as the filing of tariffs, submission of periodic financial and operational reports to regulators, and payment of regulatory fees and assessments, including, in some states, contributions to state universal service programs. Notwithstanding federal and state laws and regulations requiring nondiscriminatory access to public rights-of-way, in some jurisdictions certain of our competitors, especially ILECs, have certain advantages by reason of having obtained approvals for operation under prior, less regulatory intensive regimes. For example, in California, certain competitors of ours are subject to a less rigorous environmental review procedure for proposed construction than we are, thereby enabling them potentially to construct new facilities more quickly than us and at a lower cost. We have filed comments in connection with a California Public Utility Commission rulemaking proceeding advocating for parity among carriers related to the environmental review of certain construction projects. We cannot represent that this effort will be successful, however, and we continue to be concerned that the disparate treatment of telecommunications carriers by California regulators will continue in the foreseeable future. In some jurisdictions, our pricing flexibility for intrastate services may be limited because of regulation, although our direct competitors will be subject to similar restrictions. However, we cannot assure you that future regulatory, judicial, or legislative action will not have a material adverse effect on us. 

Some states may also impose a state universal service fund assessment on intrastate telecommunications services to fund state universal service projects. The rate of assessment varies by state. To the extent the state assessment applies to our dark fiber revenue and transmission services, we are required to pay into the state funds.

States also regulate the leasing of poles and conduits owned by incumbent utilities, including telecom and electric and gas utilities. The rates are calculated based on FCC formulas implemented by the states and generally are more advantageous than market-based rates. The leasing of these facilities is determined by a commercially negotiated contract.
 
7


Local
 
In addition to federal and state laws, local governments exercise legal authority that can affect our business. For example, local governments, such as the City of New York, typically retain the ability to manage public rights-of-way subject to the limitation that local governments may not prohibit persons from providing telecommunications services and local governments may not treat telecommunications service providers in a discriminatory manner. Because of the need to obtain approvals, local authorities can affect the timing and costs associated with our use of public rights-of-way.

Regulation of the Internet
 
Laws and regulations that apply directly to the Internet are becoming more prevalent. The U.S. Congress frequently considers laws regarding privacy and security relating to the collection and transmission of information over the Internet. Congress also addressed the need for regulation on the protection of children, copyrights, trademarks, domain names, taxation and the transmission of sexually explicit material over the Internet. The European Union adopted its own privacy regulations and other countries may do so in the future. Other nations have taken actions to restrict the free flow of material deemed objectionable over the Internet.

The scope of laws and regulations applicable to the Internet is subject to conflicting interpretations and developments. The applicability to the Internet of laws and regulations from various jurisdictions governing issues such as property ownership, sales tax, libel and personal privacy is unsettled and may take years to resolve. For example, the 1996 Communications Act prohibits the transmission of certain types of information and content over the Internet but the scope of this prohibition is currently unsettled. In addition, although courts held unconstitutional substantial parts of the Communication Decency Act, federal or state governments may enact, and courts may uphold, similar legislation as well as laws covering issues such as intellectual property rights over the Internet and the characteristics and quality of Internet services and consumer protection laws. In the U.S., federal agencies, such as the FCC and the Federal Trade Commission, occasionally have overlapping jurisdiction in matters regarding privacy, consumer protection and fraud that are part of Internet-based services or transactions. In addition, several state regulators and lawmakers are also exercising jurisdiction in these areas. Foreign countries have also enacted laws in these fields.

The current application of most of these laws does not directly affect us in a material manner, although these laws do affect many of our Internet connectivity customers. The extent that Internet connectivity providers such as ourselves are held directly or contributorily liable for violations of such laws by their customers or others involved with Internet-based services or transactions is an area of law that is only now becoming established, and it is possible that we may face increased legal liability and costs of legal compliance.

Regulation in the United Kingdom
 
The telecommunications regulatory regime in the U.K. is derived from directives and other regulatory instruments of the European Union Council, Parliament and the European Commission. In particular, in February 2002, the European Commission adopted a package of five new directives which set out a new framework for the regulation of electronic communications networks and services throughout the EU. These five directives were incorporated into U.K. national law by the Communications Act 2003, which came into effect on July 25, 2003, and Privacy and Electronic Communications (EC Directive) Regulations 2003, which came into effect on December 11, 2003.

The Communications Act 2003 introduced a number of changes to the previous regulatory and licensing framework that existed in the U.K. under the Telecommunications Act 1984, including the abolition of the requirement for operators to hold individual licenses. However, in many ways, similar end-results are achieved under the new general authorization regime by the obligation imposed upon electronic communication providers to comply with some basic conditions, known as the General Conditions of Entitlement. A breach of any of these conditions could lead the regulator, the Office of Communications (“OFCOM”), to impose fines and, potentially, suspend or revoke the right to provide electronic communications networks and services.

The Communications Act 2003 retained the broad structure of the ‘Code Powers,’ which were introduced as an annex to the previous legislation. Code Powers provide enhanced legal powers for operators who wish to construct and maintain networks on both public and private land. AboveNet Communications UK Limited, our U.K. operating subsidiary (“ACUK”), holds such Code Powers as a result of automatic entitlement arising from its previous status as a license holder. Although Code Powers give operators the right to install these networks on public highways, each operator is required to certify to OFCOM each year that it has sufficient and acceptable financial security in place to cover the costs which could be incurred by local councils or road authorities if they were required to remove these networks or restore the public roads following the insolvency of that operator. This security is commonly referred to as “funds for liabilities.” OFCOM has indicated that it will generally require an operator to provide board-level certification of third party security for this purpose.

During 2006, the European Commission began conducting a review of these five directives and their associated regulatory framework (the “2006 Review”) to assess their continuing suitability and efficacy, and whether any amendments are necessary. The European Commission completed and published the 2006 Review in November 2007. The proposals are being debated in the European Parliament and by member state governments in the European Union Council. Once adopted at the European Union Council level, the rules have to be incorporated into national law before taking effect. The European Commission expects any changes to be in effect by 2010. It is not possible, at this stage, to assess the impact of the 2006 Review on the U.K. telecommunications regulatory regime.

Our subsidiary, ACUK, is entitled to provide electronic communications networks and services throughout the U.K. and is therefore liable for property taxation (“Business Rates”) on the amount of fiber in use and in our control during each fiscal year. These Business Rates are levied on companies by the “Ratings Authority,” a U.K. Government Department.

Glossary of Terms
 
Cable route miles – the length of fiber cable installed in a network. This does not necessarily correspond to geographical footprint. For example, if two cables are installed in along the same path, the length of both cables would count in assessing “cable route miles.”

Carrier hotel (or Telehouse)– a facility containing many telecommunications service providers that are widely interconnected. The facility is generally industrial in nature with high-capacity power service, backup batteries and generators, fuel storage, riser cable systems, large cooling capability and advanced fire suppression systems.
 
Central Office– a facility used to house telecommunications equipment (e.g. switching equipment) that is used to make connections between the local loops (local distribution network) in the vicinity of the facility to regional or long distance telecommunications facilities. Central Offices are typically operated by the ILEC.

CLEC– this is an acronym for “competitive local exchange carrier,” a carrier providing telecommunications services in competition with the ILEC.

Co-location– the placement of equipment in a telecommunications POP, data center or central office.
 
8


Data Center – a facility used to house computer systems and associated components. It generally includes environmental controls (air conditioning, fire suppression, etc.), redundant/backup power supplies, redundant data communications connections and high security.

Dark Fiber– fiber that has not yet been connected to telecommunications transmission equipment and therefore not yet activated or “lit” for the transmission of voice, data or video traffic.

DWDM– in fiber-optic communications, wavelength-division multiplexing (WDM) is a technology that combines (multiplexes) multiple optical signals onto a single optical fiber by using different wavelengths (colors) of laser light to carry the different signals. DWDM is an acronym for Dense Wavelength-Division Multiplexing. The term “dense” refers to the number of channels being multiplexed - a DWDM system typically has the capability to multiplex greater than 16 wavelengths.

Edge network the routers, switches and facilities that provide entry points into and exit points out from a service provider’s core network (also referred to as its backbone).

Ethernetthe standard local area network (LAN) protocol. Ethernet was originally specified to connect devices on a company or home network as well as to a cable modem or DSL modem for Internet access. Due to its ubiquity in the LAN, Ethernet has become a popular transmission protocol in the metro and long haul networks as well. Ethernet is defined by the IEEE in the 802.3 standard.

Facilities-based provider– a provider that predominately utilizes its own facilities and transmission and termination equipment (whether owned or leased) in the provision of telecommunications services rather than the facilities of other telecommunications services providers.

Fiber miles – the route miles of a network multiplied by the number of fibers within each cable on the network. For example, if a 10 mile network segment with one cable of 432 count fiber is installed, it would represent 10x1x432 or 4,320 fiber miles.

Gbps– gigabits per second, a measure of telecommunications transmission speed. One gigabit equals 1 billion bits of information.

IEEE  The Institute of Electrical and Electronics Engineers or IEEE (pronounced as eye-triple-e) is an international non-profit, professional organization for the advancement of technology related to electricity. It has the most members of any technical professional organization in the world, with more than 360,000 members in approximately 175 countries and sets numerous standards in the telecommunications industry.

ILEC– incumbent local exchange carrier, typically one of the historic regional Bell operating companies.

IP– Internet protocol, the transmission protocol used in the transmission of data over the Internet.

JUS– this is an acronym for the Japan-US Cable Network, a trans-Pacific undersea telecommunications cable system running between U.S. and Japan.

Lateral an extension from the main or core portion of a network to a customer’s premises or other connection point.

Mbps– megabits per second, a measure of telecommunications transmission speed. One megabit equals 1 million bits of information.

MPLS– this is an acronym for MultiProtocol Label Switching, which is a standards-based technology for speeding up network traffic flow and making it easier to manage. MPLS involves setting up a specific path for a given source/destination pair, identified by a label put in each packet, thus saving the time needed for a router or switch to look up the address for the next node to which the packet is to be sent.

Multiplexing – an electronic or optical process that combines a large number of lower speed transmissions into one higher speed data stream. Multiplexing can be accomplished via either time-division (TDM) or wavelength-division (WDM) methods.

Nm (nanometer)– the unit measure used to quantify wavelength. The term “nm range” is used to quantify a portion of the optical spectrum in which a particular optical transmission system operates.

NZDSF– this is an acronym for non-zero dispersion shifted fiber, a fiber type optimized for long distance transmission in the 1550 nm range.

Packet– a packet is a formatted block of information carried by a communications network. Traditional point-to-point communications networks simply transmit data as a series of bytes, characters or bits alone.

OC– this is an acronym for optical carrier level, a measure of the transmission rate of optical telecommunications traffic. For example: OC-1 = 51.85 Mbps.

Optical – relating to the transmission of telecommunications traffic through the use of light through fiber.

Peering– the interconnection between Internet service providers pursuant to which they exchange traffic from their respective customers.

Peering exchange a facility at which multiple Internet service providers peer or exchange customer traffic to reach other parts of the Internet.

POP– this is an acronym for point-of-presence, a facility at which certain telecommunications services, ranging from co-location to transmission to fiber termination, occur.

SONETthis is an acronym for Synchronous Optical Network, an electronics and network architecture for variable bandwidth products that enable transmission of voice, data and video (multimedia) at very high speeds. SONET ring architecture provides the ability for automatic restoration of service in the event of a fiber cut or equipment failure by automatically rerouting traffic in the opposite direction around the ring.

TAT-14– this is an acronym for a trans-Atlantic undersea telecommunications cable system running between U.S. and a number of points in Europe.
 
Telehouse (or Carrier hotel) – a facility containing many telecommunications service providers that are widely interconnected. The facility is generally industrial in nature with high-capacity power service, backup batteries and generators, fuel storage, riser cable systems, large cooling capability and advanced fire suppression systems.
 
9


Tier 1– a network generally operated by an Internet service provider that connects to the entire Internet solely via peering connections.

Although there is no formal definition of the "Internet Tier hierarchy," the generally accepted definition among networking professionals is:
 
·
Tier 1 - A network that peers with every other network to reach the Internet.
 
·
Tier 2 - A network that peers with some networks, but still purchases IP transit (i.e., routing of traffic to all other places on the Internet) to reach at least some portion of the Internet.
 
·
Tier 3 - A network that solely purchases transit from other networks to reach the Internet.

TDM – this is an acronym for time division multiplexing, an electronic process that combines a large number of lower speed data streams into one high speed transmission through the use of fixed time slots within the high-speed stream.

Transport service– a telecommunication service moving data from one place to another.

UNE– this is an acronym for unbundled network element, which is a regulatory term used to describe a segment of an ILEC telecommunications network that must be offered on a stand-alone basis, and is used in the provision of telecommunications services.

VPN – this is an acronym for virtual private network, a private communications network used by companies or organizations to communicate confidentially over a shared (not a dedicated) network. VPN traffic can be carried over a shared networking infrastructure on top of standard protocols, or over a service provider's private network.

WAN this is an acronym for wide area network, or a network crossing a large geographical area.

Wavelength– a channel of light that carries telecommunications traffic through the process of wavelength-division multiplexing.

Special Note Regarding Forward-looking Statements
 
Information contained or incorporated by reference in this Annual Report on Form 10-K, in other SEC filings by the Company, in press releases, and in presentations by the Company or its management, contains “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 covered by the forward-looking statements will be achieved, and other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. Such forward-looking statements include, but are not limited to, those relating to the Company’s financial and operating prospects, future opportunities, ability to retain existing customers and attract new ones, the Company’s exposure to the financial services industry, the Company’s acquisition strategy and ability to integrate acquired companies and assets, outlook of customers, reception of new products and technologies, and strength of competition and pricing. In addition, such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results expressed or implied by such forward-looking statements. Also, the Company’s business could be materially adversely affected and the trading price of the Company’s common stock could decline if any such risks and uncertainties develop into actual events. The Company undertakes no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.

Available Information
 
Since emerging from bankruptcy, in addition to this Annual Report on Form 10-K for the year ended December 31, 2007 and our Annual Report on Form 10-K for the year ended December 31, 2006, we have filed certain Current Reports on Form 8-K with the SEC. These reports are available at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Additionally, this information is available at the SEC’s website (http://www.sec.gov). All of our SEC filings are available, free of charge, by going to our website at http://www.above.net at the About / Investors tabs.

 
We have a limited history of financial reporting.
 
We have provided only limited historical financial information upon which you may base your evaluation of our performance. We were formed in April 1993, filed for bankruptcy protection in May 2002 and emerged from bankruptcy in September 2003. As noted below, as a result of a lack of available records, we have not provided financial information for periods prior to our emergence from bankruptcy in September 2003. Further, our financial results since September 2003 have been affected by a number of non-recurring revenue and expense events, which makes it more difficult to forecast our future financial performance. Accordingly, you must consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies with limited financial history of financial reporting.

We are not in compliance with our reporting obligations under the Securities Exchange Act of 1934.
 
We have not made any timely periodic filings with the SEC required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for any period since prior to our filing for bankruptcy in May 2002. The filing of this Annual Report on Form 10-K or future periodic filings will not cure these past violations. Because of our failure to make timely periodic filings with the SEC, we could be subject to civil penalties and other administrative proceedings by the SEC. We do not anticipate being able to list our common stock on any national exchange until, at a minimum, we have become current with our periodic SEC filings. However, even if we become current with our SEC filings, we cannot provide any assurances that we will be able to meet other applicable listing standards or that if listed, a public trading market will develop in our securities.
 
This Annual Report on Form 10-K is not compliant with our reporting obligations.
 
The Annual Report on Form 10-K requires five years of selected financial data, which for 2007 would include selected financial information for the full year of 2003. Because of a lack of historical records, we have not provided selected financial information for the period from January 1 to September 7, 2003. Due to our failure to provide the selected financial information for these periods, this Annual Report on Form 10-K does not comply with the requirements of the SEC rules.
 
10


Our prior SEC Investigation may negatively affect us.
 
As previously discussed in “Corporate History,” the SEC initiated a formal investigation of MFN in June 2002. On December 15, 2006, we received a “Wells” notice from the SEC staff in connection with such investigation indicating that the SEC staff was considering recommending that the SEC bring a civil injunctive action against us alleging that we violated various provisions of the federal securities laws. In connection with the contemplated action, the staff could have sought a permanent injunction, disgorgement, and civil penalties. In response to the Wells notice, we made a written submission to the SEC staff setting forth reasons why a civil injunctive action should not be authorized by the SEC. On March 19, 2007, we received a notice from the SEC staff stating that the investigation of MFN had been terminated and that no enforcement action against us had been recommended to the SEC. Such notice was provided to us under the guidelines of the final paragraph of Securities Act Release No. 5310 which states, among other things, that “[such notice] must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff’s investigation of that particular matter. All that such a communication means is that the staff has completed its investigation and that at that time no enforcement action has been recommended to the SEC.” While there have been no further actions to date, we cannot assure you that there will not be any further action on this or other matters by the SEC.

Our revenue includes certain fees that are not predictable.
 
Historically, a portion of our revenue has included certain termination payments received by the Company to settle contractual commitments, which are referred to as termination revenue. Additionally, we have received settlements of our claims in various customer bankruptcy cases, which is also included in termination revenue. Termination revenue amounted to $8.5 million, $8.3 million and $12.1 million in 2007, 2006 and 2005, respectively. This revenue is not predictable and may not be sustainable.

In prior years, we incurred significant net losses and we cannot assure you that we will generate net income or that we will sustain positive operating cash flow in the future.
 
We have incurred net losses since our inception other than in 2006 and 2007. In 2006, we generated net income, principally from the sale of our remaining data centers and in 2007, we generated operating income and net income. The net income reported for 2007 includes the non-cash gain of $10.3 million on the reversal of foreign currency translation adjustments from the liquidation of certain subsidiaries.

In order for us to continue to generate positive operating cash flow and net income, we will need to continue to obtain new customers, increase our revenue from our existing customers and manage our costs effectively. In the event we are unable to do so, or if we lose customers, we may not be able to continue to generate operating cash flow or net income in the future.

We have significant exposure to the financial services industry.

We have a large number of customers in the financial services industry. Financial services companies, including some of our customers, have recently reported significant losses caused by the write down and re-evaluation of some of their investments and portfolio positions, which has created significant liquidity problems within the financial services industry. These problems may affect our customers’ ability to pay for our services and to place orders for new services. In addition, our operating results may also be adversely affected if our customers file for bankruptcy or are acquired by institutions or entities that are not interested in purchasing services from us.

We have incurred secured indebtedness
 
On February 29, 2008, we closed a $60 million senior secured credit facility with two unaffiliated third party lenders, which is comprised of a revolving working capital line and two term loans (collectively, the “Credit Facility”). The Credit Facility is secured by substantially all of our assets. On September 26, 2008, we executed a joinder agreement to the Credit Facility that adds an additional lender and increases the amount of the Credit Facility to $90 million effective October 1, 2008, subject to the terms of the joinder agreement, including the payment of a $0.45 million fee at closing and a $0.1 million advisory fee. The availability under the Revolver increased to $27 million, the Term Loan increased to $36 million and the available Delayed Draw Term Loan increased to $27 million. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” and Note 16, “Subsequent Events - Bank Financing,” to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Amounts borrowed under this facility bear interest at short-term LIBOR or at the administrative agent’s base rate at our discretion, plus the applicable margins, as defined. Effective August 4, 2008, we entered into a three year swap arrangement, fixing our interest on the $24 million outstanding under the Credit Facility at 3.65%, plus the applicable margin of 3.25%. This Credit Facility imposes restrictions on our operations, including the requirement that we maintain a cash balance of $20 million during the term of this facility. Further, if we are unable to meet any of the reporting or financial covenants under this facility, the lenders may demand that we repay the full amount borrowed under this facility or may limit our access to any available amounts.

If our operations do not produce sufficient cash flow to fund our operating expenses and capital requirements, we may be required to raise additional capital through a debt or equity financing.
 
Until we can generate positive free cash flow, we will continue to rely on our existing cash, cash from operating activities and funds available under our Credit Facility to meet our cash needs. Our future capital requirements may increase if we acquire or invest in additional businesses, assets, services or technologies, which may require us to issue additional equity or debt. We may also face unforeseen capital requirements for new technology that we require to remain competitive or to comply with new regulatory requirements, for unforeseen maintenance of our network and facilities and for other unanticipated expenses associated with running our business. We cannot assure you that we will have access to necessary capital, nor can we assure you that any such financing will be available on terms that are acceptable to us. If we issue equity securities to raise additional funds, our existing stockholders may be diluted. Additionally, our Credit Facility imposes limitations on the amount of additional indebtedness we may incur.

The concerns of our customers or prospective customers regarding our long-term financial status may discourage some of them from purchasing services from us in the future.
 
Customers purchasing high bandwidth communications services and leasing dark fiber often require a high degree of reliability and long-term stability from their vendors because significant portions of their business may rely upon these services. The impact of our bankruptcy reorganization, our failure to comply with our SEC reporting obligations for several years and the prior SEC investigation, cannot be accurately quantified and may impact our business. These factors could cause customers and prospective customers to question our financial soundness and may also affect the contractual terms that are available to us. To the extent that our customers believe that we may not remain financially viable in the long run, they may choose not to purchase services from us. These perceptions, if widespread, could materially adversely affect our business, financial condition and results of operations.

We may not be able to develop and maintain systems and controls to operate our business effectively.
 
We have experienced severe difficulties developing and maintaining financial and other systems necessary to operate our business properly and for a period of over six years we could not file our periodic reports with the SEC.
 
11


Our history of rapid initial growth, expansion through acquisitions with attendant integration issues, significant reorganization and restructuring activities and associated significant staffing reductions, budgetary constraints and attendant limitations on investment in internal systems have increased the risk of internal control deficiencies.
 
Under Section 404 of the Sarbanes-Oxley Act, management is required to assess the effectiveness of our internal control over financial reporting on a periodic basis. Pursuant to our assessment of internal control over financial reporting as of December 31, 2007, we have identified the material weaknesses described in Item 9A, “Controls and Procedures.” These weaknesses mean that there is more than a remote likelihood that we will not prevent or detect a material misstatement in our financial statements. Although we are developing and have already begun implementing plans to remediate these weaknesses and have undertaken additional procedures to produce our financial statements, we cannot assure you that we will be successful in this regard. Further, as a result of these material weaknesses, our management has concluded that we do not have effective internal control over financial reporting and that our disclosure controls and procedures were not effective. We remain delinquent in our financial reporting to the SEC. In the event that we are unable to develop and maintain appropriate systems and controls, it could materially adversely affect our business, financial condition and results of operations. We believe, however, that the financial statements included in Item 8 of this Form 10-K fairly present, in all material respects, our financial condition and results of operations for the periods presented.

Our common stock is not listed and it may be difficult for our stockholders to sell their shares.
 
Our common stock is currently not listed on any stock exchange. Although we are aware that trades in our common stock occur through the over the counter market, the stock is very thinly traded. As a result, prices may be volatile and it may be difficult to find a purchaser for shares of our common stock. Although we plan to list our common stock with NASDAQ, we cannot assure you that NASDAQ will accept our listing. Further, we cannot predict the extent to which investor interest in our shares will lead to the development of an active trading market or how liquid that market may become.

We may not be able to successfully implement our business strategy because we depend on factors beyond our control, which could adversely affect our results of operations.
 
Our future largely depends on our ability to implement our business strategy - including shifting from carrier to enterprise customers and from leasing dark fiber to providing lit services - to create new business and revenue opportunities. Our results of operations will be adversely affected if we cannot fully implement our business strategy. Successful implementation depends on numerous factors beyond our control, including economic, competitive, regulatory and other conditions and uncertainties, the ability to obtain licenses, permits, franchises and rights-of-way on reasonable terms and conditions and the ability to hire and retain qualified management personnel.

Our success depends on our ability to compete effectively in our industry.
 
The telecommunications industry is extremely competitive, particularly with respect to price and service. Our failure to compete effectively with our competitors could have a material adverse effect on our business, financial condition and results of operations. A significant increase in industry capacity or reduction in overall demand would adversely affect our ability to maintain or increase prices. Further, we anticipate that prices for certain telecommunications services such as IP bandwidth will continue to decline due to a number of factors including (a) price competition as various network providers attempt to gain market share to cover the fixed costs of their network investments and/or install new networks that might compete with our networks; and (b) technological advances that permit substantial increases in the transmission capacity of many of our competitors’ networks.

In the telecommunications industry, we compete against ILECs, which have historically provided local telephone services and currently occupy significant market positions in their local telecommunications markets. In addition to these carriers, several other competitors, such as facilities-based communications service providers including CLECs, cable television companies, electric utilities and large end-users with private networks offer services similar to those offered by us. Many of our competitors have greater financial, managerial, sales and marketing and research and development resources than we do.

Rapid technological changes could affect the continued use of our services.
 
The telecommunications industry is subject to rapid and significant changes in technology that could materially affect the continued use of our services. Changes in technology could negatively affect the desire of customers to purchase our existing services and may require us to make significant investments in order to meet customer demands for services incorporating new technologies. We also cannot assure you that technological changes in the communications industry and Internet-related industry will not have a material adverse effect on our business, financial condition and results of operations.

We are dependent on key personnel.
 
Our business is managed by certain key management and operating personnel. We believe that the success of our business strategy and our ability to operate successfully depend on the continued employment of such employees and the ability to attract qualified employees. We face significant competition from a wide range of companies in our recruiting efforts, and we could experience difficulties in recruiting and retaining qualified personnel in the future.

Reliance on consultants.
 
We currently rely on certain consultants to provide senior financial and accounting services, including one that is our acting Chief Financial Officer. To the extent that the consultants were to terminate their services agreements before we have hired permanent replacements, our ability to regain compliance with our Exchange Act filing obligations could be further delayed. Further, if any of these consultants do not provide a high quality level of service, it could further delay the production of, or result in a misstatement in, our financial statements.

We depend on third party service providers for important parts of our business operations and the failure of those third parties to provide their services could negatively affect our services.
 
We rely on third party service providers for important parts of our business, including most of the fibers on which our long haul network operates and significant portions of the conduits into which our fiber optic cables are installed in our metro networks. If these third party providers fail to perform the services required under the terms of our contracts with them or fail to renew agreements on reasonable terms and conditions, it could materially and adversely affect the performance of our services and we may experience difficulties locating alternative service providers on favorable terms, if at all.

Changes in our traffic patterns or industry practice could result in increasing peering costs for our IP network.
 
Peering agreements with other Internet service providers allow us to access the Internet and exchange traffic with these providers. In most cases, we peer with other Internet service providers on a settlement or payment-free basis. If other providers change the terms upon which they allow settlement-free peering or if changes in our Internet traffic patterns, including the ratio of our inbound to outbound traffic, cause us to fall below the criteria that these providers use in allowing settlement-free peering, the costs of operating our Internet backbone will likely increase. Any increases in costs could have an adverse effect on our margins and our ability to compete in the Internet services market.
 
12


Customer agreements contain service level and delivery obligations that could subject us to liability or the loss of revenue.
 
Our contracts with customers generally contain service guarantees and service delivery date targets, which if not met by us, enable customers to claim credits against their payments to us and, under certain conditions, terminate their agreements. If we are unable to meet our service level guarantees or service delivery dates, it could adversely affect our revenue and cash flow.

We are required to maintain, repair, upgrade and replace our network and facilities, and our failure to do so could harm our business.
 
Our business requires that we maintain, upgrade, repair and periodically replace our facilities and networks. This requires and will continue to require, management time and the periodic expenditure of capital. In the event that we fail to maintain, upgrade or replace essential portions of our network or facilities, it could lead to a material degradation in the level of services that we provide to our customers which would adversely affect our business. Our networks can be damaged in a number of ways, including by other parties engaged in construction close to our network facilities. In the event of such damage, we will be required to incur expenses to repair the network in order to maintain services to customers. We could be subject to significant network repair and replacement expenses in the event of a terrorist attack or natural disaster damages our network. Further, the operation of our network requires the coordination and integration of sophisticated and highly specialized hardware and software technologies. Our failure to maintain or properly operate this hardware and software can lead to degradations or interruptions in customer service. Our failure to provide proper customer service can result in claims from our customers for credits or damages and can damage our reputation for service, thereby limiting future sales opportunities.

Requests to relocate our network can result in additional expenses.
 
We are periodically required to relocate portions of our network by municipalities, railroads, highway authorities and other entities that engage in construction or other activities in areas close to our network. These relocations can be expensive and time consuming to management and can result in interruptions of service to customers. If we are required to engage in an increased amount of relocation activities, it could adversely affect our business, financial condition and results of operations.

Governmental regulation may negatively affect our operations.
 
Existing and future government laws and regulations greatly influence how we operate our business. U.S. Federal and state laws directly shape the telecommunications and Internet markets. Consequently, regulatory requirements and changes could adversely affect our operations and also influence the markets for telecommunications and Internet services. We cannot predict the future regulatory framework of our business.

Local governments also exercise legal authority that may have an adverse effect on our business because of our need to obtain rights-of-way for our fiber networks. While local governments may not prohibit persons from providing telecommunications services nor treat telecommunication service providers in a discriminatory manner, they can affect the timing and costs associated with our use of public rights-of-way.

Government regulation of the Internet may subject us to liability.
 
Laws and regulations that apply to the Internet are becoming more prevalent. The U.S. Congress has considered Internet laws regarding privacy and security relating to the collection and transmission of information over the Internet, entrusting the Federal Trade Commission with strong enforcement power. The U.S. Congress also has adopted laws that regulate the protection of children, copyrights, trademarks, domain names, taxation and the transmission of sexually explicit material over the Internet. The European Union adopted its own privacy regulations and other countries may do so in the future. Other nations have taken actions to restrict the free flow of material deemed objectionable over the Internet.

The scope of many of these laws and regulations is subject to conflicting interpretations and significant uncertainty that may take years to resolve. As a result of this uncertainty, we may be exposed to direct liability for our actions and to contributory liability for the actions of our customers.

We cannot predict our future tax liabilities. If we become subject to increased levels of taxation, our financial condition and results of operations could be adversely affected.
 
We provide telecommunication and other services in multiple jurisdictions across the United Stated and in London and are therefore subject to multiple sets of complex and varying tax laws and rules. We cannot predict the amount of future tax liabilities to which we may become subject. Any increase in the amount of taxation incurred as a result of our operations or due to legislative or regulatory changes could result in a material adverse effect on our sales, financial condition and results of operations. While we believe that our current provisions are reasonable and appropriate, we cannot assure you that these items will be settled for the amounts accrued or that we will not identify additional exposures in the future.

Our inability to produce audited financial statements has prevented us from filing our federal and state income taxes in a timely manner.
 
Because we have been unable to produce auditable financial statements on a timely basis, we delayed the filing of federal and state income tax returns for 2003 to 2006. While we have made progress in filing past returns, we are still beyond the filing deadlines, including all applicable extensions, for a number of federal and state returns. In January 2008, we filed our federal and state income tax returns for the years ended December 31, 2003 through December 31, 2005. We are still subject to tax audits in these jurisdictions. While we believe that we will not owe any material amount of income taxes in these jurisdictions due to the significant losses incurred by us, we could be subject to various fines or penalties as a result of our non-timely filings.

Our franchises, licenses, permits, rights-of-way, conduit leases and property leases could be canceled or not renewed, which would impair our ability to provide our services.
 
We must maintain rights-of-way, franchises and other permits from railroads, utilities, state highway authorities, local governments, transit authorities and others to operate our networks. We cannot assure you that we will be successful in maintaining these right-of-way agreements or obtaining future agreements on acceptable terms. Some of these agreements may be short-term or revocable at will, and we cannot assure you that we will continue to have access to existing rights-of-way after they have expired or terminated. If a material portion of these agreements were terminated or could not be renewed and we were forced to abandon our networks, the termination could have a material adverse effect on our business, financial condition and results of operations. In addition, in some cases landowners have asserted that railroad companies, utilities and others to whom they granted easements to their properties are not entitled as a result of these easements to grant rights-of-way to telecommunications providers. If these disputes are resolved in the landowners' favor, we could be obligated to make substantial lease payments to these landowners for the lease of these rights-of-way or to indemnify the right-of-way holder for its losses.
 
13


In the past, we have had franchises and rights-of-way expire prior to executing a renewal and in the interim until such renewal was executed, operated without an agreement. We expect that this will continue to occur in the future. These expirations have not caused any material adverse effect on our operations in the past, and we do not expect that they will in the future. However, to the extent that a municipality or other right-of-way holder attempts to terminate our related operations upon the expiration of a franchise or right-of-way agreement, it could materially adversely effect our business, financial condition and results of operations.

In order to expand our network to new locations, we often need to obtain additional rights-of-way, franchises and other permits. Our failure to obtain these rights in a prompt and cost effective manner may prevent us from expanding our network which may be necessary to meet our contractual obligations to our customers and could expose us to liabilities and have an adverse effect on our business, financial condition and results of operations.

If we lose or are unable to renew key real property leases where we have located our POPs, it could adversely affect our services and increase our costs as we would be required to restructure our network and move our POPs.

Stockholders affiliated with certain of our directors own a significant percentage of our shares, which will limit your ability to influence corporate matters.
 
As of August 31, 2008, two stockholders affiliated with certain of our directors beneficially owned in the aggregate approximately 33.19% of our outstanding common stock and our executive officers and directors, as a group, beneficially owned approximately 3.19% of our common stock. Accordingly, these stockholders could have significant influence over the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers, consolidations or a sale of all or substantially all of our assets. The interests of these stockholders may differ from the interests of our other stockholders. In addition, third parties may be discouraged from making a tender offer or bid to acquire the Company because of this concentration of ownership.

Our charter documents, our Shareholders’ Rights Plan and Delaware law may inhibit a takeover that stockholders may consider favorable.
 
Provisions in our restated certificate of incorporation, our amended and restated by-laws, our Shareholders’ Rights Plan and Delaware law could delay or prevent a change of control or change in management that would provide stockholders with a premium to the market price of their common stock. Our Shareholders’ Rights Plan has significant anti-takeover effects by causing substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors. In addition, the authorization of undesignated preferred stock gives our Board of Directors the ability to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of us. If a change of control or change in management is delayed or prevented, this premium may not be realized or the market price of our common stock could decline.

 
None.
ITEM 2. PROPERTIES
 
Our principal properties currently are fiber optic networks and their component assets. We own substantially all of the communications equipment required for operating the network and our business. Such assets are located at leased locations in the areas that we serve.

We lease our principal executive offices in White Plains, New York and London, U.K., as well as significant sales, administrative and other support offices. We lease properties to locate the POPs necessary to operate our networks. Our executive office located at 360 Hamilton Avenue, White Plains, New York is approximately 33,000 square feet and leased under an agreement that expires in May 2010. Office and POP space is leased in the markets where we maintain our network and generally ranges from 1,000 to 33,000 square feet under agreements that expire over the next 16 years (as of December 31, 2007), with the majority of leases expiring over the next five years.
 
Our existing properties are in good condition and are suitable for the conduct of our business.

We do not own any real property. As of December 31, 2007, we conducted our business in the U.S. through 115 operating leases totaling approximately 579,000 rentable square feet.

The majority of our leases have renewal provisions at either fair market value or a stated escalation above the last year of the current term.

 
Under our plan of reorganization, which became effective on September 8, 2003 (“Plan of Reorganization”) or (“Plan”), essentially all claims against our U.S. entities that arose prior to their emergence from bankruptcy on September 8, 2003 were discharged in accordance with the Plan of Reorganization. A summary of the treatment of claims in the bankruptcy proceeding is provided in Note 1, “Background and Organization,” to the accompanying consolidated financial statements. For additional information regarding our bankruptcy filing, see “Business - Corporate History.”
Our significant legal proceedings are as follows.

The SEC initiated a formal investigation of Metromedia Fiber Network, Inc. (the pre-bankruptcy emergence predecessor to AboveNet, Inc.) in June 2002. The investigation was initiated after Metromedia Fiber Network, Inc. announced that it would need to restate previously issued financial statements from 2001. On December 15, 2006, we received a “Wells” notice from the SEC staff in connection with such investigation indicating that the SEC staff was considering recommending that the SEC bring a civil injunctive action against us alleging that the Company violated various provisions of the federal securities laws. In connection with the contemplated action, the staff could have sought a permanent injunction, disgorgement, and civil penalties. In response to the Wells notice, we made a written submission to the SEC staff setting forth reasons why a civil injunctive action should not be authorized by the SEC. On March 19, 2007, we received a notice from the SEC staff stating that the investigation of Metromedia Fiber Network, Inc. has been terminated and that no enforcement action against us had been recommended to the SEC. Such notice was provided to us under the guidelines of the final paragraph of Securities Act Release No. 5310 which states, among other things, that "[such notice] must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff's investigation of that particular matter. All that such a communication means is that the staff has completed its investigation and that at that time no enforcement action has been recommended to the Commission.” While there have been no further actions to date, we cannot assure you that there will not be any future investigations.
 
14


We are a party to a fiber lease agreement with SBC Telecom, Inc. (“SBC”), a subsidiary of AT&T, entered into in May 2000. We believed that SBC was obligated under this agreement to lease 40,000 fiber miles, reducible to 30,000 under certain circumstances, for a term of 20 years at a price set forth in the agreement, which was subject to adjustment based upon the number of fiber miles leased (the higher the volume of fiber miles leased, the lower the price per fiber mile). SBC disagreed with such interpretation of the agreement and in 2003, the issue was litigated before the Bankruptcy Court of the Southern District Court of New York (the “Bankruptcy Court”). In November 2003, the Bankruptcy Court agreed with our interpretation of the agreement, which decision SBC has not appealed. Subsequently, SBC also alleged that we were in breach of our obligations under such agreement and that therefore we were unable to assume the agreement upon our emergence from bankruptcy. We disagreed with SBC’s position, however in December 2005, the Bankruptcy Court agreed with SBC. In 2006, we appealed certain aspects of the decision to the District Court for the Southern District of New York but the District Court denied our appeal. In March 2007, we filed a notice of appeal to the Second Circuit Court of Appeals seeking relief with respect to the Bankruptcy Court’s determination that we were in default of the agreement with SBC. During the term of the contract, SBC has paid us at the higher rate per fiber mile to reflect the reduced volume of services SBC believes it was obligated to take, in accordance with its understanding of the fiber lease agreement. However, for financial statement purposes, we recorded revenue based on the lower amount per fiber mile for the fiber miles accepted by SBC.

In July 2008, we and SBC entered into the “Stipulation and Release Agreement” under which a new service agreement was executed for the period from July 10, 2008 to December 31, 2010. Under this new service agreement, SBC agreed to continue to purchase the existing services at the current rate being paid by SBC for such services. Further, SBC will have a fixed minimum payment commitment, which declines over the contract term. SBC may cancel service at any time, subject to the notice provisions, but is subject to the payment commitment. The payment commitment may be satisfied by the existing services or SBC may order new services. Additionally, the May 2000 fiber lease agreement was terminated and we and SBC released each other from any claims related to that agreement. The difference between the amount paid by SBC and the amount recognized by us as revenue, which aggregated $3.5 million at July 10, 2008 ($3.2 million at December 31, 2007), will be recorded as settlement revenue in the third quarter of 2008.

Our U.K. operating subsidiary, ACUK, is a party to a duct purchase and fiber lease agreement (the “Duct Purchase Agreement”) with EU Networks Fiber UK Ltd, formerly Global Voice Networks Limited (“GVN”). A dispute between the parties arose regarding the extent of the network duct that was sold and fiber that was leased to GVN pursuant to the Duct Purchase Agreement. As a result of this dispute, in 2006, GVN filed a claim against ACUK in the High Court of Justice in London seeking ownership of the disputed portion of the network duct, the right to lease certain fiber and associated damages. In December 2007, the court ruled in favor of GVN with respect to the disputed duct and fiber. In early February 2008, ACUK delivered most of the disputed duct and fiber to GVN. Additionally, under the original ruling, we were also required to construct the balance of the disputed duct and fiber and deliver it to GVN pursuant to a schedule ordered by the court. Additional portions of the disputed duct and fiber were constructed and subsequently delivered and other portions are scheduled for delivery. We also had certain repair and maintenance obligations that we must perform with respect to such duct. GVN was also seeking to enforce an option requiring ACUK to construct 180 to 200 chambers for GVN along the network. In June 2008, we paid $3.0 million in damages pursuant to the ruling in the liability trial. Additionally, we reimbursed GVN $1.8 million for legal fees and incurred our own legal fees of $2.4 million. Further, we have incurred or are obligated for costs totaling $2.7 million to build additional network. In early August 2008, we reached a settlement agreement under which we paid GVN $0.6 million and agreed to provide additional construction of duct at an estimated cost of $1.2 million and provide GVN limited additional access to ACUK’s network. GVN and ACUK provided mutual releases of all claims against each other, including ACUK’s repair obligation and the chamber construction obligations discussed above. We recorded a loss on litigation of $11.7 million at December 31, 2007, of which $0.8 million was paid in 2007 and $10.9 million is included in accrued expenses on the consolidated balance sheet at December 31, 2007.

In May 2008, Telekenex, Inc. (“Telekenex”), a customer, filed a complaint against us in the San Francisco County Superior Court alleging that we failed to deliver to Telekenex fiber optic capacity under a certain ten year contract between Telekenex and us. Telekenex asserts in the complaint that it is entitled to such fiber optic capacity and unspecified damages. On September 29, 2008, we signed a settlement agreement with Telekenex pursuant to which we agreed to pay $0.35 million and provide Telekenex additional fiber access in order to resolve the dispute. Pursuant to the settlement agreement, the parties released each other from any claims related to the dispute and Telekenex is required to dismiss the complaint.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 There were no matters submitted to a vote of security holders during the year covered by this Annual Report on Form 10-K.
 
15


PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our securities are not listed on any exchange. However, we are aware that shares of our common stock are traded on the over-the-counter market. We plan to apply for listing on the NASDAQ Market at such point as we are current on our filings under the Exchange Act.
 
The table below sets forth, on a per share basis, for the periods indicated, the intra-day high and low sales prices for our common shares on the over-the-counter market as reported to NASDAQ for each quarter of 2007 and 2006.

   
High
 
Low
 
Year ended December 31, 2007
             
First Quarter Ended March 31, 2007
 
$
60.00
 
$
41.00
 
Second Quarter Ended June 30, 2007
 
$
65.00
 
$
55.00
 
Third Quarter Ended September 30, 2007
 
$
100.00
 
$
61.00
 
Fourth Quarter Ended December 31, 2007
 
$
91.00
 
$
55.00
 
               
Year ended December 31, 2006
             
First Quarter Ended March 31, 2006
 
$
41.00
 
$
28.35
 
Second Quarter Ended June 30, 2006
 
$
50.00
 
$
35.00
 
Third Quarter Ended September 30, 2006
 
$
54.00
 
$
45.50
 
Fourth Quarter Ended December 31, 2006
 
$
64.00
 
$
40.00
 
 
There were 1,018 stockholders of record of AboveNet’s common stock as of August 31, 2008.
 
Dividends
 
We have not declared or paid cash dividends on our common stock, and we do not expect to do so for the foreseeable future. The payment of future cash dividends, if any, will be at the discretion of our Board of Directors and will depend upon, among other things, our liquidity, our operations, capital requirements and surplus, general financial condition, and such other factors as our Board of Directors may deem relevant.
 
Description of AboveNet’s Equity Securities
 
 Pursuant to our Plan of Reorganization, upon our emergence from bankruptcy, we issued 8,750,000 shares of common stock to our pre-petition creditors and the right to purchase 1,699,210 shares of common stock at a price of $29.9543 per share, under a rights offering, of which the rights to purchase 1,668,992 shares of common stock have been exercised. In connection with the conclusion of our bankruptcy case in July 2008, 862 shares were determined to be unclaimed and were cancelled. In addition, 1,064,956 shares of common stock were reserved for issuance under our 2003 Stock Incentive Stock Option and Stock Unit Grant Plan, also referred to herein as our 2003 Stock Incentive Plan, Equity Incentive Plan or Equity Compensation Plan, 709,459 shares of common stock were reserved for issuance upon the exercise of the five year warrants, exercisable at a price of $20.00 per share, of which warrants to purchase 33,119 shares of common stock had been exercised as of December 31, 2007. 834,658 shares of common stock were reserved for issuance upon the exercise of the seven year warrants, exercisable at a price of $24.00 per share, of which warrants to purchase 29,097 shares of common stock had been exercised as of December 31, 2007.

In July 2008, our bankruptcy case was concluded upon the settlement of all remaining claims. In connection with the conclusion of the case, 862 common shares (as described above), five year warrants to purchase 10 shares of common stock and seven year warrants to purchase 12 shares of common stock went unclaimed. Accordingly, these warrants were cancelled and common shares issued and outstanding will be reduced on our balance sheet by 862 shares.

Under the terms of the five year and seven year warrant agreements (collectively, the “Warrant Agreements”), as described in Note 9, “Stock-Based Compensation,” to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K, if the market price of our common stock, as defined in the respective Warrant Agreements, 60 days prior to the expiration date of the respective warrants, was greater than the warrant exercise price, we were required to give each warrant holder notice that at the warrant expiration date, the warrants would be deemed to have been exercised pursuant to the net exercise provisions of the respective Warrant Agreements (the “Net Exercise”), unless the warrant holder elected, by written notice, to not exercise its warrants. Under the Net Exercise, shares issued to warrant holders would be reduced by the number of shares necessary to cover the aggregate exercise price of the shares, valuing such shares at the current market price, as defined in the Warrant Agreements. Any fractional shares, otherwise issuable, would be paid in cash. The expiration date for the five year warrants was September 8, 2008. Accordingly, five year warrants to purchase 158,874 shares of common stock were deemed exercised pursuant to Net Exercise, of which 106,456 shares were issued to the warrant holders, 52,418 shares were returned to treasury and $4,295 was paid to recipients for fractional shares. In addition, five year warrants to purchase 25 shares of common stock were cancelled in accordance with instructions from the warrant holder.

AboveNet’s Common and Preferred Stock
 
On September 8, 2003, we authorized 10,000,000 shares of preferred stock, $0.01 par value and 30,000,000 shares of common stock, $0.01 par value. The holders of common stock are entitled to one vote for each issued and outstanding share and are entitled to receive dividends, subject to the rights of the holders of preferred stock. Preferred stock may be issued from time to time in one or more classes or series, each of which classes or series shall have such distributive designation as determined by the Board of Directors. In the event of any liquidation, the holders of the common stock will be entitled to receive the assets of the Company available for distribution, after payments to creditors and preferred rights of any outstanding preferred stock. In 2006, we designated 500,000 shares as Series A Junior Participating Preferred Stock in connection with the adoption by the Board of Directors of a Shareholders’ Rights Plan.
 
16


Table of Securities Authorized for Issuance under Equity Compensation Plan
 
 The following table sets forth the indicated information regarding our equity compensation plan and arrangements as of December 31, 2007.
 
Plan category (1)
 
Number of Securities to be
Issued Upon Exercise of
Outstanding Options and
Restricted Stock Units (2)
 
Weighted Average
Exercise Price of
Outstanding Options and
Restricted Stock Units (2)
 
Number of Securities Remaining
Available for Future Issuance Under
Equity Compensation Plan
(Excluding Securities Reflected in
the First Column) (3)
 
Equity compensation plan approved by security holders
   
 
$
   
 
Equity compensation plan not approved by security holders
   
701,822
   
27.48
   
11,293
 
Total
   
701,822
 
$
27.48
   
11,293
 

(1)
Excludes shares available under the 2008 Equity Incentive Plan, described below.
   
(2)
Includes 229,875 shares of common stock underlying restricted stock units. The weighted average exercise price does not take into account the shares to be delivered in connection with these outstanding restricted stock units, which have no exercise price.
   
(3)
Excludes warrants granted to creditors as part of settled bankruptcy claims, as follows:

   
Weighted Average
Exercise Price
 
Total Warrants
Originally Issued
 
Warrants Exercised as of
December 31, 2007
 
Unexercised Warrants
Outstanding
at December 31, 2007
 
Five year stock purchase warrants
 
$
20.00
   
709,459
   
33,119
   
676,340
 
Seven year stock purchase warrants
 
$
24.00
   
834,658
   
29,097
   
805,561
 

The above table does not take into consideration five year warrants to purchase 10 shares of common stock and seven year warrants to purchase 12 shares of common stock that were unclaimed and were cancelled at the conclusion of our bankruptcy case and five year warrants to purchase 25 shares of common stock that were cancelled in accordance with instructions from the warrant holder.

Adoption of 2008 Equity Incentive Plan
 
On August 29, 2008, the Board of Directors of the Company approved the Company’s 2008 Equity Incentive Plan (the “2008 Plan”). The 2008 Plan will be administered by the Company’s Compensation Committee unless otherwise determined by the Board of Directors. Any employee, officer, director or consultant of the Company or subsidiary of the Company selected by the Compensation Committee is eligible to receive awards under the 2008 Plan. Stock options, restricted stock, restricted and unrestricted stock units and stock appreciation rights may be awarded to eligible participants on a stand alone, combination or tandem basis. 750,000 shares of the Company’s common stock may be issued pursuant to awards granted under the 2008 Plan in accordance with its terms. The number of shares available for grant and the terms of outstanding grants are subject to adjustment for stock splits, stock dividends and other capital adjustments as provided in the 2008 Plan. See “Adoption of 2008 Equity Incentive Plan,” included in Item 11, “Executive Compensation.”

Share Repurchases
 
In December, 2007, we delivered 310,719 shares of common stock to certain employees (including the named executive officers) and former employees, which represented shares underlying all vested restricted stock units at such date, of which 303,369 shares were delivered on December 28, 2007. We purchased an aggregate 129,816 shares back from the employees at $75.00 per share, the closing market price of our common stock on such date, in order to provide them with funds sufficient to satisfy minimum tax withholding obligations and provide the employees sufficient funds to meet our estimates (at their highest marginal tax rates) of their residual income tax obligations. The aggregate value of the shares purchased by us of $9.7 million was charged to treasury stock. We decided to purchase these shares because the delivery of the shares underlying the stock units triggered significant tax obligations for these individuals. Below is a summary of these repurchases.

Period
 
Total Number of Shares
Purchased
 
Average Price Paid Per
Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number of
Shares that may yet be
Purchased Under the
Plans or Programs
December 1 to 31, 2007 (*)
 
129,816
 
$75.00
 
0
 
0
___________________
 
(*) There were no other stock repurchases during Fiscal 2007.
 
17


 
The following graph compares the cumulative total stockholder return (stock price appreciation) of our common stock with the cumulative return (including reinvested dividends) of the NASDAQ (U.S.) Index and the Russell 2000 Index, for the period from December 3, 2003 through December 31, 2007. We filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in May 2002 and emerged from bankruptcy on September 8, 2003. Shares that were issued pursuant to the Plan of Reorganization first traded on December 3, 2003 at $35.00 per common share, which is the starting point for the graph below. Our stock has not been listed on any national exchange since our emergence from bankruptcy as we are not compliant with the periodic filing requirements of the Exchange Act. However, our shares of common stock are traded on the over-the-counter market (pink sheets). The stock price performance shown on the graph is not necessarily indicative of future price performance. The comparisons in the chart below are based upon historical data and are not indicative of, nor intended to forecast, future performance of the Company’s common stock.


 
 
12/03/2003
 
12/31/2003
 
12/31/2004
 
12/31/2005
 
12/31/2006
 
12/31/2007
 
AboveNet, Inc.
 
$
100
 
$
107
 
$
91
 
$
81
 
$
171
 
$
223
 
NASDAQ (U.S.)
   
100
   
102
   
111
   
113
   
123
   
135
 
Russell 2000 Index
   
100
   
102
   
120
   
123
   
144
   
141
 
 
18


ITEM 6. SELECTED FINANCIAL DATA
 
The table below presents selected consolidated financial data of the Company as of and for the years ended December 31, 2007, 2006, 2005, 2004 and for the period from September 8, 2003 (fresh start date) to December 31, 2003. We have not included information for the period from January 1, 2003 to September 7, 2003, which period preceded our emergence from bankruptcy, because we lack certain records necessary to include the proper information. The historical financial data as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005, have been derived from the historical consolidated financial statements presented elsewhere in this Annual Report on Form 10-K and should be read in conjunction with such consolidated financial statements and accompanying notes.
 
Upon emergence from bankruptcy on September 8, 2003 (the “Effective Date”), we adopted fresh start accounting and reporting in accordance with SOP 90-7, which resulted in material adjustments to the historical carrying amounts of our assets and liabilities. Fresh start accounting required us to allocate the reorganization value to our assets and liabilities based upon their estimated fair values. Adopting fresh start accounting has resulted in material adjustments to the historical carrying amount of our assets and liabilities. We engaged an independent appraiser to assist in the allocation of the reorganization value, and in determining the fair market value of our property and equipment and overall enterprise value. The determination of fair values of assets and liabilities is subject to significant estimation and assumptions. See Note 1, “Background and Organization - Bankruptcy Filing and Reorganization,” and Note 2, “Basis of Presentation and Significant Accounting Policies - Fresh Start Accounting,” to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for a complete description of the fresh start accounting impacts on our Effective Date balance sheet.
 
(In millions, except share and per share information)

   
 Years Ended December 31,
 
Period from
September 8, 2003
to December 31,
 
   
 2007
 
 2006
 
 2005
 
 2004
 
2003
 
Statements of Operations data:
      
 
 
 
 
 
 
 
 
Revenue
 
$
253.6
 
$
236.7
 
$
219.7
 
$
189.3
 
$
59.6
 
Costs of revenue (including provision for equipment impairment of $2.2 for the year ended December 31, 2007)
   
110.3
   
121.9
   
119.2
   
112.2
   
36.9
 
Selling, general and administrative expenses
   
80.9
   
71.1
   
69.6
   
71.7
   
32.6
 
Depreciation and amortization
   
47.5
   
47.2
   
43.1
   
40.8
   
13.0
 
Loss on litigation
   
11.7
   
   
   
   
 
Operating income (loss)
   
3.2
   
(3.5
)
 
(12.2
)
 
(35.4
)
 
(22.9
)
Gain on reversal of foreign currency translation adjustments from liquidation of subsidiaries
   
10.3
   
   
   
   
 
Interest income
   
3.3
   
2.4
   
1.3
   
1.1
   
0.5
 
Interest expense
   
(2.3
)
 
(5.8
)
 
(5.9
)
 
(11.1
)
 
(4.9
)
Other income, net
   
3.8
   
2.1
   
10.9
   
9.2
   
1.4
 
Gain (loss) on sales of data centers
   
   
48.2
   
(1.3
)
 
   
 
Income (loss) from continuing operations before income taxes
   
18.3
   
43.4
   
(7.2
)
 
(36.2
)
 
(25.9
)
Provision for income taxes
   
4.5
   
   
0.4
   
0.5
   
0.3
 
Income (loss) from continuing operations
   
13.8
   
43.4
   
(7.6
)
 
(36.7
)
 
(26.2
)
Income (loss) from discontinued operations, net of taxes
   
   
3.0
   
(0.8
)
 
(1.1
)
 
(0.3
)
Net income (loss)
 
$
13.8
 
$
46.4
 
$
(8.4
)
$
(37.8
)
$
(26.5
)
Income (loss) per share, basic:
         
               
 
Income (loss) per share from continuing operations
 
$
1.28
 
$
4.07
 
$
(0.72
)
$
(3.48
)
$
(2.49
)
Income (loss) per share from discontinued operations
   
   
.28
   
(0.07
)
 
(0.10
)
 
(0.03
)
Income (loss) per share, basic
 
$
1.28
 
$
4.35
 
$
(0.79
)
$
(3.58
)
$
(2.52
)
Shares used in computing basic income (loss) per share
   
10,751,921
   
10,669,365
   
10,596,244
   
10,550,249
   
10,499,961
 
Income (loss) per share, diluted:
         
   
   
   
 
Income (loss) per share from continuing operations
 
$
1.13
 
$
3.68
 
$
(0.72
)
$
(3.48
)
$
(2.49
)
Income (loss) per share from discontinued operations
   
   
.26
   
(0.07
)
 
(0.10
)
 
(0.03
)
Income (loss) per share, diluted
 
$
1.13
 
$
3.94
 
$
(0.79
)
$
(3.58
)
$
(2.52
)
Shares used in computing diluted income (loss) per share
   
12,184,139
   
11,794,279
   
10,596,244
   
10,550,249
   
10,499,961
 
 
   
 At December 31,
 
   
 2007
 
 2006
 
 2005
 
 2004
 
2003
 
Balance Sheet data:
          
 
   
 
   
 
   
  
  
Cash and cash equivalents
 
$
45.8
 
$
70.7
 
$
45.9
 
$
45.3
 
$
105.1
 
Working capital (deficit)
   
(25.6
)
 
17.4
   
(5.8
)
 
(4.0
)
 
70.8
 
Property and equipment, net
   
347.7
   
299.2
   
305.2
   
312.3
   
328.6
 
Total assets
   
432.3
   
407.7
   
385.0
   
400.2
   
499.0
 
Long-term debt (*)
   
1.6
   
1.5
   
1.6
   
1.8
   
71.9
 
Total shareholders’ equity
   
223.7
   
217.9
   
166.9
   
170.9
   
203.6
 
 
19

 
(*)
At December 31, 2007, 2006, 2005 and 2004, the balance represents the long-term obligation under a capital lease, which was included in other long-term liabilities on the respective consolidated balance sheets. At December 31, 2003, the balance represents the long-term obligation under a capital lease of $1.9 million, which was included in other long-term liabilities on the consolidated balance sheet, and notes payable of $70.0 million, which was stated separately on the consolidated balance sheet and which was satisfied in 2004.
 
   
 Years Ended December 31,
 
Period from
September 8, 2003
to December 31,
 
   
 2007
 
 2006
 
 2005
 
 2004
 
2003
 
Cash flow data:
          
 
   
 
   
 
   
 
 
Net cash provided by (used in) operating activities
 
$
69.7
 
$
51.3
 
$
43.6
 
$
25.8
 
$
(8.1
)
Net cash used in investing activities
   
(89.3
)
 
(27.2
)
 
(42.0
)
 
(23.0
)
 
(8.5
)
Net cash (used in) provided by financing activities
   
(5.4
)
 
(1.0
)
 
(1.1
)
 
(62.5
)
 
41.8
 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.
 
Executive Summary
 
Overview
 
We provide telecommunications services primarily in 14 major metropolitan markets in the U.S. and one in the U.K. (London). Our services include high bandwidth fiber-optic connectivity solutions primarily to large corporate enterprise clients and communication carriers, including Fortune 1000 and FTSE 500 companies, in the U.S. and the U.K.

The components of our operating income (loss) are revenue, costs of revenue, selling and general and administrative expenses and depreciation and amortization. Below is a description of these components. We are reporting operating income for the year ended December 31, 2007 and operating losses for the years ended December 31, 2006 and 2005, as shown in our consolidated statements of operations included elsewhere in this Annual Report on Form 10-K.

Industry
 
The demand for high bandwidth telecommunications 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 the telecommunications industry is constantly shifting, we believe that we are well positioned for continued growth in the future.
 
Strategy
 
See Item 1, “Business - Business Strategy,” for a discussion of our business strategy.
 
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, incremental contractual booking of new customer business, new customer installations and churn of existing business and capital committed and expended.

Some of the most important non-financial performance metrics measure headcount, traffic growth and installation intervals. 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 549 as of December 31, 2007, 482 of which were employed in the U.S., 65 in the U.K., one in the Netherlands and one in Japan.
 
2007 Highlights
 
Our consolidated revenue increased in 2007 by $16.9 million, or 7.1%, from $236.7 million in 2006 to $253.6 million in 2007, due principally to the growth of our domestic metro transport services, which increased by $22.3 million in 2007 compared to 2006. Additionally, in the U.S., our revenue from dark fiber services increased by $11.1 million in 2007 compared to 2006 and our domestic IP network services increased by $2.6 million in 2007 compared to 2006. Revenue from our foreign operations, primarily in the U.K., increased by $7.0 million in 2007 compared to 2006. These comparative increases were partially offset by the fact that our 2006 results included revenue of $24.5 million from our domestic data centers, which were sold in the fourth quarter of 2006.
 
During 2007, we generated net income of $13.8 million and as of December 31, 2007 we had $45.8 million of unrestricted cash, compared to $70.7 million of unrestricted cash at December 31, 2006, a decrease in liquidity of $24.9 million. This decrease was attributable primarily to cash used in investing activities (purchases of property and equipment of $90.8 million), and cash used in financing activities (primarily the purchase of $9.7 million common stock from employees and in certain cases, ex-employees, with respect to vested restricted stock units delivered to them), partially offset by cash generated from operating activities. See below in this Item 7 under, “Liquidity and Capital Resources,” for further discussion.
 
In 2007, our cash flow generated by operating activities increased as a result of the improvement in operating results described above. Our unrestricted cash and cash equivalents balance declined in 2007 compared to 2006 due to our increased capital expenditures, consistent with our growth strategy, which were $90.8 million in 2007, compared to $71.7 million in 2006, and the $9.7 million cash used to repurchase common stock in connection with the delivery of shares underlying vested restricted stock units. We believe, based on our business plan, that our existing cash, cash from our operating activities and funds available under our Credit Facility will be sufficient to fund our operations, planned capital expenditures and other liquidity requirements (including the liability arising out of the GVN litigation) at least through the third quarter of 2009. See below in this Item 7 under, “Liquidity and Capital Resources,” for further information relating to the Credit Facility.
 
20


2008 Outlook
 
We expect our revenue to increase in 2008 compared to 2007. Because a large percentage of our costs are fixed and we expect our costs will grow at a slower rate than our revenue, we are anticipating improved operating results in 2008. 2008 will be favorably impacted by the non-cash settlement of our dispute with SBC of $3.5 million, partially offset by our write-off of our investment in a new information technology platform of $2.3 million. See Item 3, “Legal Proceedings,” and Note 13, “Litigation” and Note 16, “Subsequent Events - Litigation” and “Subsequent Events - Asset Abandonment,” to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Additionally, in 2008, our capital expenditures are expected to increase in line with our expected increase in new bookings.
 
Revenue
 
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 and are subsequently amortized into income over the related service period.

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 (which declines 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.

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, right-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, stock-based compensation expense for employees not directly attributable to the operation of our networks; (ii) real estate expenses for all administrative sites; (iii) professional, consulting and audit fees; (iv) taxes (other than income taxes), including property taxes and trust fund-related taxes such as gross receipts taxes; (v) restructuring costs; and (vi) 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 Annual Report on Form 10-K.

Misstatements
 
In connection with the audit of our financial statements as of and for the year ended December 31, 2006, we determined that certain errors primarily related to income taxes, depreciation, and certain accruals were included in the financial statements previously issued as of and for the years ended December 31, 2005 and 2004 and as of and for the period ended December 31, 2003 (including the fresh start balance sheet as of September 8, 2003). Had the adjustments been made in the applicable period, the effect of the adjustments would have been to increase net loss by $0.9 million, or $0.09 per basic and diluted share for the year ended December 31, 2005, increase net loss by $0.1 million, or $0.01 per basic and diluted share for the year ended December 31, 2004 and decrease net loss by $0.2 million, or $0.02 per basic and diluted share for the period ended December 31, 2003. Management does not believe, based upon its qualitative and quantitative analysis, that such errors are material or require a restatement of any of the previously issued financial statements. Accordingly, the corrections were reflected in the financial statements as of and for the year ended December 31, 2006 and resulted in a reduction to net income of $0.3 million, or $0.03 per basic and diluted share.

2006 Reclassification
 
On February 29, 2008, we filed a Current Report on Form 8-K, which, among other things, included a consolidated statement of operations for the year ended December 31, 2006. The consolidated statement of operations for the year ended December 31, 2006, included elsewhere in this Annual Report on Form 10-K, and in the Annual Report on Form 10-K for the year ended December 31, 2006, reflects a change in the classification of certain expenses from the amounts recorded in the consolidated statement of operations included in the Current Report on Form 8-K dated February 29, 2008. The change resulted in costs of revenue decreasing by $9.3 million, from $131.2 million to $121.9 million and selling, general and administrative expenses increasing by $9.3 million, from $61.8 million to $71.1 million for the year ended December 31, 2006. This reclassification did not affect our operating loss, net income, earnings per share (basic and diluted), assets, liabilities or shareholders’ equity as of or for the year ended December 31, 2006.
 
21


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 Plan of Reorganization was September 8, 2003, 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 Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). 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 based upon 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
 
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 related service period.

In accordance with SEC Staff Accounting Bulletin 101, “Revenue Recognition in Financial Statements,” as amended by SEC Staff Accounting Bulletin 104, “Revenue Recognition,” we generally amortize revenue related to installation services on a straight-line basis over the contracted customer relationship, which generally ranges from two to twenty years.

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. 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 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. During 2007, 2006 and 2005, we included the receipts of bankruptcy claim settlements from former customers as termination revenue. Termination revenue is reported in the same manner as the original service provided, and amounted to $8.5 million, $8.3 million, and $12.1 million in 2007, 2006 and 2005, respectively.

Accounts Receivable Reserves
 
Sales Credit Reserves
 
During each reporting period, we must make estimates for potential future sales credits to be issued in respect of current revenue, related to billing errors, 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 billing errors and 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 estimation and assumption.

Allowance for Doubtful Accounts
 
During each reporting period, we must 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. Due to the current economic climate, the competitive environment in the telecommunications sector and the volatility of the financial strength of particular customer segments including resellers and CLECs, the collectability of receivables and credit worthiness of customers may become more difficult and unpredictable. 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 and assumptions.

Property and Equipment
 
Property and equipment are stated at their preliminary estimated fair values as of the Effective Date based on our reorganization value. 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, which is included in network infrastructure assets on the respective balance sheets. 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 field engineers and IP engineers and reflects their capitalized salary plus related benefits, and is based upon an allocation of their time between capitalized and non-capitalized projects. These individuals’ salaries are considered to be costs directly associated with the construction of certain infrastructure and customer build outs. The salaries and related benefits of non-engineers and supporting staff that are part of the engineering departments are not considered part of the pool subject to capitalization. Capitalized direct labor amounted to $8.6 million, $5.1 million and $4.7 million for the years ended December 31, 2007, 2006 and 2005, 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 lives or the term of the lease.

Estimated useful lives of the Company’s property and equipment are as follows:
 
Building (except certain storage huts which are 20 years)
37.5 years
Network infrastructure assets
20 years
Software and computer equipment
3 to 4 years
Transmission equipment
3 to 7 years
Furniture, fixtures and equipment
3 to 10 years
Leasehold improvements
Lesser of estimated useful life or the lease term
 
22

 
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 (loss).

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 new fiber and associated construction costs of the relocation placed into service, which is reduced by any reimbursements received for such costs. We capitalized relocation costs amounting to $2.2 million, $8.9 million and $2.0 million for the years ended December 31, 2007, 2006 and 2005, respectively. We fully depreciated the remaining carrying value of the network infrastructure rendered unusable amounting to $0.3 million, $1.6 million and $0.4 million, on an original cost basis, for the years ended December 31, 2007, 2006 and 2005, respectively.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 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 asset. Included in costs of revenue for the year ended December 31, 2007 is a provision for equipment impairment of $2.2 million recorded to recognize the loss in value of certain equipment held in inventory. There were no impairment amounts provided for the years ended December 31, 2006 or 2005.

Asset Retirement Obligations
 
In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,” 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 of electronics in leased facilities and the removal of leasehold improvements, and 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,” and 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 $6.1 million and $5.6 million at December 31, 2007 and 2006, respectively, of which $3.3 million and $3.1 million, respectively, were included in “Accrued expenses,” and $2.8 million and $2.5 million, respectively, were included in “Other long-term liabilities.” Accretion expense, which is included in “Interest expense,” amounted to $0.2 million for each of the years ended December 31, 2007, 2006 and 2005.

Foreign Currency Translation and Transactions
 
Our functional 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 (loss). Our foreign exchange transaction gains (losses) are generally included in “other income” in the consolidated statements of operations.

Income Taxes
 
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”). 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 bases, net operating loss and tax credit carry-forwards, and tax contingencies. 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. The Company records a valuation allowance against deferred tax assets to the extent that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We are subject to audit 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,” (“Interpretation No. 48”) when, despite our belief that our tax return positions are appropriate and supportable under appropriate tax law, we believe there is uncertainty with respect to certain positions and we may not succeed in realizing the tax position. We have evaluated our tax positions for items of uncertainty in accordance with Interpretation No. 48 and have determined that our tax positions are highly certain within the meaning of Interpretation No. 48. 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 year ended December 31, 2007.

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 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 weight of available evidence that some portion or the entire deferred tax asset will not be realized. Deferred tax liabilities are first applied to the deferred tax assets reducing the need for a valuation allowance. Future utilization of the remaining net deferred tax asset would require the ability to forecast future earnings. Based on past performance resulting in net loss positions, sufficient evidence exists to require a valuation allowance on our net deferred tax asset balance.
 
As a result of our bankruptcy, estimates have been made that impact the deferred tax balances. The factors resulting in estimation include, but are not limited to, the fresh start valuation of assets and liabilities, implications of cancellation of indebtedness income and various other factors.

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”). SFAS No. 148 amended SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”), to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation (see Note 9, “Stock-based Compensation,” to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
 
23

 
Under the fair value provisions of SFAS No. 123, 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)”), 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 occur. As we had recognized the impact of forfeitures as they occurred upon adoption of 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.

The following are the assumptions used by the Company to calculate the weighted average fair value of stock options granted:
 
    
Years Ended December 31,
 
    
2007
 
2006
 
2005
 
Dividend yield
   
   
   
 
Expected volatility
   
80.00
%
 
80.00
%
 
80.00
%
Risk-free interest rate
   
4.61
%
 
4.89
%
 
3.99
%
Expected life (years)
   
5.00
   
5.00
   
4.00
 
Weighted average fair value of options granted
 
 
$41.77
 
 
$31.16
 
 
$16.25
 

 
For a description of our stock-based compensation programs, see Note 9, “Stock-Based Compensation,” to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Results of Operations for the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 
Consolidated Results (in millions):
 
   
Years Ended December 31,
          
   
 2007
 
 2006
 
$ Increase/
(Decrease)
 
 % Increase/
(Decrease)
 
Revenue
 
$
253.6
 
$
236.7
 
$
16.9
   
7.1 %
 
Costs of revenue (excluding depreciation and amortization, shown separately below, and including provision for equipment impairment of $2.2 for the year ended December 31, 2007)
   
110.3
   
121.9
   
(11.6
)
 
(9.5)%
 
Selling, general and administrative expenses
   
80.9
   
71.1
   
9.8
   
13.8 %
 
Depreciation and amortization
   
47.5
   
47.2
   
0.3
   
0.6 %
 
Loss on litigation
   
11.7
   
   
11.7
   
NM
 
Operating income (loss)
   
3.2
   
(3.5
)
 
6.7
   
191.4 %
 
Other income (expense):
   
               
 
 
Gain on reversal of foreign currency translation adjustments from liquidation of subsidiaries
   
10.3
   
   
10.3
   
NM
 
Interest income
   
3.3
   
2.4
   
0.9
   
37.5 %
 
Interest expense
   
(2.3
)
 
(5.8
)
 
(3.5
)
 
(60.3)%
 
Other income, net
   
3.8
   
2.1
   
1.7
   
81.0 %
 
Gain on sales of data centers
   
   
48.2
   
(48.2
)
 
NM
 
Income from continuing operations, before income taxes
   
18.3
   
43.4
   
(25.1
)
 
(57.8)%
 
Provision for income taxes
   
4.5
   
   
4.5
   
NM
 
Income from continuing operations
   
13.8
   
43.4
   
(29.6
)
 
(68.2)%
 
Income from discontinued operations, net of taxes
   
   
3.0
   
(3.0
)
 
NM
 
Net income
 
$
13.8
 
$
46.4
 
$
(32.6
)
 
(70.3)%
 
 
NM—not meaningful

 
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.

Revenue.  Consolidated revenue in 2007 was $253.6 million, compared to $236.7 million in 2006, an increase of $16.9 million, or 7.1%. Revenue from our U.S. operations increased by $9.9 million, or 4.5%, from $217.6 million in 2006 to $227.5 million in 2007. The principal reason for this increase was due to the continued growth in our fiber services and metro transport services. In 2007, U.S. revenue from fiber services increased by $11.1 million, or 9.2%, from $120.3 million in 2006 to $131.4 million in 2007 and revenue from metro transport services increased by $22.3 million, or 79.1%, from $28.2 million in 2006 to $50.5 million in 2007. These increases were offset by a decrease in data center revenue of $23.7 million, or 96.7%, from $24.5 million in 2006 to $0.8 million in 2007 due to the sale of our domestic data centers in the fourth quarter of 2006 (four in October 2006 and one in November 2006). Revenue from our foreign operations, primarily in the U.K., increased by $7.0 million, or 36.6%, from $19.1 million in 2006 to $26.1 million in 2007. The increase was primarily due to the change in currency translation rates in 2007 compared to 2006 and to our focus on the core businesses in the U.K.

24

 
Costs of revenue. Consolidated costs of revenue in 2007 was $110.3 million, compared to $121.9 million in 2006, a decrease of $11.6 million, or 9.5%. Consolidated costs of revenue as a percentage of revenue was 43.5% in 2007, compared to 51.5% in 2006, resulting in consolidated gross profit margin of 56.5% and 48.5% in 2007 and 2006, respectively. The costs of revenue for our U.S. operations was $101.9 million and $113.6 million in 2007 and 2006, respectively, a decrease of $11.7 million, or 10.3%. The decrease in the domestic costs of revenue in 2007 compared to 2006 was attributable principally to the sale of the domestic data centers, which resulted in a decrease in costs of revenue of $15.4 million in 2007 compared to 2006. Additionally, costs of revenue was reduced due to the amount of salaries capitalized; domestic capitalized labor increased from $4.0 million in 2006 to $7.9 million in 2007. These decreases in costs of revenue were partially offset by the provision for equipment impairment of $2.2 million, an increase of $2.8 million in our long haul fiber lease expense, an increase of $1.1 million in co-location operating expense and an increase of $1.0 million in third party network costs. The costs of revenue for our foreign operations was $8.4 million in 2007, compared to $8.3 million in 2006, an increase of $0.1 million, or 1.2%.
 
Selling, General and Administrative Expenses (“SG&A”). Consolidated SG&A in 2007 was $80.9 million, compared to $71.1 million in 2006, an increase of $9.8 million, or 13.8%. SG&A as a percentage of revenue was 31.9% in 2007, compared to 30.0% in 2006. In the U.S., SG&A was $69.3 million in 2007, compared to $63.4 million in 2006, an increase of $5.9 million, or 9.3%. SG&A for our U.S. operations in 2007 compared to 2006 increased primarily due to an increase in non-cash stock-based compensation expense (principally related to restricted stock units granted in 2007) from $3.4 million in 2006 to $8.0 million in 2007. Additionally, payroll and payroll-related expenses increased by $7.5 million from $25.7 million in 2006, to $33.2 million in 2007 due to increases in salaries and headcount. These increases were partially offset by a reduction in professional fees of $4.6 million and a reduction in transaction-based taxes of $1.4 million. SG&A for our foreign operations in 2007 was $11.6 million, compared to $7.7 million in 2006, an increase of $3.9 million, or 50.6%, which was due primarily to (i) an increase in payroll and payroll-related expenses of $3.1 million; (ii) an increase in occupancy costs of $1.0 million due to the lease of new office space in the UK in 2007; and (iii) an increase in other operating costs of $1.3 million. These increases were partially offset by decreases in (i) professional fees of $1.2 million, due to the decline in audit-related fees; and (ii) stock-based compensation expense of $0.3 million.

Depreciation and amortization.  Consolidated depreciation and amortization in 2007 was $47.5 million, compared to $47.2 million in 2006, an increase of $0.3 million, or 0.6%. Consolidated depreciation and amortization as a percentage of revenue was 18.7% in 2007, compared to 19.9% in 2006. Depreciation and amortization increased as a result of additions to property and equipment in 2007 and the full year effect of depreciation on property and equipment acquired throughout 2006. This increase was partially offset by the elimination of depreciation expense associated with property and equipment sold or disposed of during 2007 and 2006, primarily the data centers in late 2006 and property and equipment, which became fully depreciated during 2007.
 
Loss on litigation. In 2007, we recorded a loss on litigation of $11.7 million with respect to the GVN litigation. Of this amount, $0.8 million was paid during 2007 and $10.9 million was accrued at December 31, 2007. See Item 3, “Legal Proceedings” and Item 8, Financial Statements, Note 13 to the Consolidated Financial Statements, “Litigation.”

Gain on reversal of foreign currency translation adjustments from liquidation of subsidiaries. We recognized a non-cash gain on the reversal of foreign currency translation adjustments of $10.3 million, previously included in other comprehensive income on our statements of shareholders’ equity, in connection with the liquidation of Metromedia Fiber Network B.V., Metromedia Fiber Network Services Ltd. and SiteSmith Ltd., each of which was a wholly-owned subsidiary, in the fourth quarter of 2007.

Interest income. Interest income, substantially all of which was earned in the U.S., increased from $2.4 million in 2006 to $3.3 million in 2007. The increase of $0.9 million, or 37.5%, was primarily due to the additional funds that we had available for investment following the sales of our domestic data centers in the fourth quarter of 2006 and higher short-term interest rates.

Interest expense.  Interest expense, substantially all of which was incurred in the U.S., includes 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 certain asset retirement obligations. Interest expense decreased from $5.8 million in 2006 to $2.3 million in 2007. The decrease of $3.5 million, or 60.3%, was primarily due to a decrease in interest expense on fair market value rent liabilities from $3.9 million in 2006 to $0.6 million in 2007 due to the reduction of such balances, which was primarily due to the sale of our domestic data centers in the fourth quarter of 2006.

Other income, net.  Other income, net is composed primarily of income from non-recurring transactions and is not comparative from a trend perspective.
 
Consolidated other income, net was $3.8 million in 2007, compared to $2.1 million in 2006, an increase of $1.7 million. In the U.S., other income, net was $2.7 million in 2007, compared to a net loss of $1.4 million in 2006, an increase of $4.1 million. For our foreign operations, other income, net was $1.1 million in 2007, compared to $3.5 million in 2006, a decrease of $2.4 million. In 2007, consolidated other income, net was comprised primarily of gains arising from the reversal of certain tax liabilities of $2.2 million, gain on a legal settlement of $0.6 million and other gains of $0.4 million, offset by losses on dispositions of property and equipment of $0.5 million and a loss on the sale of certain investments of $0.4 million. In 2006, consolidated other income, net was comprised primarily of gains arising from the reversal of certain tax liabilities of $3.2 million, gain on foreign currency of $2.0 million and other gains of $1.5 million, offset by losses on disposition of property and equipment of $4.6 million.

Gain on sales of data centers. Gain on the sales of our domestic data centers of $48.2 million in 2006 represented the excess of the proceeds received on the sale totaling $43.1 million plus the reversal of the deferred fair value rent liability and the SFAS No. 13 liability associated with the related parties totaling $28.0 million and $6.0 million, respectively, over the carrying value of the related assets sold. There was no comparable sale in 2007.
 
Income from discontinued operations, net of taxes. The income from discontinued operations, net of taxes, for the year ended December 31, 2006 includes the loss from discontinued operations of $0.9 million and the gain on the sale of AboveNet (UK) London of $3.9 million. There were no discontinued operations in the year ended December 31, 2007.
 
25


Results of Operations for the Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 
Consolidated Results (in millions):

   
Years Ended December 31,
          
   
 2006
 
 2005
 
$ Increase/
(Decrease)
 
 % Increase/
(Decrease)
 
Revenue
 
$
236.7
 
$
219.7
 
$
17.0
   
7.7 %
 
Costs of revenue (excluding depreciation and amortization, shown separately below)
   
121.9
   
119.2
   
2.7
   
2.3 %
 
Selling, general and administrative expenses
   
71.1
   
69.6
   
1.5
   
2.2 %
 
Depreciation and amortization
   
47.2
   
43.1
   
4.1
   
9.5 %
 
Operating loss
   
(3.5
)
 
(12.2
)
 
8.7
   
71.3 %
 
Other income (expense):
                     
 
 
Gain (loss) on sales of data centers
   
48.2
   
(1.3
)
 
49.5
   
NM
 
Interest income
   
2.4
   
1.3
   
1.1
   
84.6 %
 
Interest expense
   
(5.8
)
 
(5.9
)
 
(0.1
)
 
(1.7)%
 
Other income, net
   
2.1
   
10.9
   
(8.8
)
 
(80.7)%
 
Income (loss) from continuing operations, before income taxes
   
43.4
   
(7.2
)
 
50.6
   
702.8 %
 
Provision for income taxes
   
   
0.4
   
(0.4
)
 
NM
 
Income (loss) from continuing operations
   
43.4
   
(7.6
)
 
51.0
   
671.1 %
 
Income (loss) from discontinued operations, net of taxes
   
3.0
   
(0.8
)
 
3.8
   
475.0 %
 
Net income (loss)
 
$
46.4
 
$
(8.4
)
$
54.8
   
652.4 %
 
 
NM—not meaningful

 
Revenue.  Consolidated revenue in 2006 was $236.7 million, compared to $219.7 million in 2005, an increase of $17.0 million, or 7.7%. Revenue from our U.S. operations increased by $13.5 million, or 6.6%, from $204.1 million in 2005 to $217.6 million in 2006. The principal reason for this increase was due to the continued growth in our fiber services and metro transport services. In 2006, U.S. revenue from fiber services increased by $10.1 million, or 9.2%, from $110.2 million in 2005 to $120.3 million in 2006 and revenue from metro transport services increased by $13.3 million, or 89.3%, from $14.9 million in 2005 to $28.2 million in 2006. These increases were offset by a decrease in data center revenue of $4.5 million, or 15.5%, from $29.0 million in 2005 to $24.5 million in 2006 due to the sale of the domestic data centers in the fourth quarter of 2006 (four in October 2006 and one in November 2006) and a decrease in termination revenue of $3.8 million, or 31.4%, from $12.1 million in 2005 to $8.3 million in 2006. Revenue from our foreign operations, primarily in the U.K., increased by $3.5 million, or 22.4%, from $15.6 million in 2005 to $19.1 million in 2006 due primarily to our focus on our core business and strategic investment in infrastructure.

Costs of revenue. Consolidated costs of revenue in 2006 were $121.9 million, compared to $119.2 million in 2005, an increase of $2.7 million, or 2.3%. Consolidated costs of revenue as a percentage of revenue was 51.5% in 2006, compared to 54.3% in 2005, resulting in consolidated gross profit margin of 48.5% and 45.7% in 2006 and 2005, respectively. The cost of revenue for our U.S. operations was $113.6 million and $112.4 million in 2006 and 2005, respectively, an increase of $1.2 million, or 1.1%. The cost of revenue for our foreign operations was $8.3 million and $6.8 million in 2006 and 2005, respectively, an increase of $1.5 million, or 22.1%. The increase in costs of revenue represents increases in variable costs associated with our revenue streams and was not as substantial as the increase in revenue because a significant percentage of our costs of revenue are fixed and increased at a slower rate than revenue. Additionally, because we are spreading these costs over a larger revenue base, we had improved gross profit margins in 2006 compared to 2005.
 
Selling, General and Administrative Expenses (“SG&A”). Consolidated SG&A in 2006 was $71.1 million, compared to $69.6 million in 2005, an increase of $1.5 million, or 2.2%. SG&A as a percentage of revenue was 30.0% in 2006, compared to 31.7% in 2005. In the U.S., SG&A was $63.4 million in 2006, compared to $63.1 million in 2005, an increase of $0.3 million, or 0.5%. SG&A for our U.S. operations in 2006 compared to 2005 is primarily the result of an increase in audit fees and financial consulting fees of $2.4 million and $2.1 million, respectively, which were attributable to the extra costs incurred through our efforts to become timely in our financial reporting, and a net increase in other general and administrative expenses of $0.8 million. These increases were partially offset by the reduction in domestic transaction taxes of $5.0 million, attributable to billing certain of these taxes to customers that commenced in the first quarter of 2006. SG&A for our foreign operations was $7.7 million and $6.5 million in 2006 and 2005, respectively, an increase of $1.2 million, or 18.5%, which was due primarily to (i) an increase in payroll and payroll-related expenses of $1.2 million; (ii) an increase in professional fees of $1.3 million, $0.7 million of which related to the extra costs incurred through our efforts to become timely in our financial reporting and to become compliant with the requirements of the Sarbanes-Oxley Act of 2002. These increases were partially offset by a decrease in other operating costs of $1.2 million.

Depreciation and amortization.  Consolidated depreciation and amortization in 2006 was $47.2 million, compared to $43.1 million in 2005, an increase of $4.1 million, or 9.5%. Consolidated depreciation and amortization as a percentage of revenue was 19.9% in 2006, compared to 19.6% in 2005. Depreciation and amortization increased as a result of additions to property and equipment in 2006 and the full year effect of depreciation on property and equipment acquired throughout 2005. This increase was partially offset by the elimination of depreciation expense associated with property and equipment sold or disposed of during 2006 and 2005.
 
Gain on sales of data centers. Gain on the sales of our domestic data centers of $48.2 million in 2006 represented the excess of the proceeds received on the sale totaling $43.1 million plus the reversal of the deferred fair value rent liability and the SFAS No. 13 liability associated with the related parties totaling $28.0 million and $6.0 million, respectively, over the carrying value of the related assets sold. In 2005, a loss of $1.3 million was incurred on the sale of a domestic data center.

Interest income. Interest income, substantially all of which was earned in the U.S., increased from $1.3 million in 2005 to $2.4 million in 2006. The increase of $1.1 million, or 84.6%, was primarily due to the additional funds that we had available for investment following the sales of our domestic data centers in the fourth quarter of 2006 and an increase in short-term interest rates during 2006.

Interest expense.  Interest expense, substantially all of which was incurred in the U.S., includes interest related to a capital lease obligation, interest accrued on certain tax liabilities, and interest accretion relating to certain asset retirement obligations. Interest expense decreased from $5.9 million in 2005 to $5.8 million in 2006. The decrease of $0.1 million, or 1.7%, was primarily due to a decrease in interest expense on fair market value rent liabilities due to the reduction of such balances, which was primarily due to the sale of our domestic data centers.
 
26

 
Other income, net.  Other income, net is composed primarily of non-recurring transactions and is not comparative from a trend perspective.
 
Consolidated other income, net was $2.1 million in 2006, compared to $10.9 million in 2005, a decrease of $8.8 million. In the U.S., other income, net was a net loss of $1.4 million in 2006, compared to a net gain of $3.8 million in 2005, a decrease of $5.2 million. For our foreign operations, other income, net was a net gain of $3.5 million in 2006, compared to a net gain of $7.1 million in 2005, a decrease of $3.6 million. In 2006, consolidated other income, net was comprised primarily of gains arising from the reversal of certain tax liabilities of $3.2 million, gain on foreign currency of $2.0 million and other gains of $1.5 million, offset by losses on disposition of property and equipment of $4.6 million. In 2005, consolidated other income, net was comprised of the non-cash gain on the settlement of a contractual obligation of $9.0 million, a gain on the settlement of a lease of $3.5 million, offset by the loss on foreign currency of $1.2 million and other losses totaling $0.4 million.
 
Income (loss) from discontinued operations, net of taxes. As discussed in Note 7, “Discontinued Operations and Dispositions,” to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we sold or liquidated six European subsidiaries during the years ended December 31, 2005 and 2004. The operating results of these entities, as well as the gain or loss on sale of disposition, were included in income (loss) from discontinued operations, net of taxes in the related statements of operations for all periods presented. Additionally, the operating results of AboveNet (UK), which was sold in November 2006, were included in the income (loss) from discontinued operations, net of taxes, in all periods presented.

Liquidity and Capital Resources
 
We had a working capital deficit at December 31, 2007 of $25.6 million, compared to working capital of $17.4 million at December 31, 2006. Cash and cash equivalent balances at December 31, 2007 were $45.8 million, compared to $70.7 million at December 31, 2006, a decrease of $24.9 million. The decrease in working capital at December 31, 2007 was primarily attributable to the use of cash for payments for purchases of property and equipment of $90.8 million and cash of $9.7 million utilized to repurchase shares in connection with the delivery of vested restricted stock units, and the accrual of litigation costs of $10.9 million partially offset by cash generated by operating activities. The decrease in cash was due primarily to the excess of cash used for purchases of property and equipment and cash used to purchase shares over cash generated by operating activities.

Net cash provided by operating activities was $69.7 million in 2007, compared to $51.3 million in 2006. Net cash provided by operating activities in 2007 resulted primarily from the add back of non-cash items deducted in the determination of net income, principally depreciation and amortization of $47.5 million and stock-based compensation expense of $8.2 million, provision for equipment impairment of $2.2 million, partially offset by the non-cash gain of $10.3 million on the reversal of foreign currency translation adjustments from the liquidation of certain subsidiaries. Net cash provided by operating activities in 2006 resulted primarily from the add back of non-cash items deducted in the determination of net income, principally depreciation and amortization of $47.2 million and stock-based compensation expense of $3.9 million, offset by the net gain on the sale of our data centers of $48.2 million included in the determination of net income.

Accounts payable at December 31, 2007 was $7.9 million, compared to $14.6 million at December 31, 2006, a reduction of $6.7 million, which was due to an upgrade to the accounting system at December 31, 2007, which required us to close the accounts payable process earlier than in the prior year. Accrued expenses were $78.3 million at December 31, 2007, compared to $56.6 million at December 31, 2006, an increase of $21.7 million. The increase was attributable to the accrued litigation costs of $10.9 million, an increase in accrued capital expenditures of $7.2 million and an increase in overall accruals required because of the early closing of the accounts payable process at December 31, 2007, discussed above.

Net cash used in investing activities in 2007 was $89.3 million, compared to $27.2 million in 2006. Net cash used in investing activities in 2007 was primarily attributable to the purchases of property and equipment of $90.8 million. Net cash used in investing activities in 2006 reflects the proceeds generated from sales of property and equipment of $43.2 million (of which $43.1 million related to the sales of our domestic data centers) and the proceeds from the sale of the stock of AboveNet (UK) of $1.3 million, offset by the cash used for the purchase of property and equipment totaling $71.7 million. The purchase of property and equipment in each year relates to the capital required to connect new customers to our networks and to build our infrastructure. The increase in 2007 compared to 2006 was primarily due to the upgrade of our long haul network to next generation technology that has dramatically improved the long haul network's capacity and an upgrade of our core router network at major hubs to Juniper’s flagship T-Series platform.

Net cash used in financing activities was $5.4 million in 2007, which is composed of the $9.7 million utilized to buy back shares from employees in connection with the delivery of vested restricted stock units, and the principal payment on our capital lease obligation of $0.1 million, offset by the proceeds from the exercise of warrants of $1.1 million, the excess tax benefit realized from share-based payment arrangements of $2.8 million and the reduction in restricted cash of $0.5 million. Net cash used in financing activities was $1.0 million in 2006, which reflects the change in restricted cash and cash equivalents of $1.1 million and the principal payment on our capital lease obligation of $0.1 million, offset by the proceeds from the exercise of warrants of $0.2 million.

In 2007, we generated cash from operations that was sufficient to fund our operating expenses. During 2007, our capital expenditures exceeded the net cash generated from operations, thus reducing liquidity. Additionally, in December 2007, in connection with the delivery of restricted stock units, we paid an aggregate of $9.7 million to purchase shares of common stock to fund estimated tax obligations. See Item 11, “Executive Compensation,” and Note 9, “Stock-Based Compensation – Restricted Stock Units,” to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We expect that our cash from operations will continue to exceed our operating expenses and plan to continue to fund a portion of our future capital projects for both our existing business and growth with our net cash from operations.

On February 29, 2008, we closed a $60 million senior secured credit facility (the “Credit Facility”) comprised of: (i) an $18 million revolving working capital line (the “Revolver”); (ii) a $24 million term loan (the “Term Loan”); and (iii) an $18 million delayed draw term loan (“Delayed Draw Term Loan”), which is available from the closing date to and including the 270th day thereafter. The Credit Facility matures on the fifth anniversary of the closing date (February 28, 2013). The Credit Facility is secured by substantially all of our assets. We paid $0.9 million for upfront fees to the lenders and $0.3 million to our financial advisors that assisted us in obtaining the Credit Facility. Our ability to draw upon the available commitments under the Revolver is subject to compliance with all of the covenants contained in the credit agreement and our continued ability to make certain representations and warranties. Among other things, these covenants restrict our ability to pay dividends, limit annual capital expenditures in 2008, 2009 and 2010, require that we maintain a minimum of $20 million in cash deposits at all times, provide that our net total funded debt ratio cannot at any time exceed a specified amount and require that we maintain a minimum consolidated fixed charges coverage ratio. As of August 31, 2008, we had $24 million outstanding under the Credit Facility. On September 26, 2008, we executed a joinder agreement to the Credit Facility that adds an additional lender and increases the amount of the Credit Facility to $90 million effective October 1, 2008, subject to the terms of the joinder agreement, including the payment of a $0.45 million fee at closing and a $0.1 million advisory fee. The availability under the Revolver increased to $27 million, the Term Loan increased to $36 million and the available Delayed Draw Term Loan increased to $27 million. Additionally, the Delayed Draw Term Loan option available under the Credit Facility, which was originally scheduled to expire on November 25, 2008, was extended to June 30, 2009. We believe that our existing cash, cash from operating activities and funds available under our Credit Facility will be sufficient to fund operating expenses, planned capital expenditures and other liquidity requirements (including the liability arising out of the GVN litigation) at least through the third quarter of 2009.

27

 
At December 31, 2007, we had $10.9 million accrued with respect to the GVN lawsuit, of which $8.6 million had been paid through August 31, 2008. As of December 31, 2007, $0.8 million of the GVN liability had been paid and $10.9 million was included in accrued expenses on the consolidated balance sheet at such date. See Item 3, “Legal Proceedings,” and Item 8, “Financial Statements and Supplementary Data,” Note 13, “Litigation.”

In addition, in the future we may consider making acquisitions of other companies or product lines to support our growth strategy. We may finance any such acquisition of other companies or product lines from existing cash balances, through borrowings from banks or other institutional lenders, and/or the public or private offerings of debt and/or equity securities. We cannot provide assurance that any such funds will be available to us on favorable terms, or at all.

Contractual Obligations
 
Certain of our facilities and equipment are leased under non-cancelable operating and capital leases. Additionally, as discussed below, we have certain long-term obligations for rights-of-way, franchise fees and building access fees. The following is a schedule, by fiscal year, of future minimum rental payments required under current operating leases, our capital lease and other contractual arrangements as of December 31, 2007 measured from December 31, 2007:

   
Payments Due By Period (In Millions)
 
Contractual Obligations
 
Total
 
Less than
1 Year
 
1-3
Years
 
4-5
Years
 
More than
5 Years
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Lease Obligations
 
$
55.8
 
$
14.5
 
$
21.7
 
$
10.3
 
$
9.3
 
Capital Lease Obligations (Including Interest)
   
2.4
   
0.3
   
0.5
   
0.5
   
1.1
 
Other Rights-of-Way, Franchise Fees and Building Access Fees
   
135.0
   
21.0
   
28.4
   
20.5
   
65.1
 
Total
 
$
193.2
 
$
35.8
 
$
50.6
 
$
31.3
 
$
75.5
 
 
Excluded from this table are capital commitments (all of which relate to 2008), which totaled $26.0 million at December 31, 2007.
 
Excluded from this table are contractual obligations incurred with respect to certain severance arrangements entered into in 2008, including the modification and termination of the contract of Mr. Doris (our former Senior Vice President and Chief Financial Officer) on March 4, 2008. See Item 8, Financial Statements and Supplementary Data, Note 16, “Subsequent Events - Employment Contract Termination and Employment Contracts,” for a further discussion.

Excluded from this table are the obligations related to the Credit Facility consummated February 29, 2008. See Item 8, Financial Statements and Supplementary Data, Note 16, “Subsequent Events - Bank Financing,” for a further discussion.

Segment Results (in millions)
 
Our results (excluding intercompany activity) are segmented according to groupings based on geography.
 
United States:

   
 2007
 
 2006
 
 $ Increase/
(Decrease)
 
 % Increase/
(Decrease)
 
Revenue
 
$
227.5
 
$
217.6
 
$
9.9
   
4.5 %
 
Costs of revenue (excluding depreciation and amortization, shown separately below, and including provision for equipment impairment of $2.2 for the year ended December 31, 2007)
   
101.9
   
113.6
   
(11.7
)
 
(10.3)%
 
Selling, general and administrative expenses
   
69.3
   
63.4
   
5.9
   
9.3 %
 
Depreciation and amortization
   
41.4
   
43.0
   
(1.6
)
 
(3.7)%
 
Operating income (loss)
   
14.9
   
(2.4
)
 
17.3
   
720.8 %
 
Other income (expense):
                     
 
 
Interest income
   
3.1
   
2.4
   
0.7
   
29.2 %
 
Interest expense
   
(2.3
)
 
(5.8
)
 
(3.5
)
 
(60.3)%
 
Other income (expense), net
   
2.7
   
(1.4
)
 
4.1
   
292.9 %
 
Gain on sale of data centers
   
   
48.2
   
(48.2
)
 
NM
 
Income from continuing operations before income taxes
   
18.4
   
41.0
   
(22.6
)
 
(55.1)%
 
Provision for income taxes
   
4.5
   
   
4.5
   
NM
 
Income from continuing operations
   
13.9
   
41.0
   
(27.1
)
 
(66.1)%
 
Net income
 
$
13.9
 
$
41.0
 
$
(27.1
)
 
(66.1)%
 

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United Kingdom and others:

   
 2007
 
 2006
 
$ Increase/
(Decrease)
 
 % Increase/
(Decrease)
 
Revenue
 
$
26.1
 
$
19.1
 
$
7.0
   
36.6 %
 
Costs of revenue (excluding depreciation and amortization, shown separately below)
   
8.4
   
8.3
   
0.1
   
1.2 %
 
Selling, general and administrative expenses
   
11.6
   
7.7
   
3.9
   
50.6 %
 
Depreciation and amortization
   
6.1
   
4.2
   
1.9
   
45.2 %
 
Loss on litigation
   
11.7
   
   
11.7
   
NM
 
Operating loss
   
(11.7
)
 
(1.1
)
 
(10.6
 
NM
 
Other income (expense):