item 14 principal accountant fees services aggregate fees professional services rendered company bdo seidman llp february 29 2008 years ended december 31 2006 2005 represents prorated amount audit fees incurred 2003 2005 period estimated 2005 table represents fees incurred respect relevant year recognize audit fees operating results services provided schedule fees incurred company year respective audit periods information 2008 services rendered february 28 2008 audit fees discussed item 9 “changes disagreements accountants accounting financial disclosure” august 2006 bdo seidman llp engaged audit company’s financial statements december 31 2006 2005 2004 2003 fiscal years ended december 31 2006 2005 2004 period september 8 2003 december 31 2003 audit fees years ended december 31 2006 2005 respectively professional services rendered audit consolidated financial statements described audit related fees audit related fees typically due diligence related mergers acquisitions fees years ended december 31 2006 2005 tax fees tax fees years ended december 31 2006 2005 services related tax compliance including preparation tax returns claims refund tax planning advice including assistance representation tax audits appeals advice related mergers acquisitions fees consulting services related certain compensatory stock matters years ended december 31 2006 2005 auditor independence audit committee considered nonaudit services provided bdo seidman llp determined provision services effect bdo seidman llps independence company audit committee preapproval policy procedures audit committee must review preapprove audit except provided nonaudit services provided bdo seidman llp independent registered public accounting firm conducting reviews audit nonaudit services audit committee determine whether provision services would impair bdo seidman’s independence audit committee preapprove services believes impair bdo seidman’s independence audit committee delegated chairman authority preapprove nonaudit related services subsequently communicated audit committee part iv item 15 item 14 principal accountant fees services aggregate fees billed professional services rendered company bdo usa llp including amounts billed affiliate bdo llp february 28 2011 except portion 118800 described 2010 local statutory financial statements uk yet billed years ended december 31 2010 2009 table represents fees incurred service year service provided relevant audit period recognize audit fees operating results services provided information 2009 services rendered february 28 2010 includes 118800 estimated audit local statutory financial statements uk abovenet communications uk limited abovenet communications europe limited mfn europe limited audit fees june 2010 bdo usa llp engaged audit company’s financial statements year ended december 31 2010 june 2009 bdo usa llp engaged audit company’s financial statements year ended december 31 2009 audit fees years ended december 31 2010 2009 respectively professional services rendered audit consolidated financial statements described audit related fees audit related fees typically due diligence related mergers acquisitions fees year ended december 31 2010 tax fees tax fees years ended december 31 2010 2009 services related tax compliance including preparation tax returns claims refund tax planning advice including assistance representation tax audits appeals review company’s earnings profits analysis billings date irs section 382 analysis auditor independence audit committee considered nonaudit services provided bdo usa llp determined provision services effect bdo usa llps independence company audit committee preapproval policy procedures audit committee must review preapprove audits except provided nonaudit services provided bdo usa llp independent registered public accounting firm conducting reviews audit nonaudit services audit committee determine whether provision services would impair bdo usa llp’s independence audit committee preapprove services believes impair bdo usa llp’s independence audit committee delegated chairman authority preapprove nonaudit related services subsequently communicated audit committee services rendered bdo usa llp 2009 2010 preapproved pursuant process part iv item 15 item 14 exhibits financial statement schedules reports form 8k 1 financial statements see index consolidated financial statements page 2 financial statement schedules schedule ii valuation qualifying accounts schedules listed omitted since either applicable information contained elsewhere financial statements notes thereto amounts insignificant immaterial b current reports form 8k december 4 1998 company filed current report form 8k related companys announcement unregistered offering 650000000 aggregate principal amount 10 senior notes due 2008 notes issued november 25 1998 price per note 100 details disclosed press release dated november 20 1998 filed exhibit current report date filing annual report form 10k proxy materials furnished security holders copies proxy materials sent commission compliance rules c exhibits exhibit description number 31 form amended restated certificate incorporation metromedia fiber network inc incorporated reference companys registration statement form s1 registration 33333653 32 form amended restated bylaws metromedia fiber network inc incorporated reference companys registration statement form s1 registration 33333653 41 specimen class common stock certificate metromedia fiber network inc incorporated reference companys registration statement form s1 registration 33333653 42 indenture dated november 25 1998 metromedia fiber network inc ibj whitehall bank trust company formerly ibj schroder bank trust company incorporated reference companys registration statement form s4 registration 33371129 43 form 10 series senior notes due 2008 metromedia fiber network inc incorporated reference companys registration statement form s4 registration 33371129 44 form 10 series b senior notes due 2008 metromedia fiber network inc incorporated reference companys amendment 1 registration statement form s4 registration 33371129 101 form metromedia fiber network inc 1997 incentive stock plan incorporated reference companys registration statement form s1 registration 33333653 102 employment agreement national fiber network inc stephen garofalo dated february 26 1997 incorporated reference companys registration statement form s1 registration 33333653 103 employment agreement national fiber network inc howard finkelstein dated april 30 1997 incorporated reference companys registration statement form s1 registration 33333653 104 agreement dated april 30 1997 amended modification agreement dated october 1997 among metromedia company stuart subotnick arnold wadler silvia kessel stephen garofalo national fiber network inc incorporated reference companys registration statement form s1 registration 33333653 105 franchise agreement city new york national fiber network inc dated december 20 1993 incorporated reference companys registration statement form s1 registration 33333653 106 conduit occupancy agreement new york telephone company national fiber network inc dated may 1993 incorporated reference companys registration statement form s1 registration 33333653 107 consulting agreement national fiber network realprop capital corporation dated february 1 1996 incorporated reference companys registration statement form s1 registration 33333653 108 letter agreement national fiber network inc peter sahagen dated february 11 1997 incorporated reference companys registration statement form s1 registration 33333653 109 office lease national fiber network inc 110 east 42nd street associates dated march 19 1997 incorporated reference companys registration statement form s1 registration 33333653 1010 office lease national fiber network inc 110 east 42nd street dated june 1997 incorporated reference companys registration statement form s1 registration 33333653 1011 trademark license agreement metromedia company metromedia fiber network inc dated august 14 1997 incorporated reference companys registration statement form s1 registration 33333653 1012 fiber optic use agreement national fiber network inc nextlink new york llc dated june 3 1997 portions exhibit subject request securities exchange commission confidential treatment omitted material separately filed securities exchange commission incorporated reference companys registration statement form s1 registration 33333653 1013 amended restated agreement provision fiber optic transmission network dated effective date us one communications new york inc national fiber network inc portions exhibit subject request securities exchange commission confidential treatment omitted material separately filed securities exchange commission incorporated reference companys registration statement form s1 registration 33333653 1014 fiber lease innerduct use agreement metromedia fiber network inc nextlink communications inc dated february 23 1998 portions exhibit subject request securities exchange commission confidential treatment omitted material separately filed securities exchange commission incorporated reference companys 1997 annual report form 10k file no00023269 1015 amendment 1 fiber lease innerduct use agreement metromedia fiber network inc nextlink communications inc made entered march 4 1998 portions exhibit subject request securities exchange commission confidential treatment omitted material separately filed securities exchange commission incorporated reference companys 1997 annual report form 10k file 00023269 1016 agreement lease connecticut general life insurance company metromedia fiber network services inc dated march 9 1998 incorporated reference companys 1997 annual report form 10k file 00023269 1017 purchase agreement dated november 20 1998 among metromedia fiber network inc salomon smith barney inc chase securities inc deutsche bank securities inc donaldson lufkin jenrette securities corporation incorporated reference companys registration statement form s4 registration 33371129 1018 registration rights agreement dated november 25 1998 among metromedia fiber network inc salomon smith barney inc chase securities inc deutsche bank securities inc donaldson lufkin jenrette securities corporation incorporated reference companys registration statement form s4 registration 33371129 1019 security agreement dated november 25 1998 metromedia fiber network inc ibj whitehall bank trust company incorporated reference companys registration statement form s4 registration 33371129 1020 employment agreement metromedia fiber network inc vincent galluccio dated august 31 1998 incorporated reference companys amendment 1 registration statement form s4 registration 33371129 1021 employment agreement metromedia fiber network inc gerard benedetto dated august 31 1998 incorporated reference companys amendment 1 registration statement form s4 registration 33371129 1022 employment agreement metromedia fiber network inc nicholas tanzi dated august 31 1998 incorporated reference companys amendment 1 registration statement form s4 registration 33371129 211 list subsidiaries metromedia fiber network inc 231 consent ernst young llp 241 power attorney officers directors 271 financial data schedule filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized metromedia fiber network inc stephen garofalo stephen garofalo chairman chief executive officer dated march 1999 undersigned officers directors metromedia fiber network inc hereby severally constitute arnold l wadler howard finkelstein gerard benedetto singly true lawful attorneys full power singly sign us names capacities indicated reports including amendments thereto exhibits thereto documents connection therewith generally things name behalf capacities enable metromedia fiber network inc comply applicable provisions securities exchange act 1934 amended requirements securities exchange commission hereby ratify confirm signatures may signed said attorneys either reports including amendments thereto documents connection therewith pursuant requirements section 13 15d securities exchange 1934 amended report signed following persons behalf registrant capacities dates indicated signatures title capacities date stephen garofalo chairman board march 1999 chief executive officer stephen garofalo howard finkelstein president chief operating march 1999 officer director howard finkelstein gerard benedetto vice president march 1999 chief financial officer gerard benedetto chief accounting officer silvia kessel executive vice president march 1999 director silvia kessel arnold l wadler executive vice president march 1999 secretary director arnold l wadler vincent galluccio senior vice president march 1999 director vincent galluccio john w kluge director march 1999 john w kluge stuart subotnick director march 1999 stuart subotnick david rockefeller director march 1999 david rockefeller leonard white director march 1999 leonard white metromedia fiber network inc subsidiaries index consolidated financial statements report independent auditors f 2 consolidated balance sheets december 31 1998 1997 f 3 consolidated statements operations years ended december 31 1998 1997 1996 f 4 consolidated statements cash flows years ended december 31 1998 1997 1996 f 5 consolidated statements changes stockholders equity deficiency years ended december 31 1998 1997 1996 f 6 notes consolidated financial statements f 8 schedule ii valuation qualifying accounts 1 report independent auditors board directors shareholders metromedia fiber network inc audited accompanying consolidated balance sheets metromedia fiber network inc subsidiaries company december 31 1998 1997 related consolidated statements operations stockholders equity cash flows three years period ended december 31 1998 audits also included financial statement schedule listed index item 14a consolidated financial statements schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position metromedia fiber network inc subsidiaries december 31 1998 1997 consolidated results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein ernst young llp new york new york march 4 1999 metromedia fiber network inc subsidiaries consolidated balance sheets 000s except share amounts see accompanying notes metromedia fiber network inc subsidiaries consolidated statements operations 000s except per share amounts see accompanying notes metromedia fiber network inc subsidiaries consolidated statements cash flows 000s see accompanying notes metromedia fiber network inc subsidiaries notes consolidated financial statements note 1 business operations line business company facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure communications carriers corporategovernment customers united states company focuses operations domestic intracity fiber optic networks clusters 15 largest cities based population throughout united states company operates highbandwidth fiber optic communications networks new york philadelphia company also engineering constructing networks washington dc chicago san francisco boston company designing networks atlanta dallas houston seattle los angeles company also built obtained intercity fiber optic capacity links certain intracity networks company construction 250route mile network new york washington dc company also obtained rights fiber optic capacity facilitiesproviders obtained fiber optic capacity linking certain metropolitan areas new yorkchicago new yorkboston chicagoseattleportland plans construct intracity networks except portland addition company entered joint venture united kingdom telecommunications company connect new york network london company formed joint venture construct highbandwidth fiber optic network connecting 13 major cities germany obtain certain additional fiber optic capacity western europe note 2 summary significant accounting policies basis presentation consolidated financial statements include accounts company subsidiaries significant intercompany balances transactions eliminated consolidation investment 50 owned joint venture united kingdom telecommunications company accounted equity method certain balances consolidated financial statements restated conform current period presentation management estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenues expenses reporting periods actual results may differ estimates fair value financial instruments carrying amounts cash accounts receivable accounts payable accrued liabilities approximate fair value fair value longterm debt determined based quoted market rates cash flows financial instruments discounted companys estimated current interest rate enter similar financial instruments december 31 1998 fair value companys fixed rate longterm debt 10 senior notes due 2008 650 million recorded amounts longterm debt company approximates fair values cash equivalents purposes consolidated financial statements company considers highly liquid investments original maturity three months less purchased cash equivalents metromedia fiber network inc subsidiaries notes consolidated financial statements pledged securities connection sale 10 senior notes see note 9 portion net proceeds utilized purchase portfolio consisting us government securities mature dates sufficient provide payment full interest 10 senior notes may 15 2000 pledged securities stated cost adjusted premium amortization accrued interest fair value pledged securities approximates carrying value accounts receivable accounts receivable includes trade receivables costs estimated earnings excess billings contracts company utilizes percentage completion method recognizing revenue fiber optic transmission network related equipment fiber optic transmission network related equipment stated cost costs connection installation expansion network capitalized depreciation computed using straightline method life either franchise agreement right way related network property equipment property equipment stated cost depreciation computed using straightline method estimated useful lives assets include debt issuance costs franchise agreements deposits costs amortizable amortized straightline basis period ranging ten fifteen years longlived assets company reviews impairment longlived assets certain identifiable intangibles whenever events changes circumstances indicate carrying amount asset may recoverable company identified impairment indicators income taxes accordance statement financial accounting standards sfas 109 accounting income taxes company recognizes deferred income taxes tax consequences future years differences tax bases assets liabilities financial reporting amounts year end based enacted tax laws statutory tax rates applicable periods differences expected affect taxable income valuation allowances established necessary reduce deferred tax assets amount likely realized provision income taxes tax payable period change period deferred tax assets liabilities recapitalizations april 1997 company increased authorized common stock 01 par value 60000000 shares addition authorized preferred stock par value 01 increased 2000000 shares april 29 1997 company effected 3forone stock split outstanding shares common stock september 1997 company effected 507forone reverse stock split common stock october 28 1997 total authorized number shares common stock company increased 200 million shares par value 001 per share 180 million shares designated class common stock 20 million shares designated class b common stock august 28 1998 company completed twoforone stock split companys class b common stock form 100 percent stock dividend shareholders record close business august 7 1998 addition december 22 1998 company completed another twoforone stock split companys class b common stock form 100 percent stock dividend shareholders record close business december 8 1998 accompanying financial statements give retroactive effect recapitalizations recognition revenue company recognizes revenue telecommunications services ratably term applicable lease agreements customers amounts billed advance service provided recorded deferred revenue company also provides installation services customers services typically completed within year company records revenues related costs services completed contract method addition company occasionally grants indefeasible rights use irus portions network grants occurring prior completion portion network granted company recognizes revenue telecommunication services using percentage completion method percentage completion method progress generally measured performance milestones relating contract milestones fairly reflect progress toward contract completion network construction costs include direct material labor costs indirect costs related contract performance general administrative costs charged expense incurred necessary estimated loss uncompleted contract expensed period identified contract costs estimated using allocations total cost constructing specific phase network revisions estimated profits contracts recognized period become known stock options company adopted disclosureonly provisions sfas 123 accounting stockbased compensation company applies apb opinion 25 accounting stock issued employees related interpretations accounting stock options consulting employment incentives amounts represent value common stock warrants options issued consultants officers employees directors company incentive provide services company 1997 amounts represent value options purchase 12381300 shares companys common stock issued 1997 officers employees directors company options valued accordance apb opinion 25 difference exercise price options fair market value companys common stock date grant earnings per share accordance financial accounting standards boards fasb statement financial accounting standards sfas 128 earnings per share basic earnings per share computed based upon weighted average number common shares outstanding periods diluted earnings per share computed based upon weighted average number common shares outstanding plus assumed issuance common stock equivalents computed accordance treasury stock method metromedia fiber network inc subsidiaries notes consolidated financial statements deferred revenue deferred revenue represents prepayments received customers future use companys fiber optic network well prepayment installation services yet provided lease payments structured either prepayments monthly recurring charges prepayments accounted deferred revenues recognized term respective customer lease agreement december 31 1998 company received prepaid lease payments excess revenue recognized totaling 416 million impact recently issued accounting standards june 1997 fasb released sfas 130 reporting comprehensive income governing reporting display comprehensive income components statement effective financial statements issued periods beginning december 15 1997 company adopted standard required fiscal 1998 statement changes stockholders equity deficiency june 1997 fasb issued sfas 131 disclosures segments enterprise related information sfas 131 redefines operating segments determined requires disclosure certain financial descriptive information companys operating segments 1998 company adopted sfas 131 company currently operates one business segment june 1998 fasb issued sfas 133 accounting derivatives hedging activities establishes accounting reporting standards derivative instruments hedging activities standard effective fiscal quarters fiscal years beginning june 15 1999 company expect adoption sfas 133 impact results operations financial position cash flows note 3 accounts receivable accounts receivable consists following 000s december 31 1998 three customers accounted 43 40 14 respectively companys combined accounts receivable note 4 fiber optic transmission network related equipment fiber optic transmission network related equipment consists following 000s metromedia fiber network inc subsidiaries notes consolidated financial statements construction progress includes amounts incurred companys expansion network amounts include fiber optic cable materials engineering layout costs fiber optic cable installation costs network assets held capital leases construction progress also includes payments rights way underlying sections network build note 5 property equipment property equipment consists following note 6 investment inadvances joint venture company joint venture agreement racal telecommunications inc racal provides broadbased transatlantic communication services new york london december 31 1997 neither party made capital contribution balance investment december 31 1997 represents advances made joint venture company 1998 party made capital contributions 43 million company racal may required contribute additional capital needed respective 50 interests company accounts investment using equity method 1998 company recorded 146000 loss joint venture based 50 interest joint venture included within companys accounts receivable 70000 administrative services provided joint venture reimbursed december 31 1998 note 7 german network build february 1999 company entered joint venture viatel inc carrier 1 holdings ltd jointly build national fiber optic telecommunications network germany upon completion construction joint venture dissolved company separate metromedia fiber network inc subsidiaries notes consolidated financial statements german broadband network connection terms agreement company made deposit payment 47 million third quarter 1998 upon signing definitive agreement company provided irrevocable standby letter credit amount 64 million security construction costs network addition deposit payment made covers companys portion estimated construction costs note 8 related party transactions company party management agreement companys controlling shareholder metromedia company provides consultation advisory services relating legal matters insurance personnel corporate policies cash management internal audit finance taxes benefit plans services reasonably requested management agreement terminates december 31 year automatically renewed successive oneyear terms unless either party terminates upon 60 days prior written notice 1998 management fee agreement 500000 per year payable quarterly rate 125000 company also obligated reimburse metromedia company outofpocket costs expenses incurred advances paid metromedia company connection management agreement 1997 metromedia company received money outofpocket costs expenses interest advances extended company management agreement march june 1997 company entered two oneyear leases office space affiliate subsequent june 1997 affiliate sold property year ended december 31 1997 office rent expenses leases amounted approximately 110000 note 9 settlement agreements february 1996 company entered settlement agreement former officer regarding termination employment agreement provided company make payments officer totaling 1003000 including interest former officers services effectively terminated prior december 31 1995 accordingly december 31 1995 company recorded 876146 liability accordance terms settlement agreement settlement agreement also reaffirmed option previously issued former officer may 1 1995 entitles holder purchase 207883 shares companys common stock 0006 per share february 1 1999 1997 company repurchased retired warrants held former officer november 14 1996 company amended referenced settlement agreement former officer whereby consultant company agreed purchase common stock company former officer certain affiliates exchange 640000 complete satisfaction aforementioned liability february 11 1997 company entered agreement consultantdirector pursuant agreement company agreed pay consultantdirector fee 250000 full complete payment services provided company consultantdirector fees compensation due consultantdirector resulting prior agreements company consultantdirector agreed release company claims company march 1998 company entered settlement agreement howard katz realprop capital corporation evelyn katz among others settled resulted dismissal litigation company defendant katz et al v national fiber network inc et al 97 civ 2764 jgk katz litigation metromedia fiber network inc subsidiaries notes consolidated financial statements note 10 notes payable november 25 1998 company issued sold 6500 million 10 senior notes due november 15 2008 net proceeds 10 senior notes approximately 6300 million deducting offering costs included longterm assets interest 10 senior notes payable semiannually arrears may 15 november 15 year commencing may 15 1999 approximately 915 million net proceeds utilized purchase certain pledged securities proceeds together interest earned securities used satisfy companys semiannual interest obligations may 15 2000 10 senior notes subject redemption option company whole part time november 15 2003 specified redemption prices addition prior november 15 2001 company may use net cash proceeds certain specified equity transactions redeem 35 10 senior notes specified redemption prices indentures pursuant 10 senior notes issued contain certain covenants among matters limit ability company subsidiaries incur additional indebtedness issue stock subsidiaries pay dividends make distributions repurchase equity interests subordinated indebtedness engage sale leaseback transactions create certain liens enter certain transactions affiliates sell assets enter certain mergers consolidations event change control company defined indentures holders 10 senior notes right require company purchase notes whole part price equal 101 stated principal amount thereof plus accrued unpaid interest thereon date purchase 10 senior notes senior unsecured obligations company subordinated current future indebtedness companys subsidiaries including trade payables note 11 equity transactions common stock november 3 1997 company completed initial public offering ipo 36432000 shares class common stock offering price 4 per share net proceeds company ipo deducting expenses ipo approximately 1339 million addition october 28 1997 total 38259760 shares common stock company owned stockholders prior ipo exchanged equal number shares class common stock company also reserved issuance 17041944 shares class common stock conversion class b common stock october 28 1996 shareholder granted companys chairman board option purchase 1599556 shares common stock company aggregate exercise price 500000 letter dated december 3 1996 option amended reduce number option shares 1295356 shares chairman thereafter assigned option company february 11 1997 company exercised option payment 500000 april 15 1996 company entered stock purchase agreement vento company new york llc vcny pursuant agreement company issued 6084000 shares common stock vcny consideration services provided vcny company estimated value stock issued approximated 2760000 concurrent execution aforementioned stock purchase agreement parties entered consulting agreement term agreement april 15 1996 april 15 2001 terms agreement vcny provide guidance advice respect management daytoday operations companys fiber optic transmission network consideration services company reimbursed vcny reasonable personnel travel costs incurred vcny metromedia fiber network inc subsidiaries notes consolidated financial statements respect performance services october 9 1996 company entered settlement agreement companys former chief executive officer vcny regarding termination officers employment services provided vcny agreement provided vcny deliver total 6084000 shares common stock exchange payments made company payments made sale shares companys obligation buy shares deemed null void september 1996 company sold 43736 shares common stock three individuals total proceeds 23500 august 1996 company issued 730080 shares common stock consulting services company recorded noncash charge 334800 issuance july 1996 company issued 48672 shares common stock consideration consulting services company recorded noncash charge 21200 issuance addition company issued 602316 shares three employees services rendered transaction later rescinded shares returned company june 1996 company sold total 152100 shares common stock two individuals total proceeds 100000 concurrent issuance shares company issued warrants shareholders entitling holders purchase total 152100 shares 066 per share threeyear period january 12 1996 company entered agreement legal counsel issue common stock additional consideration legal services provided pursuant agreement amended company issued total 1964420 shares common stock management estimated value 1964420 shares issued 907301 recorded noncash charge connection issuance preferred stock april 30 1997 company sold aggregate 33613300 shares series b convertible preferred stock par value 001 per share series b preferred stock metromedia company affiliates metromedia aggregate purchase price 325 million metromedia investment share series b preferred stock convertible 507 shares companys common stock october 28 1997 series b convertible preferred shares converted 17041944 shares class b common stock october 281997 total 157308 shares class b common stock outstanding converted equivalent number shares class common stock portion proceeds metromedia investment used repay metromedia loan discussed accrued interest thereon 4058127 repay shortterm indebtedness 3485000 redeem 2115000 outstanding shares companys preferred stock series preferred stock related warrants april 30 1997 metromedia loaned company aggregate 4000000 metromedia loan portion proceeds metromedia loan used purchase 2353880 shares companys common stock warrants purchase 831532 shares common stock shares companys series preferred stock series b preferred stock remained outstanding december 31 1997 series b preferred stock company eliminated pursuant actions board directors metromedia fiber network inc subsidiaries notes consolidated financial statements stock warrants 1996 company entered agreement customer exclusive usage rights fibers portions network connection agreement company borrowed 49 million customer april 30 1997 company amended agreement satisfy obligations abovereferenced note providing additional leased fiber miles ii cash payment 1370000 iii warrant purchase common stock company july 1998 agreement amended include additional fiber miles companys network cancellation warrants b october 1995 february 1996 company issued sold private offering 858000 convertible subordinated notes concurrent issuance notes warrants issued company noteholders purchase 522008 shares common stock 200 per share november 2000 1996 1997 exchange extension due dates notes company issued warrants purchase 659042 shares common stock 200 per share recorded charge 111306 220036 1996 1997 respectively 1997 company repaid outstanding balance notes plus accrued interest december 31 1998 782016 warrants exercised c september 1996 company entered loan agreement finance company 550000 loan bore interest 10 per annum repaid 1997 incentive loan company issued finance company warrants purchase 377208 shares common stock exercise price 148 warrants exercisable september 1999 1996 company recorded noncash charge 13640 connection issuance warrants exercised august 1995 company initiated 600000 private offering subordinated notes bore interest annual rate 15 repaid 1997 issuance notes warrants issued noteholders april 1996 company issued total 237436 shares companys common stock exchange surrender cancellation warrants threemonth extension maturity date notes 1996 company recorded noncash charge 107322 connection issuance e april 1995 company entered loan agreement customer 500000 bearing interest 11 per annum july 1997 note repaid full connection loan company issued customer warrant entitling holder purchase total 2676668 shares companys common stock february 1997 warrant exchanged new warrant purchase 1825200 shares companys common stock 121 per share new warrant expires february 13 2000 december 31 1998 none warrants exercised f december 13 1996 company issued sold private investor aggregate cash consideration 2025000 600000 shares 10 cumulative convertible preferred stock series preferred stock bearing dividends rate 34 per share per annum ii warrants purchase 456300 shares class common stock exercise price 124 per share iii contingent stock subscription warrant purchase number shares class common stock number determined based certain future events exercise price 001 per share connection metromedia investment private investor allowed series preferred stock contingent warrants redeemed aggregate redemption price 2115000 includes accrued unpaid dividends series preferred stock number shares underlying private investors warrants increased 456300 912600 january 1998 private investor made cashless exercise warrants number shares issuable upon exercise reduced number shares closing day exercise value equal aggregate exercise price accordingly company issued private investor 691060 common shares warrants metromedia fiber network inc subsidiaries notes consolidated financial statements g june 1996 company granted 608400 common stock purchase warrants companys legal counsel exercisable 02 per share period four years additional consideration legal services provided company recorded noncash charge 200000 issuance december 31 1998 warrants exercised december 31 1998 aggregate company reserved approximately 2228050 shares class common stock exercise outstanding warrants stock options 1997 company granted certain officers employees directors options purchase 12380944 shares class common stock options exercise prices 049 191 per share expire 2007 company recorded noncash charge 19218591 issuance october 28 1997 stockholders company approved metromedia fiber network inc 1997 incentive stock plan 1997 option plan 1997 option plan authorized award 4000000 options acquire class common stock company directors officers employees company others deemed provide substantial important services company 1997 options purchase 2450000 shares companys class common stock granted exercise price 400 per share market price date grant 1998 options purchase 1700000 shares companys class common stock granted exercise prices ranging 388 859 per share market price date grant grants 557500 canceled 117500 exercised december 31 1998 may 18 1998 stockholders company approved metromedia fiber network inc 1998 incentive stock plan 1998 option plan 1998 option plan authorized award 10000000 options acquire class common stock company directors officers employees company others deemed provide substantial important services company options purchase 3459000 shares companys class common stock granted exercise prices ranging 728 2650 per share market prices dates grant compensation committee companys board directors responsible determining type award awards granted number shares terms awards exercise price options exercisable period exceed ten years date grant vesting periods range immediate vesting four years following table summarizes stock option transactions two years ended december 31 1998 metromedia fiber network inc subsidiaries notes consolidated financial statements following table summarizes information stock option outstanding december 31 1998 pro forma information regarding net income earnings per share required statement financial standards 123 accounting stockbased compensation determined company accounted employees stock options fair value method provided statement fair value options estimated date grant using blackscholes option pricing model following assumptions vested nonvested options blackscholes options valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility metromedia fiber network inc subsidiaries notes consolidated financial statements companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense vesting period options companys pro forma information follows 000s note 12 significant customers years ended december 31 1998 1997 one customer accounted 40 21 respectively companys total revenue years ended december 31 1998 1997 another customer accounted 35 15 respectively companys total revenue years ended december 31 1998 third customer accounted 12 companys total revenue note 13 income taxes income tax expense benefit years ended december 31 1998 1997 1996 follows thousands total income tax expense benefit differed amounts computed applying federal statutory income tax rate 35 earnings loss income tax expense benefit result following items years ended december 31 1998 1997 1996 thousands metromedia fiber network inc subsidiaries notes consolidated financial statements tax effects temporary differences give rise significant portions deferred tax assets liabilities december 31 1998 1997 follows thousands portion deferred tax asset reserved since certain future taxable income realized carryforward period year asset turnaround provision federal state income taxes years ended december 31 1997 1996 december 31 1998 company expects fully utilized net operating losses note 14 401k plan 1998 company implemented 401k plan permits employees make contributions plan pretax salary reduction basis accordance internal revenue code fulltime employees eligible participate beginning quarter following three months service eligible employees may contribute 15 annual compensation company matches 50 employees first 6 contributions company contributed 78000 1998 matching contributions company bore nominal administrative cost plan 1998 metromedia fiber network inc subsidiaries notes consolidated financial statements note 15 reconciliation earnings per share thousands note 16 commitments contingencies network construction projects 1998 company commenced construction various networks outside new york metropolitan area companys commitment purchase materials contracts construction fiber optic network systems approximately 70 million december 31 1998 franchise license rightof way agreements operating capital leases company entered various franchise license agreements municipalities utilityrelated companies instances install operate repair maintain replace cable wire fiber transmission media related equipment facilities terms agreements vary length various renewal termination provisions company charges portions agreements incurred constructioninprogress related portion network completed fees charged operations connection agreements approximately 1673000 607000 459000 years ended december 31 1998 1997 1996 respectively metromedia fiber network inc subsidiaries notes consolidated financial statements addition company leases office operation facilities various equipment expire various times march 31 2010 rent expense charged operations approximately 958000 268000 158000 years ended december 31 1998 1997 1996 respectively company entered capital lease agreements certain network assets certain rightsofways total assets acquired capital leases approximately 27876000 december 31 1998 capital leases held constructioninprogress related portion network completed approximate minimum payments aforementioned agreements thousands employment agreements company executed employment contracts future services five years certain senior executives company minimum commitment aggregating approximately 34 million december 31 1998 amount included consolidated financial statements december 31 1998 litigation october 20 1997 vento company new york llc commenced action metromedia fiber network stephen garofalo peter silverman law firm silverman collura chernis balzano pc peter sahagen consulting group florida collectively sahagen defendants robert kramer birdie capital corp lawrence black sterling capital llc penrush limited needham capital group arthur asch michael asch ronald kuzon kramer defendants united states district court southern district new york 97 civ 7751 may 29 1998 vento company filed amended complaint amended vento company alleges four causes metromedia fiber network inc subsidiaries notes consolidated financial statements action connection sale 900000 shares adjusted subsequent stock splits class common stock peter sahagen kramer defendants january 13 1997 four causes action include violation section 10b securities exchange act 1934 rule 10b5 promulgated act ii fraud fraudulent concealment iii breach fiduciary duty iv negligent misrepresentation omission first second causes action vento company seeking among things rescission vento company sale alternatively damages amount cannot currently ascertain believe excess 36 million together interest third fourth causes action vento company seeking damages amount cannot currently ascertain believe excess 36 million together interest vento company also seeking punitive damages amount 50 million reasonable legal fees cost action defendants including metromedia fiber network stephen garofalo moved dismiss vento companys amended complaint june 12 1998 claudio e contardi commenced action peter sahagen consulting group florida metromedia fiber network united states district court southern district new york 98 civ 4140 mr contardi alleges cause action among things breach finders fee agreement entered mr sahagen mr contardi november 14 1996 breach implied covenant good faith fair dealing contained finders fee agreement mr contardi seeking among things number shares metromedia fiber network cannot currently ascertain believe approximately 225000 shares calculated date complaint filed damages amount cannot currently ascertain believe approximately 49 million calculated date complaint filed costs expenses incurred action filed answer complaint raised affirmative defenses intend vigorously defend actions believe acted appropriately connection matters issue two cases however cannot assure determine advantages entering settlement outweigh risk expense protracted litigation ultimately successful defending allegations unsuccessful defending allegations award magnitude sought vento company litigation would material adverse effect financial condition results operations addition subject various claims proceedings ordinary course business based information currently available believe none current claims proceedings individually aggregate including vento company litigation contardi litigation material adverse effect financial condition results operations although make assurances regard exhibit index metromedia fiber network inc subsidiaries schedule ii valuation qualifying accounts s1 item 14 exhibits financial statement schedules reports form 8k 1 financial statements see table contents financial statements item 8 financial statements supplementary data 2 financial statement schedules schedule ii valuation qualifying accounts schedules omitted since either applicable information contained elsewhere item 8 financial statements supplementary data 3 exhibits filed herewith b current reports form 8k period october 1 1997 december 31 1997 company file reports form 8k date filing annual report form 10k proxy materials furnished securityholders copies proxy materials sent commission compliance rules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized new york city new york metromedia fiber network inc stephen garofalo stephen garofalo chairman chief executive officer dated march 30 1998 undersigned officers directors metromedia fiber network inc hereby severally constitute arnold l wadler howard finkelstein gerard benedetto singly true lawful attorneys full power singly sign us names capacities indicated reports including amendments thereto exhibits thereto documents connection therewith generally things name behalf capacities enable metromedia fiber network inc comply applicable provisions securities exchange act 1934 amended requirements securities exchange commission hereby ratify confirm signatures may signed said attorneys either reports including amendments thereto documents connection therewith pursuant requirements section 13 15d securities exchange 1934 report signed following persons behalf registrant capacities dates indicated signatures title capacities date stephen garofalo chairman board chief executive officer march 30 1998 stephen garofalo howard finkelstein president chief operating officer director march 30 1998 howard finkelstein gerard benedetto vice president chief financial officer march 30 1998 gerard benedetto chief accounting officer silvia kessel executive vice president director march 30 1998 silvia kessel arnold l wadler executive vice president secretary director march 30 1998 arnold l wadler vincent galluccio senior vice president director march 30 1998 vincent galluccio john w kluge director march 30 1998 john w kluge exhibit index filed herewith item 14 principal accountant fees services aggregate fees billed professional services rendered company bdo usa llp including amounts billed affiliate bdo llp february 29 2012 years ended december 31 2011 2010 table represents fees incurred service year service provided relevant audit period recognize audit fees operating results services provided audit fees june 2011 bdo usa llp engaged audit company’s financial statements year ended december 31 2011 june 2010 bdo usa llp engaged audit company’s financial statements year ended december 31 2010 audit fees years ended december 31 2011 2010 respectively professional services rendered audit consolidated financial statements described auditrelated fees auditrelated fees typically due diligence related mergers acquisitions 67320 fees incurred year ended december 31 2011 tax fees tax fees years ended december 31 2011 2010 services related tax compliance including research respect certain transaction taxes tax planning advice including assistance review company’s irs section 382 analysis auditor independence audit committee considered nonaudit services provided bdo usa llp determined provision services effect bdo usa llps independence company audit committee preapproval policy procedures audit committee must review preapprove audit except provided nonaudit services provided bdo usa llp independent registered public accounting firm conducting reviews audit nonaudit services audit committee determine whether provision services would impair bdo usa llp’s independence audit committee preapprove services believes impair bdo usa llp’s independence audit committee delegated chairman authority preapprove nonaudit services subsequently communicated audit committee services rendered bdo usa llp 2010 2011 preapproved pursuant process part iv item 15 item 14 principal accountant fees services aggregate fees billed professional services rendered company bdo seidman llp august 31 2008 years ended december 31 2007 2006 table represents fees incurred service year service provided relevant audit period recognize audit fees operating results services provided information 2008 services rendered august 31 2008 audit fees discussed item 9 “changes disagreements accountants accounting financial disclosure” august 2006 bdo seidman llp “bdo” engaged audit company’s financial statements december 31 2006 2005 2004 2003 fiscal years ended december 31 2006 2005 2004 period september 8 2003 december 31 2003 may 2008 bdo engaged audit company’s financial statements year ended december 31 2007 audit fees years ended december 31 2007 2006 respectively professional services rendered audit consolidated financial statements described audit related fees audit related fees typically due diligence related mergers acquisitions fees years ended december 31 2007 2006 tax fees tax fees years ended december 31 2007 2006 services related tax compliance including preparation tax returns claims refund tax planning advice including assistance representation tax audits appeals advice related mergers acquisitions fees consulting services related certain compensatory stock matters years ended december 31 2007 2006 auditor independence audit committee considered nonaudit services provided bdo seidman llp determined provision services effect bdo seidman llps independence company audit committee preapproval policy procedures audit committee must review preapprove audits except provided nonaudit services provided bdo seidman llp independent registered public accounting firm conducting reviews audit nonaudit services audit committee determine whether provision services would impair bdo seidman’s independence audit committee preapprove services believes impair bdo seidman’s independence audit committee delegated chairman authority preapprove nonaudit related services subsequently communicated audit committee nonaudit services preapproved part iv item 15 item 14 principal accountant fees services aggregate fees billed professional services rendered company bdo seidman llp including amounts billed affiliate bdo stoy hayward llp february 28 2010 years ended december 31 2009 2008 table represents fees incurred service year service provided relevant audit period recognize audit fees operating results services provided information 2009 services rendered february 28 2010 substantially work performed year ended december 31 2006 audit fees june 2009 bdo engaged audit company’s financial statements year ended december 31 2009 november 2008 bdo engaged audit company’s financial statements year ended december 31 2008 audit fees years ended december 31 2009 2008 respectively professional services rendered audit consolidated financial statements described audit related fees audit related fees typically due diligence related mergers acquisitions fees year ended december 31 2008 tax fees tax fees years ended december 31 2009 2008 services related tax compliance including preparation tax returns claims refund tax planning advice including assistance representation tax audits appeals advice related mergers acquisitions auditor independence audit committee considered nonaudit services provided bdo seidman llp determined provision services effect bdo seidman llps independence company audit committee preapproval policy procedures audit committee must review preapprove audits except provided nonaudit services provided bdo seidman llp independent registered public accounting firm conducting reviews audit nonaudit services audit committee determine whether provision services would impair bdo seidman’s independence audit committee preapprove services believes impair bdo seidman’s independence audit committee delegated chairman authority preapprove nonaudit related services subsequently communicated audit committee 2009 2008 services preapproved 2008 2009 pursuant process part iv item 15 item 14 exhibits financial statement schedules reports form 8k 1 financial statements see index consolidated financial statements page 2 financial statement schedules schedule ii valuation qualifying accounts schedules listed omitted since either applicable information contained elsewhere financial statements notes thereto amounts insignificant immaterial b current reports form 8k october 11 2000 filed form 8k related entering agreement plan merger among us sitesmith inc acqueduct acquisition corp whollyowned subsidiary dated october 9 2000 february 14 2001 filed form 8k related completion merger sitesmith inc february 8 2001 date filing annual report form 10k proxy materials furnished security holders copies proxy materials sent commission compliance rules c exhibits exhibit number description 31 form amended restated certificate incorporation metromedia fiber network inc incorporated reference companys registration statement form s1 registration 33333653 32 amendment amended restated certificate incorporation metromedia fiber network inc dated may 8 1999 33 form amended restated bylaws metromedia fiber network inc incorporated reference companys registration statement form s1 registration 33333653 41 specimen class common stock certificate metromedia fiber network inc incorporated reference companys registration statement form s1 registration 33333653 42 indenture dated november 25 1998 metromedia fiber network inc ibj whitehall bank trust company formerly ibj schroder bank trust company incorporated reference companys registration statement form s4 registration 33371129 43 form 10 series senior notes due 2008 metromedia fiber network inc incorporated reference companys registration statement form s4 registration 33371129 44 form 10 series b senior notes due 2008 metromedia fiber network inc incorporated reference companys amendment 1 registration statement form s4 registration 33371129 45 indenture dated november 17 1999 metromedia fiber network inc bank new york trustee incorporated reference companys current report form 8k filed november 24 1999 46 form 10 senior notes due 2009 metromedia fiber network inc incorporated reference companys current report form 8k filed november 24 1999 101 form metromedia fiber network inc 1997 incentive stock plan incorporated reference companys registration statement form s1 registration 33333653 102 employment agreement national fiber network inc stephen garofalo dated february 26 1997 incorporated reference companys registration statement form s1 registration 33333653 103 agreement dated april 30 1997 amended modification agreement dated october 1997 among metromedia company stuart subotnick arnold wadler silvia kessel stephen garofalo national fiber network inc incorporated reference companys registration statement form s1 registration 33333653 104 conduit occupancy agreement new york telephone company national fiber network inc dated may 1993 incorporated reference companys registration statement form s1 registration 33333653 105 consulting agreement national fiber network realprop capital corporation dated february 1 1996 incorporated reference companys registration statement form s1 registration 33333653 106 letter agreement national fiber network inc peter sahagen dated february 11 1997 incorporated reference companys registration statement form s1 registration 33333653 107 trademark license agreement metromedia company metromedia fiber network inc dated august 14 1997 incorporated reference companys registration statement form s1 registration 33333653 108 fiber optic use agreement national fiber network inc nextlink new york llc dated june 3 1997 portions exhibit subject request securities exchange commission confidential treatment omitted material separately filed securities exchange commission incorporated reference companys registration statement form s1 registration 33333653 109 amended restated agreement provision fiber optic transmission network dated effective date us one communications new york inc national fiber network inc portions exhibit subject request securities exchange commission confidential treatment omitted material separately filed securities exchange commission incorporated reference companys registration statement form s1 registration 33333653 1010 fiber lease innerduct use agreement metromedia fiber network inc nextlink communications inc dated february 23 1998 portions exhibit subject request securities exchange commission confidential treatment omitted material separately filed securities exchange commission incorporated reference companys 1997 annual report form 10k file no00023269 1011 amendment 1 fiber lease innerduct use agreement metromedia fiber network inc nextlink communications inc made entered march 4 1998 portions exhibit subject request securities exchange commission confidential treatment omitted material separately filed securities exchange commission incorporated reference companys 1997 annual report form 10k file 00023269 1012 agreement lease connecticut general life insurance company metromedia fiber network services inc dated march 9 1998 incorporated reference companys 1997 annual report form 10k file 00023269 1013 purchase agreement dated november 20 1998 among metromedia fiber network inc salomon smith barney inc chase securities inc deutsche bank securities inc donaldson lufkin jenrette securities corporation incorporated reference companys registration statement form s4 registration 33371129 1014 registration rights agreement dated november 25 1998 among metromedia fiber network inc salomon smith barney inc chase securities inc deutsche bank securities inc donaldson lufkin jenrette securities corporation incorporated reference companys registration statement form s4 registration 33371129 1015 security agreement dated november 25 1998 metromedia fiber network inc ibj whitehall bank trust company incorporated reference companys registration statement form s4 registration 33371129 1016 employment agreement metromedia fiber network inc gerard benedetto dated august 31 1998 incorporated reference companys amendment 1 registration statement form s4 registration 33371129 1017 amendment dated september 1 2000 employment agreement metromedia fiber network inc gerard benedetto 1018 employment agreement metromedia fiber network inc nicholas tanzi dated august 31 1998 incorporated reference companys amendment 1 registration statement form s4 registration 33371129 1019 franchise agreement city new york national fiber network inc dated december 20 1993 incorporated reference companys 1999 annual report form 10k file 00023269 211 list subsidiaries metromedia fiber network inc 231 consent ernst young llp filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized metromedia fiber network inc stephen garofalo stephen garofalo chairman chief executive officer dated march 30 2001 undersigned officers directors metromedia fiber network inc hereby severally constitute nicholas tanzi gerard benedetto singly true lawful attorneys full power singly sign us names capacities indicated reports including amendments thereto exhibits thereto documents connection therewith generally things name behalf capacities enable metromedia fiber network inc comply applicable provisions securities exchange act 1934 amended requirements securities exchange commission hereby ratify confirm signatures may signed said attorneys either reports including amendments thereto documents connection therewith pursuant requirements section 13 15d securities exchange 1934 amended report signed following persons behalf registrant capacities dates indicated metromedia fiber network inc subsidiaries index consolidated financial statements report independent auditors board directors shareholders metromedia fiber network inc audited accompanying consolidated balance sheets metromedia fiber network inc subsidiaries company december 31 2000 1999 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2000 audits also included financial statement schedule listed index item 14a consolidated financial statements schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position metromedia fiber network inc subsidiaries december 31 2000 1999 consolidated results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 financial statements 1999 company implemented provisions fasb interpretation 43 real estate sales respect certain leases ernst young llp new york new york march 5 2001 metromedia fiber network inc subsidiaries consolidated balance sheets 000s except share amounts see accompanying notes metromedia fiber network inc subsidiaries consolidated statements operations 000s except per share amounts see accompanying notes metromedia fiber network inc subsidiaries consolidated statements cash flows 000s see accompanying notes year ended december 31 2000 company issued shares total value 59292 connection acquisitions connection acquisition common stock abovenet 1999 company issued shares class common stock total value 1681102 options warrants total value 98925 metromedia fiber network inc subsidiaries consolidated statement changes stockholders equity 000s metromedia fiber network inc subsidiaries consolidated statement changes stockholders equity continued 000s see accompanying notes note 1 basis presentation description business significant accounting policies basis presentation consolidated financial statements include accounts metromedia fiber network inc wholly owned subsidiaries collectively company significant intercompany balances transactions eliminated consolidation investments joint ventures majority owned company control exercises significant influence accounted using equity method certain reclassifications made consolidated financial statements prior years conform current presentation description business company provides fiber optic infrastructure highbandwidth internet connectivity communications intensive customers company facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure communications carriers corporate government customers united states europe acquisition abovenet communications inc abovenet company also provides onehop connectivity enables mission critical internet applications thrive well highbandwidth infrastructure including managed colocation services paixnet inc paix serves packet switching center isps also offers secure faulttolerant colocation services isps summary significant accounting policies management estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenues expenses reporting periods actual results may differ estimates fair value financial instruments carrying amounts cash accounts receivable accounts payable accrued liabilities approximate fair value fair value longterm debt determined based quoted market rates cash flows financial instruments discounted companys estimated current interest rate enter similar financial instruments december 31 2000 fair value companys fixed rate longterm debt 10 senior notes due 2008 2009 approximately 556 million 842 million respectively recorded amount convertible subordinated notes payable approximates fair value foreign currency translation statutory accounts companys foreign subsidiaries maintained accordance local accounting regulations stated local currencies local statements translated us generally accepted accounting principles us dollars accordance statement financial accounting standards sfas 52 accounting foreign currency translation note 1 basis presentation description business significant accounting policies continued sfas 52 foreign currency assets liabilities generally translated using exchange rates effect balance sheet date results operations generally translated using average exchange rates prevailing throughout year effects exchange rate fluctuations translating foreign currency assets liabilities us dollars accumulated part foreign currency translation component comprehensive income stockholders equity gains losses foreign currency transactions included net income period occur gains losses remeasurement monetary assets liabilities denominated foreign currency reporting currency included net income period remeasurement cash equivalents purposes consolidated financial statements company considers highly liquid investments maturity three months less purchased cash equivalents pledged securities connection sale 10 senior notes due 2008 see note 12 portion net proceeds utilized purchase portfolio consisting us government securities matured dates sufficient provide payment full interest 10 senior notes due 2008 may 15 2000 pledged securities stated cost adjusted premium amortization accrued interest fair value pledged securities approximated carrying value accounts receivable accounts receivable includes trade receivables costs estimated earnings excess billings contracts company previously utilized percentage completion method recognizing revenue marketable securities marketable securities primarily consist investments us government corporate obligations classified heldtomaturity accordingly investments carried cost unrealized gains losses reported upon maturation underlying investment fiber optic transmission network related equipment fiber optic transmission network related equipment stated cost costs connection installation expansion network capitalized depreciation computed using straightline method life either franchise agreement right way related network data centers depreciation computed using straightline method shorter life lease ten years property equipment fixed assets stated cost depreciation financial reporting purposes calculated using straightline method estimated useful lives assets ranging three five years leasehold improvements amortized lesser useful life asset remaining period lease note 1 basis presentation description business significant accounting policies continued intangible assets intangible assets consist principally goodwill amortized periods 10 20 years december 31 2000 1999 accumulated amortization intangibles 1106 million 249 million assets include debt issuance costs franchise agreements deposits costs amortizable amortized straightline basis period ranging ten twenty years longlived assets company assesses recoverability goodwill intangible assets determining whether amortization unamortized balance remaining life recovered forecasted cash flows undiscounted forecasted cash flows indicate unamortized amounts recovered adjustment made reduce net amounts amount consistent forecasted future cash flows discounted companys incremental borrowing rate cash flow forecasts based trends historical performance managements estimate future performance giving consideration existing anticipated competitive economic conditions company identified impairment indicators income taxes accordance sfas 109 accounting income taxes company recognizes deferred income taxes tax consequences future years differences tax bases assets liabilities financial reporting amounts year end based enacted tax laws statutory tax rates applicable periods differences expected affect taxable income valuation allowances established necessary reduce deferred tax assets amount likely realized provision income taxes tax payable period change period deferred tax assets liabilities recapitalizations company completed twoforone stock splits companys class b common stock form 100 percent stock dividend effective august 28 1998 december 22 1998 may 19 1999 april 17 2000 accompanying financial statements give retroactive effect stock splits may 6 1999 total authorized number shares stock company increased approximately 29 billion shares par value 001 per share 20 million shares designated preferred stock 24 billion shares designated class common stock 522 million shares designated class b common stock note 1 basis presentation description business significant accounting policies continued recognition revenue company recognizes revenue telecommunications services ratably term applicable lease agreements customers amounts billed advance service provided recorded deferred revenue bandwidth space requirement charges recognized period services provided addition company occasionally enters salestype leases portions network leases entered prior completion portion network contracts entered june 30 1999 company recognizes revenue using percentage completion method percentage completion method progress generally measured performance milestones relating contract milestones fairly reflect progress toward contract completion network construction costs include direct material labor costs indirect costs related contract performance general administrative costs charged expense incurred necessary estimated loss uncompleted contract expensed period identified contract costs estimated using allocations total cost constructing specific phase network revisions estimated profits contracts recognized period become known companys contracts provision dark fiber accounted operating leases recognizes recurring monthly revenues certain contracts company recognizes revenue percentage completion method provision dark fiber effective june 30 1999 financial accounting standards board fasb issued fasb interpretation 43 real estate sales fin 43 requires sales leases integral equipment accounted accordance real estate accounting rules company believes staff securities exchange commission requires classification dark fiber cables ground integral equipment defined fin 43 accounting dark fiber leases defined fin 43 change economics contracts requires company however recognize revenue certain leases operating leases term contract opposed prior method recognizing revenue period company delivers fiber result change accounting treatment reduces revenue income company recognizes earlier years contract spreads life contract regardless cash received delivery fiber took place way example company entered agreement 25year lease dark fiber customer pays 1000 million cash contract signed contract provided delivery fiber five year period company previously recorded revenues 200 million five years company delivered dark fiber contrast real estate accounting rules fin 43 would require recognition revenue 40 million per year 25 year term contract even though company would receive cash payment 1000 million contract signed company implemented fin 43 real estate accounting certain leases entered june 30 1999 restated amounts contracts executed prior date although change economics contracts timing cash received company impact change accounting resulted company recording substantially less revenue july 1 1999 would recorded change imposed revenue recognized years ended december 31 2000 1999 1998 related percentage completion method 325000 403 million 328 million respectively related cost sales recorded 48000 107 million 112 million years ended december 31 2000 1999 1998 respectively future similar revenues recognized term related contracts typically 20 years company adopted staff accounting bulletin sab 101 amended adoption sab 101 amended expected material impact companys results operations note 1 basis presentation description business significant accounting policies continued stock options company adopted disclosureonly provisions sfas 123 accounting stockbased compensation company applies apb opinion 25 accounting stock issued employees related interpretations accounting stock options earnings per share accordance sfas 128 earnings per share basic earnings per share computed based upon weighted average number common shares outstanding periods diluted earnings per share computed based upon weighted average number common shares outstanding plus assumed issuance common stock equivalents computed accordance treasury stock method deferred revenue deferred revenue represents prepayments received customers future use companys fiber optic network colocation facilities well prepayment installation services yet provided lease payments structured either prepayments monthly recurring charges prepayments accounted deferred revenues recognized term respective customer lease agreement comprehensive loss sfas 130 reporting comprehensive income loss establishes rules reporting comprehensive income components comprehensive income loss consists net income loss foreign currency translation adjustments comprehensive income loss years ending december 31 2000 1999 1998 approximately 4089 million 1236 million 10 million respectively segment information company discloses information regarding segments accordance sfas 131 disclosures segments enterprise related information sfas 131 establishes standards reporting financial information operating segments annual financial statements requires reporting selected information operating segments interim financial reports disclosure segment information required company operates one business segment years ended december 31 2000 1999 excess 90 companys assets located united states company derived substantially revenue businesses located united states impact recently issued accounting standards june 1998 fasb issued sfas 133 accounting derivatives hedging activities establishes accounting reporting standards derivative instruments hedging activities standard effective fiscal quarters fiscal years beginning december 15 1999 adoption sfas 133 impact companys results operations financial position cash flows note 2 business acquisitions accounted purchase method results operations acquired businesses included consolidated financial statements dates acquisition september 2000 company purchased remaining 50 interest 50 owned joint venture austria abovenet austria gmbh approximately 2 million june 2000 company purchased additional 375 interest 50 owned joint venture germany abovenet germany gmbh approximately 14 million october 2000 remaining 125 purchased approximately 500000 may 9 2000 company finalized agreement pacific gateway exchange inc pge purchase pges ownership position cable consortia owns operates tat14 japanus cable networks two pges subsidiaries japanus transaction closed june 2000 tat 14 transaction closed august 2000 terms sale company paid approximately 52 million net cash proceeds pge primarily reimburse payments made pge consortia mfn assumed pges payment obligations cable consortia arising respective closing dates acquisition related japanese subsidiary related us subsidiary accounted purchase method accounting excess purchase price fair value net assets acquired approximately 16 million recorded goodwill february 2000 company purchased remaining 60 40 owned joint venture united kingdom abovenet uk limited shares companys stock market value 10 million excess purchase price fair values net assets acquired approximately 104 million recorded goodwill january 19 2000 company completed acquisition mibh inc network outsourcing provider offering fullservice management business internet connectivity solutions approximately 523 million cash stock excess purchase price fair values net assets acquired approximately 518 million recorded goodwill terms agreement mibh became wholly owned subsidiary metromedia fiber network inc subsequently merged metromedia fiber network services inc shareholders mibh privately held company received aggregate 1884418 shares metromedia fiber network class common stock fair market value approximately 493 million 30 million cash september 8 1999 company acquired outstanding common stock abovenet total purchase price paid company class common stock approximately 18 billion holders abovenet common stock options warrants received 235 shares companys class common stock options warrants respectively abovenet primary operations san jose california leading provider facilitiesbased managed services customerowned web servers related equipment known colocation high performance internet connectivity solutions electronic commerce business critical internet operations excess purchase price fair values net assets acquired approximately 16 billion recorded goodwill amortized straight line basis 20 years addition connection acquisition company issued letter credit secured companys restricted cash amount 25 million secure credit facility abovenet june 21 1999 abovenet acquired certain assets assumed certain liabilities paix compaq computer corporation compaq total purchase price 764 million consisting 70 million cash certain future ongoing services provided abovenet compaq value estimated 50 million acquisition related costs 14 million paix highlevel switching peering point global internet service providers content providers note 2 business acquisitions continued march 11 1999 company acquired outstanding common stock communication systems development inc csd 25 million cash csd primary operations dallas texas engaged engineering construction fiber optic networks excess purchase price fair values net assets acquired approximately 112 million recorded goodwill amortized straight line basis 20 years 2000 csd merged metromedia fiber network services inc following unaudited pro forma financial information presents combined results operations company acquisitions occurred beginning 1998 giving effect certain adjustments including amortization goodwill related income tax effects pro forma financial information necessarily reflect results operations would occurred entities constituted single entity periods amounts presented thousands except per share amounts year ended december 31 2000 pro forma results operations presented effects 2000 acquisitions significant note 3 accounts receivable accounts receivable consists following 000s december 31 2000 two customers accounted 20 17 respectively companys combined accounts receivable december 31 1999 two customers accounted 29 25 respectively companys combined accounts receivable note 4 fiber optic transmission network related equipment fiber optic transmission network related equipment consists following 000s construction progress includes amounts incurred companys expansion network amounts include fiber optic cable materials engineering layout costs fiber optic cable installation costs construct data centers network assets held capital leases construction progress also includes payments rights way underlying sections network build 2000 1999 434 million 94 million interest expense capitalized respectively note 5 property equipment property equipment consists following note 6 investments advances joint ventures company records investments companies joint ventures less majority owned company control exercises significant influence equity method accounting december 31 2000 1999 companys unconsolidated investments joint ventures cost net adjustments equity earnings losses follows 1 september 2000 company purchased remaining 50 interest abovenet austria 2 february 2000 company purchased remaining 60 40 owned joint venture abovenet uk limited 3 june 2000 company purchased additional 375 interest 50 owned joint venture abovenet germany gmbh note 7 investment fibernet december 20 1999 company signed lease agreement fibernet telecom group inc fibernet lease intracity dark fiber fibernet key markets next 20 years part transaction company exchanged existing interest one fibernets subsidiaries local fiber llc additionally fibernet agreed provide company access certain fibernets commercial office buildings partial consideration agreements fibernet issued 5 million shares common stock valued 300 million company representing approximately 100 fibernets fully diluted shares company accounting investment cost method note 8 accrued expenses accrued expenses december 31 2000 1999 consist following thousands note 9 related party transactions company party management agreement companys controlling shareholder metromedia company provides consultation advisory services relating legal matters insurance personnel corporate policies cash management internal audit finance taxes benefit plans services reasonably requested management agreement terminates december 31 year automatically renewed successive oneyear terms unless either party terminates upon 60 days prior written notice 2000 1999 management fee agreement 10 million 1998 management fee agreement 500000 company also obligated reimburse metromedia company outofpocket costs expenses incurred advances paid metromedia company connection management agreement december 31 2000 company note receivable officer approximately 980000 recorded receivables accompanying balance sheet note 10 settlement agreements march 1998 company entered settlement agreement howard katz realprop capital corporation evelyn katz among others settled resulted dismissal litigation company defendant katz et al v national fiber network inc et al 97 civ 2764 jgk march 2000 company defendants entered settlement agreement plaintiffs vento company new york llc v metromedia fiber network inc et al 97 civ 7751jgk settled resulted dismissal litigation note 11 notes payable march 6 2000 company issued 9753 million 615 convertible subordinated notes due march 15 2010 verizon communications verizon notes convertible shares class common stock conversion price 1700 per share interest notes payable semiannually arrears march 15 september 15 commencing september 15 2000 upon occurrence change control holder convertible subordinated notes right require company purchase part holders convertible subordinated notes price equal 100 outstanding principal amount payment amounts due convertible subordinated notes subordinated prior payment senior notes note 11 notes payable continued october 25 1999 company issued sold approximately euros 250 million 750 million 10 senior notes due december 15 2009 net proceeds 10 senior notes approximately 9500 million deducting offering costs included longterm assets interest 10 senior notes payable semiannually arrears june 15 december 15 year commencing june 15 2000 10 senior notes due 2009 subject redemption option company whole part time december 15 2004 specified redemption prices addition prior december 15 2002 company may use net cash proceeds certain specified equity transactions redeem 35 10 senior notes specified redemption prices november 25 1998 company issued sold 6500 million 10 senior notes due november 15 2008 net proceeds 10 senior notes approximately 6300 million deducting offering costs included longterm assets interest 10 senior notes payable semiannually arrears may 15 november 15 year commencing may 15 1999 approximately 915 million net proceeds utilized purchase certain pledged securities proceeds together interest earned securities used satisfy companys semiannual interest obligations may 15 2000 10 senior notes subject redemption option company whole part time november 15 2003 specified redemption prices addition prior november 15 2001 company may use net cash proceeds certain specified equity transactions redeem 35 10 senior notes specified redemption prices indentures pursuant senior notes issued contain certain covenants among matters limit ability company subsidiaries incur additional indebtedness issue stock subsidiaries pay dividends make distributions repurchase equity interests subordinated indebtedness engage sale leaseback transactions create certain liens enter certain transactions affiliates sell assets enter certain mergers consolidations event change control company defined indentures holders senior notes right require company purchase notes whole part price equal 101 stated principal amount thereof plus accrued unpaid interest thereon date purchase senior notes senior unsecured obligations company subordinated current future indebtedness companys subsidiaries including trade payables december 31 2000 abovenet 132 million outstanding credit facility credit facility additional borrowings available borrowings outstanding credit facility payable 42 monthly installments bear interest rates ranging 133 151 collateralized equipment leasehold improvements purchased proceeds borrowing additionally connection acquisition company issued letter credit secured companys restricted cash amount 250 million secure credit facility subsequent december 31 2000 company paid balance outstanding credit facility note 12 equity transactions common stock september 1999 connection abovenet acquisition company issued 83305350 shares class common stock exchange outstanding shares abovenets common stock exchange ratio 235 shares class common stock per share abovenet common stock note 12 equity transactions continued october 7 1999 company entered securities purchase agreement verizon purchased approximately 511 million newly issued shares class common stock purchase price 1400 per share convertible subordinated note approximately 9753 million convertible shares class common stock conversion price 1700 per share transaction closed march 6 2000 assuming conversion convertible subordinated note investment would represent 197 companys outstanding shares stock warrants 1995 1997 company issued warrants purchase 14789240 shares common stock prices ranging 030 050 warrants issued connection previously issued notes december 31 2000 warrants exercised september 1999 connection abovenet acquisition company issued 893166 common stock warrants exchange outstanding warrants abovenets common stock date acquisition december 31 2000 239596 warrants outstanding december 31 2000 aggregate company reserved approximately 2239074 shares class common stock exercise outstanding warrants stock options 1997 company granted certain officers employees directors options purchase 49523776 shares class common stock options exercise prices 0125 048 per share expire 2007 october 28 1997 stockholders company approved metromedia fiber network inc 1997 incentive stock plan 1997 option plan 1997 option plan authorized award 16000000 options acquire class common stock company directors officers employees company others deemed provide substantial important services company 1997 options purchase 9800000 shares companys class common stock granted exercise price 100 per share market price date grant 1998 options purchase 6800000 shares companys class common stock granted exercise prices ranging 97 215 per share market price date grant may 18 1998 stockholders company approved metromedia fiber network inc 1998 incentive stock plan 1998 option plan 1998 option plan authorized award 40000000 options acquire class common stock company directors officers employees company others deemed provide substantial important services company march 13 2000 board directors amended the1998 plan increase number shares available grant options plan 40000000 60000000 options 1998 options purchase 13836000 shares companys class common stock granted exercise prices ranging 182 663 per share market prices dates grant 1999 options purchase 12210900 shares companys class common stock issued exercise prices ranging 852 2197 market prices dates grant 2000 options purchase 26653296 shares companys class common stock issued exercise prices ranging 966 4975 market prices date grant following september 8 1999 merger abovenet options granted pursuant abovenet plans converted stock options exercisable 10885222 companys class common stock representing 235 exchange ratio compensation committee companys board directors responsible determining type award awards granted number shares terms awards exercise price options exercisable period exceed ten years date grant vesting periods range immediate vesting four years note 12 equity transactions continued following table summarizes stock option transactions three years ended december 31 2000 following table summarizes information stock option outstanding december 31 2000 note 12 equity transactions continued pro forma information regarding net income earnings per share required statement financial standards 123 accounting stockbased compensation determined company accounted employees stock options fair value method provided statement fair value options estimated date grant using blackscholes optionpricing model following assumptions vested nonvested options blackscholes options valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models necessarily provide reliable single measure fair value employee stock options purposes pro forma disclosures estimated fair value options amortized expense vesting period options companys pro forma information follows 000s weighted average fair value options granted 2328 1035 121 years ended december 31 2000 1999 1998 respectively note 13 significant customers 2000 customers accounting greater 10 companys total revenue 1999 three customers accounted 25 12 10 respectively companys total revenue 1998 three customers accounted 40 35 12 respectively companys total revenue note 14 income taxes income tax expense benefit years ended december 31 2000 1999 1998 follows thousands 2000 1999 1998 current federal 4513 state local 2720 7233 deferred federal 2375 state local 1456 3831 3402 total income tax expense benefit differed amounts computed applying federal statutory income tax rate 35 earnings loss income tax expense benefit result following items years ended december 31 2000 1999 1998 thousands deferred income taxes reflect net tax effect temporary differences carrying amount assets liabilities financial reporting purposes amounts used income tax purposes note 14 income taxes continued significant components companys deferred tax assets liabilities december 31 2000 1999 follows thousands deferred tax asset fully offset valuation allowance since certain future taxable income realized carryforward period realize tax benefit valuation allowance increased 245847 137724 year ended december 31 2000 1999 respectively december 31 2000 company net operating loss carryforward approximately 663 million set expire beginning 2019 note 15 401k plan company 401k plan permits employees make contributions plan pretax salary reduction basis accordance internal revenue code fulltime employees eligible participate plan beginning quarter following three months service eligible employees may contribute 15 annual compensation company matches 50 employees first 6 contributions company contributed 778000 293000 78000 years ending december 31 2000 1999 1998 respectively matching contributions company bore nominal administrative cost plan since inception abovenet 401k plan abovenet plan permitted employees make contributions abovenet plan pretax salary reduction basis accordance internal revenue code fulltime employees eligible participate beginning quarter following three months service eligible employees could contribute 15 annual compensation company matched 50 employees first 6 contributions company contributed 195000 period acquisition date december 31 1999 matching contributions company bore nominal administrative cost abovenet plan since acquisition date 2000 abovenet plan frozen abovenet employees enrolled plan abovenet plan rolled plan note 16 reconciliation earnings per share thousands except per share amounts note 17 commitments contingencies network construction projects companys commitment purchase materials contracts construction fiber optic network systems approximately 7330 million december 31 2000 letter credit february 1999 company issued irrevocable standby letter credit amount 640 million connection signing agreement viatel inc carrier 1 holdings ltd jointly build national fiber optic telecommunications network germany first quarter 2000 letter credit amount increased 125 million franchise license rightof way agreements operating capital leases company entered various franchise license agreements municipalities utilityrelated companies instances install operate repair maintain replace cable wire fiber transmission media related equipment facilities terms agreements vary length various renewal termination provisions company charges portions agreements incurred constructioninprogress related portion network completed fees charged operations note 17 commitments contingencies continued connection agreements approximately 14542400 8478000 1673000 years ended december 31 2000 1999 1998 respectively addition company leases office operation facilities various equipment expire various times december 31 2000 rent expense charged operations approximately 53865000 4920000 958000 years ended december 31 2000 1999 1998 respectively company entered capital lease agreements certain network assets certain rightsofways total assets acquired capital leases approximately 26842000 december 31 2000 capital leases held constructioninprogress related portion network completed approximate minimum payments aforementioned agreements thousands franchise license rightofway capital operating agreements leases year ended december 31 2001 7262 2827 61664 2002 7563 2307 65413 2003 7796 1991 65960 2004 7362 2060 64578 2005 7268 2133 65273 thereafter 41930 44011 718113 total minimum lease payments 79181 55329 1041001 less amounts representing 29914 interest present value future 25415 minimum lease payments less amounts due one year 935 24480 litigation june 12 1998 claudio e contardi commenced action peter sahagen consulting group florida company united states district court southern district new york 98 civ 4140 contardi litigation mr contardi alleges cause action among things breach finders fee agreement entered mr sahagen mr contardi november 14 1996 breach implied covenant good faith fair dealing contained finders fee agreement mr contardi seeking among things number shares companys common stock company cannot currently ascertain believe approximately 112500 shares calculated date complaint filed without taking account subsequent stock splits damages amount cannot currently ascertain believes approximately 49 million calculated date complaint filed costs expenses incurred action company filed answer complaint raised affirmative defenses company moved summary judgment complaint june 5 2000 court denied summary judgment motion july 20 2000 court entered note 17 commitments contingencies continued stipulation order dismissing action without prejudice grounds court lacks subject matter jurisdiction december 28 2000 contardi refiled action southern district new york captioned contardi v sahagen et al 00 civ 9811 jgk alleging claims company breach contract breach implied covenant good faith fair dealing conversion unjust enrichment contardi seeks among things 1814400 shares companys stock damages amount highest value said mfnnfn shares plaintiff entitled date defendants breach time trial together interest therein january 2000 herman goldsmith arnold schickler commenced action us f garofalo electric co inc stephen garofalo supreme court state new york county new york 60016300 goldsmith litigation complaint alleges cause action breach contract connection alleged finders agreement entered 1993 messrs goldsmith schickler one hand f garofalo electric co inc stephen garofalo plaintiffs seek damages 86062759099 plus interest september 7 1999 addition costs expenses reasonable attorneys fees april 7 2000 company filed motion dismiss complaint company intends vigorously defend goldsmith litigation contardi litigation plaintiff pursues action actions company believes acted appropriately connection matters issue two cases however company make assurances determine advantages entering settlement outweigh risk expense protracted litigation ultimately successful defending allegations company unsuccessful defending allegations award magnitude sought contardi litigation goldsmith litigation would material adverse effect financial condition results operations mfn responding rule nisi show cause action issued georgia public service commission gpsc result certain subcontractors causing damage underground utility facilities mfn believes complied georgia utility laws prescribed underground excavation procedures subcontractors among thorough safetyconscious industry excellent safety record dealing subcontractors result mfn plans vigorously contest action notwithstanding defenses mfn may subject revocation certificate public convenience necessity state georgia imposition fines sanctions result gpscs action mfn respondent proceeding ca public utilities commission cpuc issue cpuc whether mfn improperly engaged certain construction actions authority initial certificate public convenience necessity cpcn mfn believes act improperly vigorously asserting defenses possible ramifications stemming proceeding includes fines sanctions actions taken mfns cpcn addition company subject various claims proceedings ordinary course business based information currently available company believes none current claims proceedings individually aggregate including contardi litigation goldsmith litigation seriously harm financial condition results operations although make assurances regard note 18 selected quarterly financial data unaudited selected financial information quarterly periods 1999 1998 presented thousands except per share amounts note 19 subsequent event acquisition sitesmith inc february 8 2001 company completed merger sitesmith inc sitesmith pursuant agreement plan merger dated october 9 2000 company acquired outstanding shares sitesmith total purchase price paid company class common stock approximately 11 billion holders sitesmith common stock options warrants received 13404 shares companys class common stock options warrants respectively sitesmith provider comprehensive internet infrastructure management services designed maximize performance reliability security largescale complex internet sites sitesmith designs architects infrastructure customers internet operations installs necessary hardware software recommends establishes network connectivity performs ongoing monitoring security services relying sitesmith manage internet operations businesses focus core competencies sitesmith offers customers outsourced internet infrastructure management solution sitesmiths offerings consist core services premium services sitesmiths core services include establishing maintaining infrastructure customers internet operations sitesmiths premium services currently include automated monitoring security network redundancy company recorded acquisition using purchase method accounting excess purchase price fair values net assets acquired approximately 10 billion preliminarily allocated goodwill pending final determination certain intangible assets note 19 subsequent event continued company recently entered commitment letter citicorp usa inc salomon smith barney provides senior credit facilities aggregate amount 3500 million commitment letter provides revolving credit facility 1500 million term loan facility 2000 million commitment citicorp salomon smith barney subject customary conditions expire may 15 2001 company entered definitive documentation senior credit facilities borrowings senior credit facilities bear interest rates depend market conditions time closing companys obligations senior credit facilities guaranteed existing future subsidiaries secured assets guarantor extent permitted trust indenture governing companys outstanding notes senior credit facilities contain customary provisions relating prepayments representations warranties covenants events default borrowings senior credit facilities subject customary conditions schedule ii valuation qualifying accounts s1 item 14 principal accountant fees services aggregate fees billed professional services rendered company bdo seidman llp february 28 2009 years ended december 31 2008 2007 table represents fees incurred service year service provided relevant audit period recognize audit fees operating results services provided information 2008 services rendered february 28 2009 substantially work performed year ended december 31 2006 audit fees may 2008 bdo engaged audit company’s financial statements year ended december 31 2007 november 2008 bdo engaged audit company’s financial statements year ended december 31 2008 audit fees years ended december 31 2008 2007 respectively professional services rendered audit consolidated financial statements described audit related fees audit related fees typically due diligence related mergers acquisitions fees years ended december 31 2008 2007 tax fees tax fees years ended december 31 2008 2007 services related tax compliance including preparation tax returns claims refund tax planning advice including assistance representation tax audits appeals advice related mergers acquisitions fees consulting services related certain compensatory stock matters years ended december 31 2008 2007 auditor independence audit committee considered nonaudit services provided bdo seidman llp determined provision services effect bdo seidman llps independence company audit committee preapproval policy procedures audit committee must review preapprove audits except provided nonaudit services provided bdo seidman llp independent registered public accounting firm conducting reviews audit nonaudit services audit committee determine whether provision services would impair bdo seidman’s independence audit committee preapprove services believes impair bdo seidman’s independence audit committee delegated chairman authority preapprove nonaudit related services subsequently communicated audit committee nonaudit services preapproved part iv item 15 item 14 exhibits financial statement schedules reports form 8k 1 financial statements see index consolidated financial statements page 2 financial statement schedules schedule ii valuation qualifying accounts schedules listed omitted since either applicable information contained elsewhere financial statements notes thereto amounts insignificant immaterial b current reports form 8k 1 june 30 1999 company filed form 8k related company entering agreement plan merger among company magellan acquisition inc abovenet communications inc dated june 22 1999 2 september 10 1999 company filed form 8k announcing completion merger abovenet communications inc september 8 1999 3 october 14 1999 company filed form 8ka connection acquisition disposition assets companys completion merger abovenet communications inc pursuant agreement plan merger 6 4 october 18 1999 company filed form 8k announcing bell atlantic investments inc wholly owned subsidiary bell atlantic corporation entered securities purchase agreement october 7 1999 company 5 october 26 1999 company filed form 8ka amendment 2 connection conversion abovenet shares company shares completion merger abovenet communications inc pursuant agreement plan merger 6 november 24 1999 company filed form 8k connection completion public underwritten registered offerings 750 million 10 senior notes due 2009 date filing annual report form 10k proxy materials furnished security holders copies proxy materials sent commission compliance rules c exhibits filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized metromedia fiber network inc stephen garofalo stephen garofalo chairman chief executive officer dated march 17 2000 undersigned officers directors metromedia fiber network inc hereby severally constitute arnold l wadler howard finkelstein gerard benedetto singly true lawful attorneys full power singly sign us names capacities indicated reports including amendments thereto exhibits thereto documents connection therewith generally things name behalf capacities enable metromedia fiber network inc comply applicable provisions securities exchange act 1934 amended requirements securities exchange commission hereby ratify confirm signatures may signed said attorneys either reports including amendments thereto documents connection therewith pursuant requirements section 13 15d securities exchange 1934 amended report signed following persons behalf registrant capacities dates indicated metromedia fiber network inc subsidiaries index consolidated financial statements report independent auditors board directors shareholders metromedia fiber network inc audited accompanying consolidated balance sheets metromedia fiber network inc subsidiaries company december 31 1999 1998 related consolidated statements operations stockholders equity deficiency cash flows three years period ended december 31 1999 audits also included financial statement schedule listed index item 14a consolidated financial statements schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position metromedia fiber network inc subsidiaries december 31 1999 1998 consolidated results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 1 financial statements 1999 company implemented provisions fasb interpretation 43 real estate sales respect certain leases ernst young llp new york new york march 8 2000 metromedia fiber network inc subsidiaries consolidated balance sheets 000s except share amounts see accompanying notes metromedia fiber network inc subsidiaries consolidated statements operations 000s except per share amounts see accompanying notes metromedia fiber network inc subsidiaries consolidated statements cash flows 000s see accompanying notes connection acquisition common stock abovenet company issued shares class common stock total value 1681102 options warrants total value 98925 metromedia fiber network inc subsidiaries consolidated statement changes stockholders equity deficiency 000s metromedia fiber network inc subsidiaries consolidated statement changes stockholders equity deficiency continued 000s metromedia fiber network inc subsidiaries notes consolidated financial statements note 1 basis presentation description business significant accounting policies basis presentation consolidated financial statements include accounts metromedia fiber network inc wholly owned subsidiaries collectively company includes march 11 1999 communication systems development inc csd september 8 1999 abovenet communications inc abovenet whollyowned subsidiary palo alto internet exchange paix see note 2 significant intercompany balances transactions eliminated consolidation investments joint ventures majority owned company control exercises significant influence accounted using equity method certain reclassifications made consolidated financial statements prior years conform current presentation description business company provides dedicated fiber optic infrastructure highbandwidth internet connectivity communications intensive customers company facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure communications carriers corporate government customers united states europe acquisition abovenet company also provides onehop connectivity enables mission critical internet applications thrive well highbandwidth infrastructure including managed colocation services paix serves packet switching center isps also offers secure faulttolerant colocation services isps company currently operations construction eleven tier cities throughout united states seven selected international markets company intends expand presence include approximately 50 tier ii markets united states 17 major international markets companys existing intracity networks consist approximately 514000 fiber miles covering excess 1000 route miles first eleven tier cities intercity network consists approximately 132000 fiber miles primarily covering 255 routemile network company built new york city washington dc company also built contracted acquire primarily fiber swaps nationwide dark fiber network linking intracity networks february 1999 company entered agreement viatel inc carrier 1 holdings ltd jointly build dark fiber intercity network among selected cities throughout germany completed german network consist approximately 320000 fiber miles covering excess 1450 route miles connecting 14 major cities company also swapped strands fiber united states strands fiber circe network connects number european markets addition intercity networks company constructing 16 intracity networks throughout europe separately company also entered contract acquire rights dark fiber network facilities toronto canada summary significant accounting policies management estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenues expenses reporting periods actual results may differ estimates fair value financial instruments carrying amounts cash accounts receivable accounts payable accrued liabilities approximate fair value fair value longterm debt determined based quoted market rates cash flows financial instruments discounted companys estimated current interest rate metromedia fiber network inc subsidiaries notes consolidated financial statements note 1 basis presentation description business significant accounting policiescontinued enter similar financial instruments december 31 1999 fair value companys fixed rate longterm debt 10 senior notes due 2008 2009 650 million 10 billion respectively recorded amounts longterm debt company approximates fair values foreign currency translation statutory accounts companys foreign subsidiaries maintained accordance local accounting regulations stated local currencies local statements translated us generally accepted accounting principles us dollars accordance statement financial accounting standards 52 sfas 52 accounting foreign currency translation sfas 52 foreign currency assets liabilities generally translated using exchange rates effect balance sheet date results operations generally translated using average exchange rates prevailing throughout year effects exchange rate fluctuations translating foreign currency assets liabilities us dollars accumulated part foreign currency translation component comprehensive income stockholders equity gains losses foreign currency transactions included net income period occur cash equivalents purposes consolidated financial statements company considers highly liquid investments original maturity three months less purchased cash equivalents pledged securities connection sale 10 senior notes due 2008 see note 12 portion net proceeds utilized purchase portfolio consisting us government securities mature dates sufficient provide payment full interest 10 senior notes due 2008 may 15 2000 pledged securities stated cost adjusted premium amortization accrued interest fair value pledged securities approximates carrying value accounts receivable accounts receivable includes trade receivables costs estimated earnings excess billings contracts company utilizes percentage completion method recognizing revenue marketable securities marketable securities primarily consist investments united states government corporate obligations classified heldtomaturity accordingly investments carried cost unrealized gains losses reported upon maturation underlying investment fiber optic transmission network related equipment fiber optic transmission network related equipment stated cost costs connection installation expansion network capitalized depreciation computed using straightline method life either franchise agreement right way related network property equipment fixed assets stated cost depreciation financial reporting purposes calculated using straightline method estimated useful lives assets ranging three five years leasehold improvements amortized lesser useful life asset remaining period lease assets include debt issuance costs franchise agreements deposits costs amortizable amortized straightline basis period ranging ten twenty years metromedia fiber network inc subsidiaries notes consolidated financial statements note 1 basis presentation description business significant accounting policiescontinued longlived assets company reviews impairment longlived assets certain identifiable intangibles including goodwill whenever events changes circumstances indicate carrying amount asset may recoverable company identified impairment indicators income taxes accordance statement financial accounting standards sfas 109 accounting income taxes company recognizes deferred income taxes tax consequences future years differences tax bases assets liabilities financial reporting amounts year end based enacted tax laws statutory tax rates applicable periods differences expected affect taxable income valuation allowances established necessary reduce deferred tax assets amount likely realized provision income taxes tax payable period change period deferred tax assets liabilities recapitalizations april 1997 company increased authorized common stock 01 par value 60000000 shares addition authorized preferred stock par value 01 increased 2000000 shares april 29 1997 company effected 3forone stock split outstanding shares common stock september 1997 company effected 507forone reverse stock split common stock october 28 1997 total authorized number shares common stock company increased 200 million shares par value 001 per share 180 million shares designated class common stock 20 million shares designated class b common stock 1999 company completed twoforone stock splits companys class b common stock form 100 percent stock dividend shareholders record august 7 1998 december 8 1998 may 3 1999 splits effective august 28 1998 december 22 1998 may 19 1999 respectively may 6 1999 total authorized number shares stock company increased approximately 59 billion shares par value 001 per share 40 million shares designated preferred stock 48 billion shares designated class common stock 10 billion shares designated class b common stock march 2 2000 company announced twoforone stock split companys class b common stock form 100 percent stock dividend shareholders record march 14 2000 accompanying financial statements give retroactive effect recapitalizations recognition revenue company recognizes revenue telecommunications services ratably term applicable lease agreements customers amounts billed advance service provided recorded deferred revenue bandwidth space requirement charges recognized period services provided addition company occasionally enters salestype leases portions network leases entered prior completion portion network contracts entered june 30 1999 company recognizes revenue using percentage completion method percentage completion method progress generally measured performance milestones relating contract milestones fairly reflect progress toward contract completion network construction costs include direct material labor costs indirect costs related contract performance general administrative costs charged expense incurred necessary estimated loss uncompleted contract expensed period identified contract costs estimated using allocations total cost constructing specific phase network revisions estimated profits contracts recognized period become known metromedia fiber network inc subsidiaries notes consolidated financial statements note 1 basis presentation description business significant accounting policiescontinued companys contracts provision dark fiber accounted operating leases recognizes recurring monthly revenues certain contracts company recognizes revenue percentage completion method provision dark fiber effective june 30 1999 financial accounting standards board issued fasb interpretation 43 real estate sales fin 43 requires sales leases integral equipment accounted accordance real estate accounting rules company believes staff securities exchange commission requires classification dark fiber cables ground integral equipment defined fin 43 accounting dark fiber leases defined fin 43 change economics contracts requires company however recognize revenue certain leases operating leases term contract opposed prior method recognizing revenue period company delivers fiber result change accounting treatment reduces revenue income company recognizes earlier years contract spreads life contract regardless cash received delivery fiber took place way example company entered agreement 25year lease dark fiber customer pays 1000 million cash contract signed company previously recorded revenues 200 million 5 years company delivered dark fiber contrast real estate accounting rules fin 43 would require recognition revenue 40 million per year 25 year term contract even though company would receive cash payment 1000 million contract signed company implemented fin 43 real estate accounting certain leases entered june 30 1999 restated amounts contracts executed prior date although change economics contracts timing cash received company impact change accounting resulted company recording substantially less revenue dates july 1 1999 december 31 1999 would recorded change imposed revenue recognized years ended december 31 1999 1998 related percentage completion method 403 million 328 million respectively related cost sales recorded 107 million 112 million respectively years ended december 31 1999 1998 revenues recognized cost sales incurred relating percentage completion method 1997 future similar revenues recognized term related contracts typically 20 25 years company also provides installation services customers services typically completed within short time period company records revenues related costs services completed contract method stock options company adopted disclosureonly provisions sfas 123 accounting stockbased compensation company applies apb opinion 25 accounting stock issued employees related interpretations accounting stock options consulting employment incentives amounts represent value common stock warrants options issued consultants officers employees directors company incentive provide services company 1997 amounts represent value options purchase 49525200 shares companys common stock issued 1997 officers employees directors company options valued accordance apb opinion 25 difference exercise price options fair market value companys common stock date grant earnings per share accordance financial accounting standards boards fasb statement financial accounting standards sfas 128 earnings per share basic earnings per share computed based upon weighted average number common shares outstanding periods diluted earnings per share computed based upon weighted average number common shares outstanding plus assumed issuance common stock equivalents computed accordance treasury stock method deferred revenue deferred revenue represents prepayments received customers future use companys fiber optic network colocation facilities well prepayment installation services yet metromedia fiber network inc subsidiaries notes consolidated financial statements note 1 basis presentation description business significant accounting policiescontinued provided lease payments structured either prepayments monthly recurring charges prepayments accounted deferred revenues recognized term respective customer lease agreement comprehensive loss statement financial accounting standards 130 sfas 130 reporting comprehensive income loss establishes rules reporting comprehensive income components comprehensive income loss consists net income loss foreign currency translation adjustments comprehensive income loss years ending december 31 1999 1998 1997 approximately 1236 million 10 million 263 million respectively segment information company discloses information regarding segments accordance sfas 131 disclosures segments enterprise related information sfas 131 establishes standards reporting financial information operating segments annual financial statements requires reporting selected information operating segments interim financial reports disclosure segment information required company operates one business segment years ended december 31 1999 1998 1997 substantially companys assets located united states company derived substantially revenue businesses located united states impact recently issued accounting standards june 1998 fasb issued sfas 133 accounting derivatives hedging activities establishes accounting reporting standards derivative instruments hedging activities standard effective fiscal quarters fiscal years beginning june 15 1999 company expect adoption sfas 133 impact results operations financial position cash flows note 2 business acquisitions accounted purchase method results operations acquired businesses included consolidated financial statements dates acquisition september 8 1999 company acquired outstanding common stock abovenet total purchase price paid company class common stock approximately 18 billion holders abovenet common stock options warrants received 235 shares companys class common stock options warrants respectively abovenet primary operations san jose california leading provider facilitiesbased managed services customerowned web servers related equipment known colocation high performance internet connectivity solutions electronic commerce business critical internet operations excess purchase price fair values net assets acquired approximately 16 billion recorded goodwill amortized straight line basis 20 years addition connection acquisition company issued letter credit secured companys restricted cash amount 25 million secure credit facility abovenet june 21 1999 abovenet acquired certain assets assumed certain liabilities palo alto internet exchange paix compaq computer corporation compaq total purchase price 764 million consisting 70 million cash certain future ongoing services provided abovenet compaq value estimated 50 million acquisition related costs 14 million paix highlevel switching peering point global internet service providers content providers march 11 1999 company acquired outstanding common stock communication systems development inc csd 25 million cash csd primary operations dallas texas engaged engineering construction fiber optic networks excess purchase price fair metromedia fiber network inc subsidiaries notes consolidated financial statements note 2 business acquisitions continued values net assets acquired approximately 112 million recorded goodwill amortized straight line basis 20 years following unaudited pro forma financial information presents combined results operations company acquisitions occurred beginning 1999 1998 giving effect certain adjustments including amortization goodwill related income tax effects pro forma financial information necessarily reflect results operations would occurred entities constituted single entity periods amounts presented thousands except per share amounts subsequent end fiscal year january 19 2000 company completed acquisition mibh inc network outsourcing provider offering fullservice management business internet connectivity solutions approximately 51 million cash stock terms agreement mibh became wholly owned subsidiary metromedia fiber network inc shareholders mibh privately held company received aggregate 2078096 shares metromedia fiber network class common stock 30 million cash note 3 accounts receivable accounts receivable consists following 000s december 31 1999 two customers accounted 29 25 respectively companys combined accounts receivable metromedia fiber network inc subsidiaries notes consolidated financial statements note 4 fiber optic transmission network related equipment fiber optic transmission network related equipment consists following 000s construction progress includes amounts incurred companys expansion network amounts include fiber optic cable materials engineering layout costs fiber optic cable installation costs network assets held capital leases construction progress also includes payments rights way underlying sections network build 1999 9383 interest expense capitalized note 5 property equipment property equipment consists following note 6 investments advances joint ventures 1997 company formed joint venture racal telecommunications inc racal provides broadbased transatlantic communication services new york london 1999 1998 company made capital contributions 18 million 43 million respectively company accounts investment using equity method 1999 1998 company recorded equity losses 431000 146000 respectively based 50 interest joint venture included within companys accounts receivable 699000 administrative services provided joint venture reimbursed december 31 1999 part international expansion strategy abovenet entered joint ventures provide managed colocation internet connectivity solutions mission critical internet operations overseas march 1999 abovenet entered agreements form joint ventures austria germany france united kingdom abovenet invested total 152 million ventures 1999 joint ventures accounted equity method accounting december 1999 abovenet entered joint venture agreement japan company invested total 40 million required invest additional 40 million 40 ownership venture metromedia fiber network inc subsidiaries notes consolidated financial statements note 6 investments advances joint ventures continued february 2000 company purchased 100 shares owned joint venture partners abovenets joint venture united kingdom shares companys stock market value 10 million note 7 german network build february 1999 company entered joint venture viatel inc carrier 1 holdings ltd jointly build national fiber optic telecommunications network germany upon completion construction joint venture dissolved company separate german broadband network connection terms agreement company made deposit payment 47 million third quarter 1998 upon signing definitive agreement company provided irrevocable standby letter credit amount 64 million security construction costs network addition deposit payment made covers companys portion estimated construction costs december 31 1999 construction costs approximately 351 million incurred included fiber optic transmission network note 8 investment fibernet december 20 1999 company signed lease agreement fibernet telecom group inc fibernet lease intracity dark fiber fibernet key markets next 20 years part transaction company exchanged existing interest one fibernets subsidiaries local fiber llc additionally fibernet agreed provide company access certain fibernets commercial office buildings partial consideration agreements fibernet issued 5 million shares common stock valued 300 million company representing approximately 100 fibernets fully diluted shares company accounting investment cost method note 9 accrued expenses accrued expenses december 31 1999 1998 consist following thousands note 10 related party transactions company party management agreement companys controlling shareholder metromedia company provides consultation advisory services relating legal matters insurance personnel corporate policies cash management internal audit finance taxes benefit plans services reasonably requested management agreement terminates december 31 year automatically renewed successive oneyear terms unless either party terminates upon 60 days prior written notice 1999 management fee agreement 10 million payable quarterly rate 250000 1998 management fee agreement 500000 payable quarterly rate 125000 company also obligated reimburse metromedia company outofpocket costs expenses incurred advances paid metromedia company connection management agreement note 11 settlement agreements march 1998 company entered settlement agreement howard katz realprop capital corporation evelyn katz among others settled resulted dismissal litigation metromedia fiber network inc subsidiaries notes consolidated financial statements note 11 settlement agreements continued company defendant katz et al v national fiber network inc et al 97 civ 2764 jgk march 2000 company defendants entered settlement agreement plaintiffs vento company new york llc v metromedia fiber network inc et al 97 civ 7751jgk settled resulted dismissal litigation note 12 notes payable october 25 1999 company issued sold approximately 10 billion 10 senior notes due october 15 2009 net proceeds 10 senior notes approximately 9500 million deducting offering costs included longterm assets interest 10 senior notes payable semiannually arrears april 15 october 15 year commencing april 15 2000 10 senior notes due 2009 subject redemption option company whole part time october 15 2004 specified redemption prices addition prior october 15 2002 company may use net cash proceeds certain specified equity transactions redeem 35 10 senior notes due 2009 specified redemption prices november 25 1998 company issued sold 6500 million 10 senior notes due november 15 2008 net proceeds 10 senior notes approximately 6300 million deducting offering costs included longterm assets interest 10 senior notes payable semiannually arrears may 15 november 15 year commencing may 15 1999 approximately 915 million net proceeds utilized purchase certain pledged securities proceeds together interest earned securities used satisfy companys semiannual interest obligations may 15 2000 10 senior notes subject redemption option company whole part time november 15 2003 specified redemption prices addition prior november 15 2001 company may use net cash proceeds certain specified equity transactions redeem 35 10 senior notes specified redemption prices indentures pursuant senior notes issued contain certain covenants among matters limit ability company subsidiaries incur additional indebtedness issue stock subsidiaries pay dividends make distributions repurchase equity interests subordinated indebtedness engage sale leaseback transactions create certain liens enter certain transactions affiliates sell assets enter certain mergers consolidations event change control company defined indentures holders senior notes right require company purchase notes whole part price equal 101 stated principal amount thereof plus accrued unpaid interest thereon date purchase senior notes senior unsecured obligations company subordinated current future indebtedness companys subsidiaries including trade payables december 31 1999 abovenet 191 million outstanding credit facility credit facility additional borrowings available borrowings outstanding credit facility payable 42 monthly installments bear interest rates ranging 133 151 collateralized equipment leasehold improvements purchased proceeds borrowing additionally connection acquisition company issued letter credit secured companys restricted cash amount 250 million secure credit facility december 31 1999 outstanding borrowings credit facility due follows 2000 5385 2001 6762 2002 6934 note 13 equity transactions common stock november 3 1997 company completed initial public offering ipo 145728000 shares class common stock offering price 1 per share net proceeds company ipo deducting expenses ipo approximately 1339 million metromedia fiber network inc subsidiaries notes consolidated financial statements note 13 equity transactions continued addition october 28 1997 total 153039040 shares common stock company owned stockholders prior ipo exchanged equal number shares class common stock company also reserved issuance 68167776 shares class common stock conversion class b common stock october 28 1996 shareholder granted companys chairman board option purchase 6398224 shares common stock company aggregate exercise price 500000 letter dated december 3 1996 option amended reduce number option shares 5181424 shares chairman thereafter assigned option company february 11 1997 company exercised option payment 500000 september 1999 connection abovenet acquisition company issued 83305350 shares common stock exchange outstanding shares abovenets common stock exchange ratio 235 october 7 1999 company entered securities purchase agreement bell atlantic investments inc bell atlantic bell atlantic would purchase approximately 512 million newly issued shares class common stock purchase price 1400 per share convertible subordinated note approximately 9753 million convertible shares class common stock conversion price 1700 per share transaction closed march 6 2000 assuming issuance 512 million shares class common stock conversion convertible subordinated note investment would represent 182 companys outstanding shares bell atlantic also agreed pay company 550 million next three years exchange delivery fiber optic facilities next five years proceeds two transactions used fund expansion companys network preferred stock april 30 1997 company sold aggregate 134453200 shares series b convertible preferred stock par value 001 per share series b preferred stock metromedia company affiliates metromedia aggregate purchase price 325 million metromedia investment share series b preferred stock convertible 507 shares companys common stock october 28 1997 series b convertible preferred shares converted 68167776 shares class b common stock october 28 1997 total 629232 shares class b common stock outstanding converted equivalent number shares class common stock portion proceeds metromedia investment used repay metromedia loan discussed accrued interest thereon 4058127 repay shortterm indebtedness 3485000 redeem 2115000 outstanding shares companys preferred stock series preferred stock related warrants april 30 1997 metromedia loaned company aggregate 4000000 metromedia loan portion proceeds metromedia loan used purchase 9415520 shares companys common stock warrants purchase 3326128 shares common stock shares companys series preferred stock series b preferred stock remained outstanding december 31 1997 series b preferred stock company eliminated pursuant actions board directors stock warrants 1996 company entered agreement customer exclusive usage rights fibers portions network connection agreement company borrowed 49 million customer april 30 1997 company amended agreement satisfy obligations abovereferenced note providing additional leased fiber miles ii cash payment 1370000 iii warrant purchase common stock company july 1998 agreement amended include additional fiber miles companys network cancellation warrants b october 1995 february 1996 company issued sold private offering 858000 convertible subordinated notes concurrent issuance notes warrants issued company noteholders purchase 2088032 shares common stock 50 per share metromedia fiber network inc subsidiaries notes consolidated financial statements note 13 equity transactions continued november 2000 1996 1997 exchange extension due dates notes company issued warrants purchase 2636168 shares common stock 50 per share recorded charge 111306 220036 1996 1997 respectively 1997 company repaid outstanding balance notes plus accrued interest december 31 1999 3128064 warrants exercised c september 1996 company entered loan agreement finance company 550000 loan bore interest 10 per annum repaid 1997 incentive loan company issued finance company warrants purchase 1508832 shares common stock exercise price 037 warrants exercisable september 1999 1996 company recorded noncash charge 13640 connection issuance warrants exercised august 1995 company initiated 600000 private offering subordinated notes bore interest annual rate 15 repaid 1997 issuance notes warrants issued noteholders april 1996 company issued total 1149744 shares companys common stock exchange surrender cancellation warrants threemonth extension maturity date notes 1996 company recorded noncash charge 107322 connection issuance april 1995 company entered loan agreement customer 500000 bearing interest 11 per annum july 1997 note repaid full connection loan company issued customer warrant entitling holder purchase total 10706672 shares companys common stock february 1997 warrant exchanged new warrant purchase 7300800 shares companys common stock 030 per share new warrant expires february 13 2000 december 31 1999 none warrants exercised e december 13 1996 company issued sold private investor aggregate cash consideration 2025000 2400000 shares 10 cumulative convertible preferred stock series preferred stock bearing dividends rate 17 per share per annum ii warrants purchase 1825200 shares class common stock exercise price 031 per share iii contingent stock subscription warrant purchase number shares class common stock number determined based certain future events exercise price 0005 per share connection metromedia investment private investor allowed series preferred stock contingent warrants redeemed aggregate redemption price 2115000 includes accrued unpaid dividends series preferred stock number shares underlying private investors warrants increased 1825200 3650400 january 1998 private investor made cashless exercise warrants number shares issuable upon exercise reduced number shares closing day exercise value equal aggregate exercise price accordingly company issued private investor 2764240 common shares warrants f june 1996 company granted 2433600 common stock purchase warrants companys legal counsel exercisable 0005 per share period four years additional consideration legal services provided company recorded noncash charge 200000 issuance december 31 1999 warrants exercised g september 1999 connection abovenet acquisition company issued 893166 common stock warrants exchange outstanding warrants abovenets common stock date acquisition december 31 1999 aggregate company reserved approximately 10912200 shares class common stock exercise outstanding warrants stock options 1997 company granted certain officers employees directors options purchase 49523776 shares class common stock options exercise prices 0125 048 per share expire 2007 company recorded noncash charge 19218591 issuances grants 8616240 exercised december 31 1999 october 28 1997 stockholders company approved metromedia fiber network inc metromedia fiber network inc subsidiaries notes consolidated financial statements note 13 equity transactions continued 1997 incentive stock plan 1997 option plan 1997 option plan authorized award 16000000 options acquire class common stock company directors officers employees company others deemed provide substantial important services company 1997 options purchase 9800000 shares companys class common stock granted exercise price 100 per share market price date grant 1998 options purchase 6800000 shares companys class common stock granted exercise prices ranging 97 215 per share market price date grant grants 2230000 canceled 1931400 exercised december 31 1999 may 18 1998 stockholders company approved metromedia fiber network inc 1998 incentive stock plan 1998 option plan 1998 option plan authorized award 40000000 options acquire class common stock company directors officers employees company others deemed provide substantial important services company 1998 options purchase 13836000 shares companys class common stock granted exercise prices ranging 182 663 per share market prices dates grant 1999 option purchase 12210900 shares companys class common stock issued exercise prices ranging 852 1988 market prices dates grant grants 809800 canceled 1405880 exercised december 311999 following september 8 1999 merger abovenet options granted pursuant abovenet plans converted stock options exercisable 10885222 companys class common stock representing 235 exchange ratio options 147856 canceled 2985632 exercised december 31 1999 compensation committee companys board directors responsible determining type award awards granted number shares terms awards exercise price options exercisable period exceed ten years date grant vesting periods range immediate vesting four years following table summarizes stock option transactions three years ended december 31 1999 metromedia fiber network inc subsidiaries notes consolidated financial statements note 13 equity transactions continued following table summarizes information stock option outstanding december 31 1999 pro forma information regarding net income earnings per share required statement financial standards 123 accounting stockbased compensation determined company accounted employees stock options fair value method provided statement fair value options estimated date grant using blackscholes optionpricing model following assumptions vested nonvested options blackscholes options valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models necessarily provide reliable single measure fair value employee stock options metromedia fiber network inc subsidiaries notes consolidated financial statements note 13 equity transactions continued purposes pro forma disclosures estimated fair value options amortized expense vesting period options companys pro forma information follows 000s weighted average fair value options granted 1035 121 43 years ended december 31 1999 1998 1997 respectively subsequent end fiscal year company announced march 2 2000 executive committee board directors acting pursuant authority delegated board approved twoforone stock split companys class b common stock form 100 percent stock dividend share per share amounts presented herein give retroactive effect stock split note 14 significant customers 1999 three customers accounted 25 12 10 respectively companys total revenue 1998 three customers accounted 40 35 12 respectively companys total revenue 1997 two customers accounted 21 15 respectively companys total revenue note 15 income taxes income tax expense benefit years ended december 31 1999 1998 1997 follows thousands metromedia fiber network inc subsidiaries notes consolidated financial statements note 15 income taxes continued total income tax expense benefit differed amounts computed applying federal statutory income tax rate 35 earnings loss income tax expense benefit result following items years ended december 31 1999 1998 1997 thousands tax effects temporary differences give rise significant portions deferred tax assets liabilities december 31 1999 1998 1997 follows thousands deferred tax asset reserved since certain future taxable income realized carryforward period year asset turnaround provision federal state income taxes years ended december 31 1999 1997 december 31 1999 company net operating loss carryforward amount 226 million carryforward expire 2019 note 16 401k plan 1998 company implemented 401k plan permits employees make contributions plan pretax salary reduction basis accordance internal revenue code fulltime employees eligible participate plan beginning quarter following three months metromedia fiber network inc subsidiaries notes consolidated financial statements note 16 401k plan continued service eligible employees may contribute 15 annual compensation company matches 50 employees first 6 contributions company contributed 293000 78000 years ending december 31 1999 1998 respectively matching contributions company bore nominal administrative cost plan since inception abovenet implemented 401k plan abovenet plan permits employees make contributions abovenet plan pretax salary reduction basis accordance internal revenue code fulltime employees eligible participate beginning quarter following three months service eligible employees may contribute 15 annual compensation company matches 50 employees first 6 contributions company contributed 195000 period acquisition date december 31 1999 matching contributions company bore nominal administrative cost abovenet plan since acquisition date subsequent yearend abovenet plan frozen abovenet employees enrolled plan pending internal revenue service approval abovenet plan rolled plan note 17 reconciliation earnings per share thousands note 18 commitments contingencies network construction projects 1998 company commenced construction various networks outside new york metropolitan area companys commitment purchase materials contracts construction fiber optic network systems approximately 1483 million december 31 1999 metromedia fiber network inc subsidiaries notes consolidated financial statements note 18 commitments contingencies continued franchise license rightof way agreements operating capital leases company entered various franchise license agreements municipalities utilityrelated companies instances install operate repair maintain replace cable wire fiber transmission media related equipment facilities terms agreements vary length various renewal termination provisions company charges portions agreements incurred constructioninprogress related portion network completed fees charged operations connection agreements approximately 8478000 1673000 607000 years ended december 31 1999 1998 1997 respectively addition company leases office operation facilities various equipment expire various times march 31 2010 rent expense charged operations approximately 4920000 958000 268000 years ended december 31 1999 1998 1997 respectively company entered capital lease agreements certain network assets certain rightsofways total assets acquired capital leases approximately 27876000 december 31 1999 capital leases held constructioninprogress related portion network completed approximate minimum payments aforementioned agreements thousands litigation june 12 1998 claudio e contardi commenced action peter sahagen consulting group florida company united states district court southern district new metromedia fiber network inc subsidiaries notes consolidated financial statements york 98 civ 4140jgk mr contardi alleges cause action among things breach finders fee agreement entered mr sahagen mr contardi november 14 1996 breach implied covenant good faith fair dealing contained finders fee agreement mr contardi seeking among things number companys shares class common stock company cannot currently ascertain believe approximately 225000 shares calculated date complaint filed without taking account subsequent stock splits damages amount company cannot currently ascertain believe approximately 49 million calculated date complaint filed costs expenses incurred action company filed answer complaint raised affirmative defenses company moved summary judgment complaint january 2000 herman goldsmith arnold schickler commenced action company f garofalo electric co inc stephen garofalo supreme court state new york county new york 60016300 goldsmith litigation complaint alleges cause action breach contract connection alleged finders agreement entered 1993 messrs goldsmith schickler one hand f garofalo electric co inc stephen garofalo plaintiffs seek damages 86062759099 plus interest september 7 1999 addition costs expenses reasonable attorneys fees company intends vigorously defend actions company believes acted appropriately connection matters issue two cases however assurance company determine advantages entering settlement outweigh risk expense protracted litigation ultimately company successful defending allegations company unsuccessful defending allegations award magnitude sought goldsmith litigation would material adverse effect financial condition results operations october 20 1997 vento company new york llc commenced action company stephen garofalo peter silverman law firm silverman collura chernis balzano pc peter sahagen consulting group florida robert kramer birdie capital corp lawrence black sterling capital llc penrush limited needham capital group arthur asch michael asch ronald kuzon united states district court southern district new york 97 civ 7751jgk may 29 1998 vento company filed amended complaint july 1 1999 vento company filed second amended complaint amended vento company alleged seven causes action connection sale 900000 shares adjusted subsequent stock splits companys class common stock mr sahagen defendants january 13 1997 seven causes action included violation section 10b securities exchange act 1934 rule 10b5 promulgated act ii fraud fraudulent concealment iii breach fiduciary duty company iv negligent misrepresentation omission v breach contract vento company seeking among things rescission stock sale alternatively damages amount contended excess 460 million together interest march 2000 parties entered settlement agreement companys portion settlement company issuing shares class common stock value approximately 19 million result action dismissed prejudice june 29 1999 alleged stockholder abovenet filed lawsuit captioned kaufman v tuan et al del ch ca 17259nc court chancery state delaware new castle county plaintiff purports represent class abovenet stockholders challenges terms proposed merger company abovenet complaint names defendants abovenet directors abovenet company aider abettor complaint alleges generally abovenets directors breached fiduciary duty stockholders abovenet seeks injunction merger alternative rescission recovery unspecified damages fees expenses abovenet company individual defendants believe lawsuit without merit intend defend vigorously abovenet individual director defendants responses filed july 22 1999 connection responses motion dismiss complaint entirety motion stay discovery pending outcome motion dismiss filed abovenet individual directors abovenet july 22 1999 similar motions dismiss complaint stay discovery filed company july 26 1999 upon stipulation parties action dismissed without prejudice december 1999 metromedia fiber network inc subsidiaries notes consolidated financial statements note 18 commitments contingencies continued four complaints virtually identical complaint kaufman v tuan also filed delaware court chancery none four complaints served four actions captioned brosious v tuan et al del ch ca 17271nc chong v tuan et al del ch ca 17281nc ehlert v tuan et al del ch ca 17284nc horn v tuan et al del ch ca 17300nc addition company subject various claims proceedings ordinary course business based information currently available company believes none current claims proceedings individually aggregate including contardi litigation goldsmith litigation material adverse effect financial condition results operations although company make assurances regard note 19 selected quarterly financial dataunaudited selected financial information quarterly periods 1999 1998 presented thousands except per share amounts metromedia fiber network inc subsidiaries notes consolidated financial statements metromedia fiber network inc subsidiaries schedule ii valuation qualifying accounts s1 item 7 management’s discussion analysis financial condition results operations following discussion analysis read together consolidated financial statements related notes appearing elsewhere annual report form 10k executive summary overview provide telecommunications services primarily 14 major metropolitan markets us one uk london services include high bandwidth fiberoptic connectivity solutions primarily large corporate enterprise clients communication carriers including fortune ftse 500 companies us uk components operating loss income revenue costs revenue selling general administrative expenses depreciation amortization description components reporting operating loss periods presented consolidated financial statements included elsewhere annual report form 10k industry demand high bandwidth telecommunications services continues increase believe experience provision services customer base robust extensive network enable us take advantage growing demand although competitive landscape telecommunications industry constantly shifting believe well positioned continued growth future strategy see item 1 “business strategy” discussion business strategy key performance indicators senior management reviews group financial nonfinancial performance metrics connection management business metrics facilitate timely effective communication results key decisions allowing management react quickly changing requirements changes key performance indicators key financial indicators use include cash flow incremental contractual booking new customer business new customer installations capital committed expended important nonfinancial metrics measure headcount traffic growth installation intervals manage employee headcount changes ensure sufficient resources available service customers control expenses employees categorized managed within integrated groups sales operations engineering finance legal human resources worldwide headcount 549 december 31 2007 december 31 2006 total 502 employees 441 employed us 59 uk one netherlands one japan highlights consolidated revenues increased 2006 170 million compared 2005 due principally growth metro transport services increased 133 million 2006 compared 2005 partially offset reduction revenue due sale data center business fourth quarter 2006 full year revenue data center businesses 2005 2006 generated net income 464 million december 31 2006 707 million unrestricted cash compared 459 million unrestricted cash december 31 2005 increase liquidity 248 million increase attributable primarily cash generated operating activities 513 million proceeds generated sales property equipment 432 million primarily related sale domestic data centers offset capital expenditures 717 million 2008 outlook 2007 revenue increased compared 2006 large percentage costs fixed able increase revenues costs grew slower rate revenues resulted improved operating results however improved operating results negatively impacted recognition loss resulting gvn litigation see item 3 “legal proceedings” note 15 “subsequent events litigation” accompanying consolidated financial statements included elsewhere annual report form 10k 2007 cash flow generated operating activities increased result improvement operating results described unrestricted cash equivalents balance declined 2007 compared 2006 due increased capital expenditures consistent growth strategy believe based business plan unrestricted cash hand conjunction availability credit facility consummated february 29 2008 provide us liquidity needed fund operations including liability arising gvn litigation least second quarter 2009 see item 7 “liquidity capital resources” information related credit facility revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue subsequently amortized income related service period substantial portion revenue derived multiyear contracts telecommunications service often required make initial outlay capital extend network purchase equipment provision services customers terms contracts customer required pay termination fee declines contract term contract terminated customer without basis expiration ensure recover initial capital investment plus acceptable return costs revenue costs revenue primarily includes following real estate expenses operational sites ii costs incurred operate networks licenses rightofway permit fees professional fees related networks iii third party telecommunications fiber conduit expenses iv repairs maintenance costs incurred connection networks v employeerelated costs relating operation networks selling general administrative expenses “sga” sga primarily consist employeerelated costs salaries benefits stockbased compensation expense employees directly attributable operation networks ii real estate expenses administrative sites iii professional consulting audit fees iv taxes income taxes including property taxes owned real estate trust fundrelated taxes gross receipts taxes v restructuring costs vi regulatory costs insurance telecommunications costs professional fees license maintenance fees internal software hardware depreciation amortization depreciation amortization consists ratable measurement use property equipment depreciation amortization network assets commences assets placed service provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted us “us gaap” preparation financial statements conformity us gaap requires management make judgments estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expenses reporting period management continually evaluates judgments estimates assumptions based historical experience available information following discussion items within consolidated financial statements involve significant judgments assumptions uncertainties estimates involved areas considered critical require high levels subjectivity judgment account highly uncertain matters actual results events differ materially contemplated management making estimates impact consolidated financial statements could material full description significant accounting policies see note 2 “basis presentation significant accounting policies” accompanying consolidated financial statements included elsewhere annual report form 10k misstatements connection audit financial statements year ended december 31 2006 determined certain errors primarily related income taxes depreciation certain accruals included financial statements previously issued years ended december 31 2005 2004 period ended december 31 2003 including fresh start balance sheet september 8 2003 adjustments made applicable period effect adjustments would increase net loss 09 million 009 per basic diluted share year ended december 31 2005 increase net loss 01 million 001 per basic diluted share year ended december 31 2004 decrease net loss 02 million 002 per basic diluted share period ended december 31 2003 management believe based upon qualitative quantitative analysis errors material require restatement previously issued financial statements accordingly corrections reflected financial statements year ended december 31 2006 resulted reduction net income 03 million 003 per basic diluted share reclassification february 29 2008 filed current report form 8k among things included consolidated statement operations year ended december 31 2006 consolidated statement operations year ended december 31 2006 included elsewhere annual report form 10k reflects change classification certain expenses amounts recorded consolidated statement operations included current report form 8k dated february 29 2008 change resulted costs revenue decreasing 93 million 1312 million 1219 million selling general administrative expenses increasing 93 million 618 million 711 million year ended december 31 2006 reclassification affect operating loss net income earnings per share basic diluted assets liabilities shareholders’ equity year ended december 31 2006 fresh start accounting emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires us allocate reorganization value assets liabilities based upon estimated fair values accordance statement position 907 “financial reporting entities reorganization bankruptcy code” “sop 907” developed set financial projections utilized expert estimate fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries 3 calculation enterprise value based upon future cash flows based upon projections adopting fresh start accounting resulted material adjustments historical carrying values assets liabilities reorganization value allocated assets liabilities based upon fair values engaged independent appraiser determine fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination comprehensive loss accumulated deficit accounts revenue recognition revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income related service period accordance sec staff accounting bulletin 101 “revenue recognition financial statements” amended sec staff accounting bulletin 104 “revenue recognition” generally amortize revenue related installation services straightline basis contracted customer relationship generally ranges two twenty years termination revenue recognized customer discontinues service prior end contract period previously received consideration revenue recognition deferred termination revenue also recognized customers made early termination payments us settle contractually committed purchase amounts customer longer expects meet renegotiate contract customer result longer obligated provide services consideration previously received revenue recognition deferred 2006 2005 2004 included receipts bankruptcy claim settlements former customers termination revenue termination revenue reported manner original service provided amounted 83 million 121 million 29 million 2006 2005 2004 respectively accounts receivable reserves sales credit reserves reporting period must make estimates potential future sales credits issued respect current revenue related billing errors service interruptions customer disputes recorded reduction revenue analyze historical credit activity changes customer demand related current billing service interruptions evaluating credit reserve requirements reserve known billing errors service interruptions incurred review customer disputes reserve believe valid claims also estimate sales credit reserve related unknown billing errors disputes based historical credit activity determination general sales credit customer dispute credit reserve requirements involves significant estimation assumption allowance doubtful accounts reporting period must make estimates potential losses resulting inability customers make required payments analyze reserve requirements using several factors including length time particular customer’s receivables past due changes customer’s creditworthiness customer’s payment history length customer’s relationship us current economic climate current industry trends specific reserve requirement review performed customer accounts larger balances reserve analysis also performed accounts subject specific review utilizing factors previously mentioned due current economic climate competitive environment telecommunications sector volatility financial strength particular customer segments including resellers clecs collectability receivables credit worthiness customers may become difficult unpredictable changes financial viability significant customers worsening economic conditions changes ability meet service level requirements may require changes estimate recoverability receivables revenue previously unrecognized recovered litigation negotiations settlements judgments recognized termination revenue period collected determination specific general allowance doubtful accounts reserve requirements involves significant estimations assumptions property equipment property equipment stated preliminary estimated fair values effective date based reorganization value purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress reclassified property equipment date project complete certain internal direct labor costs constructing installing property equipment capitalized direct labor determined based upon core group field engineers ip engineers reflects capitalized salary plus related benefits based upon allocation time capitalized noncapitalized projects individuals’ salaries considered costs directly associated construction certain infrastructure customer build outs salaries related benefits nonengineers supporting staff part engineering departments considered part pool subject capitalization capitalized direct labor amounted 51 million 47 million 38 million years ended december 31 2006 2005 2004 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease estimated useful lives company’s property equipment follows property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income loss time required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances fully depreciate remaining carrying value network infrastructure removed rendered unusable capitalize new fiber associated construction costs relocation placed service reduced reimbursements received costs capitalized relocation costs amounting 89 million 20 million 08 million years ended december 31 2006 2005 2004 respectively fully depreciated remaining carrying value network infrastructure rendered unusable amounting 16 million 04 million 01 million original cost basis years ended december 31 2006 2005 2004 respectively accordance sfas 144 “accounting impairment disposal longlived assets” periodically evaluate recoverability longlived assets evaluate assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value asset impairment losses recorded years ended december 31 2006 2005 2004 asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” recognize fair value liability asset retirement obligation period incurred reasonable estimate fair value made asset retirement obligations related decommissioning electronics leased facilities removal certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities asset retirement obligations generally recorded “other longterm liabilities” capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 56 million 54 million december 31 2006 2005 respectively years 31 million included “accrued expenses” 25 million 23 million respectively included “other longterm liabilities” accretion expense included “interest expense” amounted 02 million years ended december 31 2006 2005 2004 foreign currency translation transactions functional currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect applicable balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive loss foreign exchange transaction gains losses generally included “other income” consolidated statements operations deferred taxes current deferred income taxes associated valuation allowances impacted events transactions arising normal course business well special nonrecurring items assessment appropriate amount classification income taxes dependent several factors including estimates timing realization deferred income tax income deductions actual realization deferred tax assets liabilities may materially differ estimates result changes tax laws well unanticipated future transactions impacting related income tax balances assessment valuation allowance deferred tax assets based weight available evidence portion deferred tax asset realized deferred tax liabilities first applied deferred tax assets reducing need valuation allowance future utilization remaining net deferred tax asset would require ability forecast future earnings based past performance resulting net loss positions sufficient evidence exists require valuation allowance net deferred tax asset balance result bankruptcy estimates made impact deferred tax balances factors resulting estimation include limited fresh start valuation assets liabilities implications cancellation indebtedness income various factors stockbased compensation september 8 2003 adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 9 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k fair value provisions sfas 123 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards historical basis determining volatility expected life assumptions model due limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period recognize related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation plan reorganization outstanding stock options cancelled effective january 1 2006 adopted sfas 123r “sharebased payment” “sfas 123r” using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 permitted companies estimate forfeitures recognize impact forfeitures occur recognized impact forfeitures occurred upon adoption sfas 123 adoption sfas 123r resulted change accounting treatment material impact consolidated financial statements following assumptions used company calculate weighted average fair value stock options granted description stockbased compensation programs see note 9 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k results operations year ended december 31 2006 compared year ended december 31 2005 consolidated results millions nmnot meaningful use term “consolidated” describe total results two geographic segments us uk others throughout document unless otherwise noted amounts discussed consolidated amounts revenue consolidated revenue 2006 2367 million compared 2197 million 2005 increase 170 million 77 revenue us operations increased 135 million 66 2041 million 2005 2176 million 2006 principal reason increase due continued growth fiber services metro transport services 2006 us revenue fiber services increased 101 million 92 1102 million 2005 1203 million 2006 revenue metro transport services increased 133 million 893 149 million 2005 282 million 2006 increases offset decrease data center revenue 45 million 155 290 million 2005 245 million 2006 due sale domestic data centers fourth quarter 2006 four october 2006 one november 2006 decrease termination revenue 38 million 314 121 million 2005 83 million 2006 revenue foreign operations primarily uk increased 35 million 224 156 million 2005 191 million 2006 due primarily focus core business strategic investment infrastructure costs revenue consolidated costs revenue 2006 1219 million compared 1192 million 2005 increase 27 million 23 consolidated costs revenue percentage revenue 515 2006 compared 543 2005 resulting consolidated gross profit margin 485 457 2006 2005 respectively costs revenue us operations 1136 million 1124 million 2006 2005 respectively increase 12 million 11 costs revenue foreign operations 83 million 68 million 2006 2005 respectively increase 15 million 221 increase costs revenue represents increases variable costs associated revenue streams substantial increase revenue significant percentage costs revenue fixed increased slower rate revenue additionally spreading costs larger revenue base improved gross profit margins 2006 compared 2005 selling general administrative expenses “sga consolidated sga 2006 711 million compared 696 million 2005 increase 15 million 22 sga percentage revenue 300 2006 compared 317 2005 us sga 634 million 2006 compared 631 million 2005 increase 03 million 05 sga us operations 2006 compared 2005 primarily result increase audit fees financial consulting fees 24 million 21 million respectively attributable extra costs incurred efforts become timely financial reporting net increase general administrative expenses 08 million increases partially offset reduction domestic transaction taxes 50 million attributable billing certain taxes customers commenced first quarter 2006 sga foreign operations 77 million 65 million 2006 2005 respectively increase 12 million 185 due primarily increase payroll related expenses 12 million ii increase professional fees 13 million 07 million related extra costs incurred efforts become timely financial reporting become compliant requirements sarbanesoxley act 2002 increases partially offset decrease operating costs 12 million depreciation amortization consolidated depreciation amortization 2006 472 million compared 431 million 2005 increase 41 million 95 consolidated depreciation amortization percentage revenue 199 2006 compared 196 2005 depreciation amortization increased result additions property equipment 2006 full year effect depreciation property equipment acquired throughout 2005 increase partially offset elimination depreciation expense associated property equipment sold disposed 2005 gain sales data centers gain sales domestic data centers 482 million 2006 represented excess proceeds received sale totaling 431 million plus reversal deferred fair value rent liability sfas 13 liability associated related parties totaling 280 million 60 million respectively carrying value related assets sold 2005 loss 13 million incurred sale domestic data center interest income interest income substantially earned us increased 13 million 24 million 2006 increase 11 million 846 primarily due additional funds available investment following sales domestic data centers fourth quarter 2006 increase shortterm interest rates 2006 interest expense interest expense substantially incurred us includes interest related capital lease obligation interest accrued certain tax liabilities interest accretion relating certain asset retirement obligations interest expense decreased 59 million 58 million 2006 decrease 01 million 17 primarily due decrease interest expense fair market value rent liabilities due reduction balances primarily due sale domestic data centers income net income net composed primarily nonrecurring transactions comparative trend perspective consolidated income net 21 million 2006 compared 109 million 2005 decrease 88 million us income net loss 14 million 2006 compared net gain 38 million 2005 decrease 52 million foreign operations income net gain 35 million 2006 compared net gain 71 million 2005 decrease 36 million 2006 consolidated income net comprised primarily gains arising reversal certain tax liabilities 32 million gain foreign currency 20 million gains 15 million offset losses disposition property equipment 46 million 2005 consolidated income net comprised noncash gain settlement contractual obligation 90 million gain settlement lease 35 million offset loss foreign currency 12 million losses totaling 04 million loss discontinued operations net taxes discussed note 7 “discontinued operations dispositions” accompanying consolidated financial statements included elsewhere annual report form 10k sold liquidated six european subsidiaries years ended december 31 2005 2004 operating results entities well gain loss sale disposition included loss discontinued operations net taxes related statements operations periods presented additionally operating results abovenet uk sold november 2006 included loss discontinued operations net taxes periods presented results operations year ended december 31 2005 compared year ended december 31 2004 consolidated results millions nmnot meaningful revenue consolidated revenue 2005 2197 million compared 1893 million 2004 increase 304 million 161 revenue us operations increased 292 million 167 1749 million 2004 2041 million 2005 primarily attributable increase fiber services revenue 99 million 99 increase metro transport services 35 million 307 increase data center revenues 49 million 203 increase ip revenue 09 million 41 additionally termination revenue increased 92 million 29 million 2004 121 million 2005 primarily result settlements received former customers increases offset decrease managed services 21 million 356 resulted reduced focus business revenue foreign operations primarily uk increased 12 million 83 144 million 2004 156 million 2005 due primarily focus core business strategic investment infrastructure costs revenue consolidated costs revenue 2005 1192 million compared 1122 million 2004 increase 70 million 62 consolidated costs revenue percentage revenue 543 2005 compared 593 2004 resulting consolidated gross profit margin 457 407 2005 2004 respectively costs revenue us operations 1124 million 1022 million 2005 2004 respectively increase 102 million 100 costs revenue foreign operations 68 million 100 million 2005 2004 respectively decrease 32 million 320 increase consolidated gross profit margin attributable improved efficiencies continued bring variable expenses line level operations increase costs revenue represents increases variable costs associated revenue streams substantial increase revenue significant percentage costs revenue fixed increased slower rate revenue additionally spreading costs larger revenue base improved gross profit margins 2005 compared 2004 sga consolidated sga 2005 696 million compared 717 million 2004 decrease 21 million 29 sga percentage revenue 317 2005 compared 379 2004 us sga 631 million 2005 compared 650 million 2004 decrease 19 million 29 decrease sga us operations 2005 compared 2004 primarily attributable decrease insurance premiums 29 million ii decrease payroll related expenses 17 million iii decrease domestic transaction taxes 14 million iv decrease legal fees 11 million decreases substantially offset increase commission expense 38 million ii increase audit fees 16 million sga foreign operations 65 million 67 million 2005 2004 respectively decrease 02 million 30 depreciation amortization consolidated depreciation amortization 2005 431 million compared 408 million 2004 increase 23 million 56 consolidated depreciation amortization percentage revenue 196 2005 compared 216 2004 increase depreciation amortization attributable full year effect depreciation expense associated property equipment added 2004 depreciation associated additions purchased throughout 2005 increase partially offset elimination depreciation expense associated property equipment sold disposed 2004 2005 interest income interest income substantially earned us increased 11 million 13 million 2005 increase 02 million 182 due primarily increase cash available investing shortterm interest bearing investments interest expense interest expense substantially incurred us decreased 111 million 59 million 2005 decrease 52 million 468 resulted two factors interest expense incurred 2005 respect term note repaid full august 10 2004 thus outstanding part 2004 ii reduction interest expense incurred fair value deferred rent balance due sale data center first quarter 2005 purchase land building data center operated eliminating related fair value deferred rent balance thus reducing balance upon interest expense incurred second quarter 2005 income net income net composed primarily nonrecurring transactions comparative trend perspective consolidated income net 109 million 2005 compared 92 million 2004 increase 17 million 185 us income net gain 38 million 2005 compared net gain 81 million 2004 decrease 43 million 531 foreign operations income net gain 71 million 2005 compared net gain 11 million 2004 increase 60 million 2005 consolidated income net comprised noncash gain settlement contractual obligation 90 million gain settlement lease 35 million offset loss foreign currency 12 million losses totaling 04 million 2004 consolidated income net comprised noncash settlement obligation resulting gain 75 million gain foreign currency 06 million gains totaling 11 million loss discontinued operations net taxes upon emergence bankruptcy september 2003 management decided sell dispose certain european operations accordingly included results operations plus gain loss sale liquidation entities loss discontinued operations net taxes related statements operations periods presented additionally abovenet uk sold november 15 2006 assets liabilities results operations cash flows abovenet uk also treated discontinued operations periods presented liquidity capital resources working capital december 31 2006 174 million compared 58 million december 31 2005 cash balances december 31 2006 707 million compared 459 million december 31 2005 increase 248 million increase working capital december 31 2006 attributable primarily proceeds generated sales property equipment totaling 432 million net cash generated operating activities totaling 513 million partially offset cash payments purchases property equipment 717 million net cash provided operating activities 513 million 2006 compared 436 million 2005 net cash provided operating activities 2006 resulted primarily add back noncash items deducted determination net income principally depreciation amortization 472 million stockbased compensation expense 39 million offset net gain sale data centers 482 million included determination net income net cash provided operating activities 2005 similarly resulted primarily add back noncash expenses deducted determination net income principally depreciation amortization expense 431 million stockbased compensation expense 40 million increase deferred revenue longterm liabilities 87 million partially offset noncash gain settlement liabilities 90 million gain leased asset termination 35 million net cash used investing activities 2006 272 million compared 420 million 2005 net cash used investing activities 2006 reflects proceeds sales property equipment totaling 432 million 431 million related sales domestic data centers proceeds sale stock abovenet uk 13 million offset cash used purchase property equipment totaling 717 million purchase property equipment year relates capital required connect new customers build infrastructure net cash used investing activities 2005 represented cash utilized purchase property equipment 420 million similar purposes net cash used financing activities 10 million 2006 reflects change restricted cash equivalents 11 million principal payment capital lease obligation 01 million offset proceeds exercise warrants 02 million net cash used financing activities 11 million 2005 reflects change restricted cash equivalents 05 million purchase treasury stock 05 million principal payment capital lease obligation 01 million 2007 generated cash operations sufficient fund operating expenses 2007 capital expenditures exceeded net cash generated operations thus reducing liquidity additionally december 2007 connection delivery restricted stock units certain executives employees purchased executives employees stock total 97 million fund certain estimated tax obligations see item 11 “executive compensation” note 15 “subsequent events restricted stock units” accompanying consolidated financial statements included elsewhere annual report form 10k expect cash operations continue exceed operating expenses plan continue fund portion future capital projects existing business growth net cash operations february 29 2008 closed 60 million senior secured credit facility “credit facility” comprised 18 million revolving working capital line “revolver” ii 24 million term loan “term loan” iii 18 million delayed draw term loan “delayed draw term loan” available closing date including 270th day thereafter credit facility matures fifth anniversary closing date february 28 2013 credit facility secured substantially assets paid 09 million upfront fees lenders 03 million financial advisors assisted us obtaining credit facility ability draw upon available commitments revolver subject compliance covenants contained credit agreement continued ability make certain representations warranties among things covenants restrict ability pay dividends limit annual capital expenditures 2008 2009 2010 require maintain minimum 20 million cash deposits times provide net total funded debt ratio cannot time exceed specified amount require maintain minimum consolidated fixed charges coverage ratio april 30 2008 24 million outstanding credit facility believe existing cash operating activities funds available credit facility sufficient fund operating expenses planned capital expenditures liquidity requirements including liability arising gvn litigation least second quarter 2009 2008 expect cash operations sufficient fund operating requirements including settlement gvn lawsuit see item 3 “legal proceedings” note 15 “subsequent events litigation” accompanying consolidated financial statements additionally expect cash excess operating requirements combined proceeds borrowed credit facility sufficient fund capital requirements corporate infrastructure customer buildout pursuant growth strategy addition future may consider making acquisitions companies product lines support growth strategy may finance acquisition companies product lines existing cash balances borrowings banks institutional lenders andor public private offerings debt andor equity securities cannot provide assurance funds available us favorable terms contractual obligations certain facilities equipment leased noncancelable operating capital leases additionally discussed certain longterm obligations rightsofway franchise fees building access fees following schedule fiscal year future minimum rental payments required current operating leases capital lease contractual arrangements december 31 2006 measured december 31 2006 excluded table capital commitments relate 2007 totaled 180 million december 31 2006 segment results segmented according groupings based geography united states united kingdom others united states united kingdom others nmnot meaningful credit risk financial instruments potentially subject us concentration credit risk consist principally temporary cash investments accounts receivable enter financial instruments trading speculative purposes auction rate notes place cash equivalents shortterm investment instruments high quality financial institutions us uk trade receivables unsecured geographically dispersed throughout us uk include large small corporate entities spanning numerous industries perform ongoing credit evaluations customers’ financial condition place cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits offbalance sheet arrangements offbalance sheet arrangements operating leases participate transactions generate relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities “spes” would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes inflation believe business impacted inflation degree general economy recently issued accounting pronouncements june 2006 fasb issued interpretation 48 “accounting uncertainty income taxes interpretation sfas 109” “interpretation 48” interpretation clarifies accounting uncertainty income tax recognized enterprise’s financial statements accordance sfas 109 “accounting income taxes” interpretation prescribed recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken income tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition interpretation effective fiscal years beginning december 15 2006 currently evaluating impact adopting interpretation 48 june 2006 emerging issues task force “eitf” ratified consensus eitf 063 “how taxes collected customers remitted governmental authorities” presented income statement “eitf 063” eitf 063 requires companies disclose accounting policies regarding gross net presentation certain taxes within scope eitf 063 taxes assessed governmental authority directly imposed revenueproducing transaction seller customer may include limited sales use value added excise taxes addition taxes significant presented gross basis amounts taxes disclosed eitf 063 effective quarterly reporting period ended march 31 2007 impact financial position results operations policy record taxes within scope eitf 063 net basis september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” sfas no157 clarifies fair value amount would exchanged sell asset transfer liability orderly transaction market participants statement also requires fair value measurement technique include adjustment risks inherent particular valuation technique andor risks inherent inputs model market participants would also include adjustment provisions sfas 157 effective fiscal periods beginning november 15 2007 applied prospectively currently evaluating impact adopting sfas 157 september 2006 staff sec issued staff accounting bulletin “sab” 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” sab 108 provides guidance consideration effects prior year misstatements quantifying current year misstatements purpose determining whether current year’s financial statements materially misstated sab 108 effective fiscal years ending november 15 2006 company adopted provisions sab 108 december 31 2006 required adoption sab 108 material impact consolidated financial position results operations cash flows february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” “sfas 159” sfas 159 gives entities option carry financial assets liabilities fair value changes fair value recorded earnings statement effective first quarter fiscal 2009 expected material impact consolidated financial position results operations cash flows february 2008 fasb issued fasb staff position fas 1572 “fsp fas 1572” fsp fas 1572 permits delay effective date sfas 157 fiscal years beginning november 15 2008 nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis least annually delay intended allow fasb constituents additional time consider effect various implementation issues arisen may arise application sfas 157 item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read together consolidated financial statements related notes appearing elsewhere annual report form 10k executive summary overview provide data transport services primarily 17 major metropolitan markets us four europe services include highbandwidth fiberoptic connectivity solutions primarily large corporate enterprise clients communication carriers large bandwidth transport requirements including fortune 1000 ftse 500 companies well governmental entities us europe components operating income revenue costs revenue selling general administrative expenses depreciation amortization description components reporting operating income years ended december 31 2010 2009 2008 shown consolidated statements operations included elsewhere annual report form 10k demand highbandwidth data transport services continues increase believe experience provision services customer base robust extensive network enable us take advantage growing demand although competitive landscape industry challenging constantly shifting believe well positioned continued growth future strategy see item 1 “business strategy” discussion business strategy key performance indicators senior management reviews group financial nonfinancial performance metrics connection management business metrics facilitate timely effective communication results key decisions allowing management react quickly changing requirements changes key performance indicators key financial indicators use include cash flow monthly expense analysis new customer installations net new revenue booked capital committed expended net revenue attrition define net revenue attrition reduction monthly recurring revenue “mrr” customers net decreases mrr result terminations price declines decreases offset increases divided total revenue excluding contract termination revenue given period important nonfinancial performance metrics measure headcount ip traffic growth installation intervals network service performance levels manage employee headcount changes ensure sufficient resources available service customers control expenses employees categorized managed within integrated groups sales operations engineering finance legal human resources worldwide headcount 692 december 31 2010 598 employed us 90 uk one netherlands germany france japan 2010 highlights consolidated revenue increased 496 million 138 3601 million year ended december 31 2009 4097 million year ended december 31 2010 included 196 million increase domestic metro services additionally us revenue fiber infrastructure wan services increased 123 million 137 million respectively year ended december 31 2010 compared year ended december 31 2009 consolidated revenue includes contract termination revenue 27 million 61 million year ended december 31 2010 compared 72 million year ended december 31 2009 revenue foreign operations primarily uk increased 51 million year ended december 31 2010 compared year ended december 31 2009 year ended december 31 2010 generated operating income 1070 million compared operating income 949 million year ended december 31 2009 net income 694 million year ended december 31 2010 compared net income 2816 million year ended december 31 2009 december 31 2010 616 million unrestricted cash compared 1653 million unrestricted cash december 31 2009 decrease liquidity 1037 million decrease cash december 31 2010 primarily attributable payment 1290 million pursuant special cash dividend 500 per share plus cash used purchases property equipment 1357 million debt principal repayments 76 million partially offset cash generated operating activities 1628 million plus cash provided exercise stock purchase warrants options purchase shares common stock totaling 62 million november 2010 received commitment suntrust bank 250 million secured revolving credit facility closed january 2011 year ended december 31 2010 cash flow generated operating activities increased compared 2009 result improvement operating results described believe based business plan existing cash operating activities funds available 250 million secured revolving credit facility sufficient fund operations planned capital expenditures liquidity requirements least march 31 2012 significant continuous judgment management required determining provision income tax deferred tax assets liabilities related valuation allowance established deferred tax assets part evaluation deferred tax assets fourth quarter 2010 recognized noncash tax benefit 73 million benefit related partial release valuation allowances previously established uk total valuation allowance respect deferred tax assets decreased 77 million 2010 comprised reversal 73 million described 10 million due future reduction statutory tax rates uk partially offset 06 million attributable foreign currency translation 2011 outlook believe based upon contracted projects awaiting delivery customers sales pipeline continue add revenue base 2011 access financing 250 million secured revolving credit facility needed sales orders year ended december 31 2010 higher sales orders year ended december 31 2009 net revenue attrition previously defined year ended december 31 2010 line net revenue attrition year ended december 31 2009 cannot predict net revenue attrition 2011 revenue derived fixed term customer contracts meaningful portion revenue generated orders past contractual expiration date provide services billed monthtomonth basis extent fixed term contractual revenue renewed monthtomonth revenue extended put new fixed term contract revenue growth cash flow may negatively affected early 2010 announced number growth initiatives included expansion services several new markets us europe included connecting miami long haul network opening denver metro market providing certain services leased fiber paris amsterdam frankfurt expect begin earn revenue markets 2011 2010 also increased investments customer capital spent fulfill customer service orders laterals customer locations including enterprise locations data centers backbone network infrastructure investments existing markets order extend reach networks improve services existing prospective customers increase revenue opportunities 2011 continue make investments customer capital infrastructure increase reach networks revenue derived leasing fiber optic data transport infrastructure provision data transport colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income fixed contract term substantial portion revenue derived multiyear contracts services provide often required make initial outlay capital extend network purchase equipment provision services customers terms contracts customer required pay termination fee contractual damages decline contract term contract terminated customer without basis expiration ensure recover initial capital investment plus acceptable return also derive revenues annual monthtomonth contracts costs revenue costs revenue primarily include following real estate expenses operational sites ii costs incurred operate networks licenses rightofway permit fees professional fees related networks iii third party telecommunications fiber conduit expenses iv repairs maintenance costs incurred connection networks v employeerelated costs relating operation networks selling general administrative expenses “sga” sga primarily consist employeerelated costs salaries benefits employees directly attributable operation networks addition stockbased compensation expenses incentive bonus expenses employees ii real estate expenses administrative sites iii professional consulting audit fees iv certain taxes income taxes including property taxes trust fundrelated taxes passed customers v regulatory costs insurance telecommunications costs professional fees license maintenance fees internal software hardware depreciation amortization depreciation amortization consists ratable measurement use property equipment depreciation amortization network assets commences assets placed service provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted us “us gaap” preparation financial statements conformity us gaap requires management make judgments estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expenses reporting period management continually evaluates judgments estimates assumptions based historical experience available information following discussion items within consolidated financial statements involve significant judgments assumptions uncertainties estimates involved areas considered critical require high levels subjectivity judgment account highly uncertain matters actual results events differ materially contemplated management making estimates impact consolidated financial statements could material full description significant accounting policies see note 2 “basis presentation significant accounting policies” accompanying consolidated financial statements included elsewhere annual report form 10k fresh start accounting emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires us allocate reorganization value assets liabilities based upon estimated fair values accordance fasb asc 85210 developed set financial projections utilized expert assist us estimating fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries 3 calculation enterprise value based upon future cash flows projections adopting fresh start accounting resulted material adjustments historical carrying values assets liabilities reorganization value allocated assets liabilities based upon fair values engaged independent appraiser assist us determining fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination comprehensive loss accumulated deficit accounts revenue recognition follow sec staff accounting bulletin sab 101 “revenue recognition financial statements” known fasb asc 60510 amended sec sab 104 “revenue recognition” also known fasb asc 60510 revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income fixed contract term prior october 1 2009 generally amortized revenue related installation services straightline basis contracted customer relationship two twenty years fourth quarter 2009 completed study historic customer relationship period result commencing october 1 2009 began amortizing revenue related installation services straightline basis generally estimated customer relationship period generally ranging three twenty years contract termination revenue recognized customer discontinues service prior end contract period previously received consideration revenue recognition deferred contract termination revenue also recognized customers made early termination payments us settle contractually committed purchase amounts customer longer expects meet renegotiate discontinue contract customer result longer obligated provide services consideration previously received revenue recognition deferred additionally include receipts bankruptcy claim settlements former customers contract termination revenue received contract termination revenue amounted 27 million 39 million 154 million 2010 2009 2008 respectively accounts receivable reserves sales credit reserves reporting period make estimates potential future sales credits issued respect current revenue related service interruptions customer disputes recorded reduction revenue analyze historical credit activity changes customer demand related current billing service interruptions evaluating credit reserve requirements reserve known service interruptions incurred review customer disputes reserve believe valid claims also estimate sales credit reserve related unknown billing errors disputes based historical credit activity determination general sales credit customer dispute credit reserve requirements involves significant estimations assumptions allowance doubtful accounts reporting period make estimates potential losses resulting inability customers make required payments analyze reserve requirements using several factors including length time particular customer’s receivables past due changes customer’s creditworthiness customer’s payment history length customer’s relationship us current economic climate current industry trends specific reserve requirement review performed customer accounts larger balances reserve analysis also performed accounts subject specific review utilizing factors previously mentioned changes financial viability significant customers worsening economic conditions changes ability meet service level requirements may require changes estimate recoverability receivables revenue previously unrecognized recovered litigation negotiations settlements judgments recognized termination revenue period collected determination specific general allowance doubtful accounts reserve requirements involves significant estimations assumptions property equipment property equipment owned effective date stated estimated fair values effective date based reorganization value net accumulated depreciation amortization incurred since effective date purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress part network infrastructure assets described included property equipment respective balance sheets december 31 2010 december 31 2009 540 million 269 million respectively construction progress certain internal direct labor costs constructing installing property equipment capitalized direct labor determined based upon core group project managers field engineers network infrastructure engineers equipment engineers capitalized direct labor based upon time spent capitalized projects consists salary plus related benefits individuals’ capitalized labor costs directly associated construction installation network infrastructure equipment customer installations salaries related benefits nonengineers supporting staff part operations engineering departments considered part pool subject capitalization capitalized direct labor amounted 100 million 114 million 107 million years ended december 31 2010 2009 2008 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful life improvement term lease estimated useful lives property equipment follows network infrastructure assets storage huts except risers 5 years 20 years hvac power equipment 12 20 years software computer equipment 3 4 years transmission ip equipment 5 7 years furniture fixtures equipment 3 10 years leasehold improvements lesser estimated useful life improvement term lease property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income time required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances fully depreciate remaining carrying value network infrastructure removed rendered unusable capitalize costs new fiber associated construction placed service certain circumstances local municipality agency responsible amounts record share relocation costs property equipment record third party portion costs accounts receivable capitalized relocation costs amounting 15 million 31 million 26 million years ended december 31 2010 2009 2008 respectively fully depreciated remaining carrying value network infrastructure rendered unusable original cost basis totaled 021 million 014 million net book value basis year ended december 31 2010 original cost basis totaled 03 million 02 million net book value basis years ended december 31 2009 2008 extent relocation requires movement existing network infrastructure another location related costs included results operations accordance statement financial accounting standards “sfas” 34 “capitalization interest cost” known fasb asc 83520 interest certain construction projects would capitalized amounts considered immaterial accordingly amounts capitalized years ended december 31 2010 2009 2008 accordance sfas 144 “accounting impairment disposal longlived assets” known fasb asc 3601035 periodically evaluate recoverability longlived assets evaluate assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value assets consider various factors determine impairment test necessary factors include consideration overall economic climate technological advances respect equipment strategy capital planning certain operational issues since june 30 2006 event occurred business environment changed trigger impairment test assets revenue service operations also consider removal assets network triggering event performing impairment test item removed service unless redeployed may little future cash flows related performed annual physical counts assets revenue service operations eg inventory primarily spare parts around september 30 2010 2009 assistance valuation report assets inventory prepared independent third party basis consistent sfas 157 “fair value measurements” known fasb asc 82010 pursuant fasb asc 3601035 determined fair value certain assets less carrying value accordingly recorded provisions impairment 05 million year ended december 31 2010 04 million years ended december 31 2009 2008 additionally december 31 2010 recorded 15 million provision impairment respect discreet group assets certain operational issues company also recorded provision equipment impairment 08 million year ended december 31 2009 record loss value certain equipment eventually sold unaffiliated third party see note 6 “change estimate” accompanying consolidated financial statements included elsewhere annual report form 10k asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” known fasb asc 41020 recognize fair value liability asset retirement obligation period incurred reasonable estimate fair value made asset retirement obligations related decommissioning removal equipment restoration leased facilities removal certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities asset retirement obligations generally recorded “other longterm liabilities” capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 79 million 72 million december 31 2010 2009 respectively 43 million 38 million respectively included “accrued expenses” 36 million 34 million respectively included “other longterm liabilities” dates accretion expense included “interest expense” amounted 028 million year ended december 31 2010 027 million years ended december 31 2009 2008 derivative financial instruments utilized may time future utilize derivative financial instruments known interest rate swaps “derivatives” mitigate exposure interest rate risk purchased first interest rate swap august 4 2008 hedge interest rate initial 240 million original principal term loan secured credit facility purchased second interest rate swap november 14 2008 hedge interest rate additional 120 million original principal term loan secured credit facility provided suntrust bank see note 9 “longterm debt” accompanying consolidated financial statements included elsewhere annual report form 10k accounted derivatives sfas 133 “accounting derivative instruments hedging activities” known fasb asc 815 fasb asc 815 requires derivatives recognized financial statements measured fair value regardless purpose intent holding policy historically entered derivatives trading purposes speculation based criteria defined fasb asc 815 interest rate swaps considered cash flow hedges 100 effective accordingly changes fair value derivatives recorded period accumulated comprehensive loss changes fair value derivatives reported accumulated comprehensive loss reclassified earnings period earnings impacted variability cash flows hedged item ineffective portion hedges recognized current period earnings unrealized net loss recorded accumulated comprehensive loss december 31 2010 2009 06 million 12 million respectively interest rate swaps marktomarket value cash flow hedges recorded current assets current liabilities noncurrent assets longterm liabilities applicable offsetting gains losses accumulated comprehensive loss january 1 2009 adopted sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” known fasb asc 81510 fasb asc 81510 changes disclosure requirements derivatives hedging activities entities required provide enhanced disclosures entity uses derivatives ii derivatives related hedged items accounted fasb asc 815 iii derivatives related hedged items affect entity’s financial position cash flows minimize credit risk relating counterparties derivatives transacting multiple high quality counterparties thereby limiting exposure individual counterparties monitoring financial condition counterparties derivatives recorded consolidated balance sheets fair value accounting gains losses resulting changes fair value derivatives depends use derivative whether qualifies hedge accounting accordance fasb asc 815 december 31 2010 net interest rate swap derivative liabilities 06 million included “accrued expenses” consolidated balance sheet december 31 2009 net interest rate swap derivative liabilities 12 million included “other longterm liabilities” consolidated balance sheet derivatives recorded fair value consolidated balance sheets december 31 2010 december 31 2009 consisted following derivative liabilities two interest rate swap agreements original three year terms included “accrued expenses” company’s consolidated balance sheet december 31 2010 “other longterm liabilities” company’s consolidated balance sheet december 31 2009 interest rate swap agreements notional amounts provide indication extent involvement agreements represent exposure market risk following table shows notional amount outstanding maturity date weighted average receive pay rates interest rate swap agreements december 31 2010 interest expense agreements respective debt instruments hedge recorded net effective interest rate hedged transaction notional amounts swap arrangements since reduced amounts corresponding reductions outstanding principal balances swap agreements settled january 2011 connection repayment term loans secured credit facility closing 250 million secured revolving credit facility cost 05 million settle swap agreements included “other expenses” consolidated statement operations three months ended march 31 2011 fair value financial instruments adopted sfas 157 “fair value measurements” “sfas 157” known fasb asc 82010 financial assets liabilities effective january 1 2008 pronouncement defines fair value establishes framework measuring fair value requires expanded disclosures fair value measurements fasb asc 82010 emphasizes fair value marketbased measurement entityspecific measurement defines fair value price would received sell asset transfer liability orderly transaction market participants measurement date fasb asc 82010 discusses valuation techniques market approach comparable market prices income approach present value future income cash flow cost approach cost replace service capacity asset replacement cost based upon observable unobservable inputs observable inputs reflect market data obtained independent sources unobservable inputs reflect market assumptions fasb asc 82010 utilizes fair value hierarchy prioritizes inputs fair value measurement techniques three broad levels level 1 observable inputs quoted prices identical assets liabilities active markets level 2 observable inputs quoted prices directly indirectly observable asset liability including quoted prices similar assets liabilities active markets quoted prices similar identical assets liabilities markets active modelderived valuations whose inputs observable whose significant value drivers observable level 3 unobservable inputs reflect reporting entity’s assumptions investment overnight money market institutional funds amounted 482 million 1541 million december 31 2010 2009 respectively included cash equivalents accompanying balance sheets classified level 1 asset party two interest rate swaps utilized modify interest rate risk recorded marktomarket value interest rate swap contracts 06 million included “accrued expenses” consolidated balance sheet december 31 2010 12 million included “other longterm liabilities” consolidated balance sheet december 31 2009 used third parties value interest rate swap agreements december 31 2010 december 31 2009 well market analysis determine fair value fair value interest rate swap contracts classified level 2 liabilities consolidated balance sheets include following financial instruments shortterm cash investments trade accounts receivable trade accounts payable note payable believe carrying amounts financial statements approximate fair value financial instruments due relatively short period time origination instruments expected realization interest rates approximate current market rates swap agreements settled january 2011 connection repayment term loans secured credit facility closing 250 million secured revolving credit facility cost 05 million settle swap agreements included “other expenses” consolidated statement operations three months ended march 31 2011 concentration credit risk financial instruments potentially subject us concentration credit risk consist principally shortterm cash investments accounts receivable enter financial instruments trading speculative purposes cash equivalents invested investmentgrade shortterm investment instruments high quality financial institutions trade receivables unsecured geographically dispersed single customer accounts greater 10 consolidated revenue accounts receivable net perform ongoing credit evaluations customers’ financial condition allowance noncollection accounts receivable based upon expected collectability accounts receivable place cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits foreign currency translation transactions functional currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect applicable balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive income foreign exchange transaction gains losses generally included “other income expense net” consolidated statements operations income taxes account income taxes accordance sfas 109 “accounting income taxes” known fasb asc 740 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis net operating losses tax credit carryforwards tax contingencies deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled subject audits various taxing authorities audits may result proposed assessments ultimate resolution results us owing additional taxes required establish reserves fasb interpretation 48 “accounting uncertainty income taxes” known fasb asc 74010 believe uncertainty respect certain positions may succeed realizing tax benefit believe tax return positions appropriate supportable relevant tax law evaluated tax positions items uncertainty accordance fasb asc 74010 determined tax positions highly certain within meaning fasb asc 74010 believe estimates assumptions used support evaluation tax benefit realization reasonable accordingly adjustments made consolidated financial statements years ended december 31 2010 2009 deferred taxes current deferred income taxes associated valuation allowances impacted events transactions arising normal course business well special nonrecurring items assessment appropriate amount classification income taxes dependent several factors including estimates timing realization deferred income tax income deductions actual realization deferred tax assets liabilities may materially differ estimates result changes tax laws well unanticipated future transactions impacting related income tax balances assessment valuation allowance deferred tax assets based likelihood portion deferred tax assets realized future periods weight available evidence considered determining realizability deferred tax assets deferred tax liabilities first applied deferred tax assets reducing need valuation allowance believe sufficient evidence exists release balance valuation allowance december 31 2010 part evaluation deferred tax assets fourth quarter 2010 recognized tax benefit 73 million december 31 2010 relating reduction certain valuation allowances established uk part evaluation deferred tax assets fourth quarter 2009 recognized tax benefit 1830 million december 31 2009 relating reduction certain valuation allowances previously established us uk believe likely utilize deferred tax assets reduce eliminate tax payments future periods reduction valuation allowances effect increasing net income 73 million 1830 million years ended december 31 2010 2009 respectively evaluations encompassed reviews recent history profitability us uk past three years ii reviews internal financial forecasts demonstrating expected capacity utilize deferred tax assets review deferred tax assets liabilities quarterly basis part fasb asc 740 review significant continuous judgment management required determining provision income tax deferred tax assets liabilities related valuation allowances established deferred tax assets possible valuation allowances could adjusted necessary stockbased compensation september 8 2003 adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” known fasb asc 71810 sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” also known fasb asc 71810 provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 12 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k fair value provisions sfas 123 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards historical basis determining volatility expected life assumptions model due limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period recognize related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation plan reorganization outstanding stock options cancelled effective january 1 2006 adopted sfas 123r “sharebased payment” “sfas 123r” known fasb asc 718 using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 permitted companies estimate forfeitures recognize impact forfeitures occurred recognized impact forfeitures occurred sfas 123 adoption sfas 123r resulted change accounting treatment material impact consolidated financial statements following assumptions used company calculate weighted average fair value stock options granted description stockbased compensation programs see note 12 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k options purchase shares common stock granted years ended december 31 2010 2009 results operations year ended december 31 2010 compared year ended december 31 2009 consolidated results dollars millions table set forth nmnot meaningful use term “consolidated” describe total results two geographic segments us uk others throughout document unless otherwise noted amounts discussed consolidated amounts net income net income year ended december 31 2010 694 million compared 2816 million year ended december 31 2009 decrease 2122 million primary reason decrease net income 1876 million change net benefit income taxes recognized 2009 compared provision income taxes 345 million total change 2221 million revenue increased 496 million costs support revenue growth also increased costs revenue increased 121 million selling general administrative expenses increased 141 million depreciation amortization increased 113 million additionally income net decreased 16 million revenue consolidated revenue 4097 million year ended december 31 2010 compared 3601 million year ended december 31 2009 increase 496 million 138 revenue us operations increased 445 million 136 3273 million year ended december 31 2009 3718 million year ended december 31 2010 principal reason increase continued growth metro fiber infrastructure wan services continued growth revenue services attributable principally revenue service installations exceeding reductions revenue contract terminations contractual price reductions us revenue metro services increased 196 million 207 948 million year ended december 31 2009 1144 million year ended december 31 2010 us revenue fiber infrastructure services increased 123 million 78 1583 million year ended december 31 2009 1706 million year ended december 31 2010 us revenue wan services increased 137 million 204 670 million year ended december 31 2009 807 million year ended december 31 2010 increases partially offset decrease 11 million 153 revenue includes domestic contract termination revenue 39 million year ended december 31 2009 25 million year ended december 31 2010 revenue foreign operations primarily uk increased 51 million 155 328 million year ended december 31 2009 379 million year ended december 31 2010 primary reason increase due increase provisioning services uk also contributing increase 02 million contract termination revenue earned year ended december 31 2010 contract termination revenue earned uk year ended december 31 2009 translation rate british pound us dollar year substantially costs revenue consolidated costs revenue year ended december 31 2010 1428 million compared 1307 million year ended december 31 2009 increase 121 million 93 consolidated costs revenue percentage revenue 349 year ended december 31 2010 compared 363 year ended december 31 2009 resulting consolidated gross profit margin 651 637 years ended december 31 2010 2009 respectively costs revenue us operations 1296 million 1193 million years ended december 31 2010 2009 respectively increase 103 million 86 increase domestic costs revenue year ended december 31 2010 compared year ended december 31 2009 attributable principally increase 51 million colocation expenses support ip network services increase presence third party data centers ii increase 27 million payrollrelated expenses iii increase 20 million expenses associated third party network costs iv increase 09 million installation costs additionally years ended december 31 2010 2009 include provision impairment 20 million 12 million respectively increases partially offset decrease 09 million repairs maintenance charges cable transmission equipment ii reversal 04 million rightofway expenses three months ended june 30 2010 due previously accrued rightofway expenses result favorable negotiations relevant jurisdiction costs revenue foreign operations 132 million year ended december 31 2010 compared 114 million year ended december 31 2009 increase 18 million 158 increase primarily increases third party network costs colocation expenses repairs maintenance charges leased fiber costs increases payroll related expenses totaling 27 million needed support provisioning services partially offset onetime benefit reduction certain business tax rates fiber valuation office agency uk effective retroactively back 2005 resulting 11 million benefit 2010 previously described translation rate british pound us dollar year substantially selling general administrative expenses “sga” consolidated sga year ended december 31 2010 966 million compared 825 million year ended december 31 2009 increase 141 million 171 sga percentage revenue 236 year ended december 31 2010 compared 229 year ended december 31 2009 us sga 856 million year ended december 31 2010 compared 712 million year ended december 31 2009 increase 144 million 202 sga us operations year ended december 31 2010 compared year ended december 31 2009 increased primarily due increase 58 million domestic payroll payrollrelated expenses 397 million year ended december 31 2009 455 million year ended december 31 2010 attributable increase annual merit increases domestic employees effectuated march 1 2010 increase sales commissions due increase year sales incentive program effect first quarter 2010 ii increase 26 million domestic noncash stockbased compensation expense 88 million year ended december 31 2009 114 million year ended december 31 2010 iii increase 10 million professional fees iv increase 08 million occupancy charges v increase 07 million transaction ad valorem taxes vi increase 34 million operating expenses primarily due increases computer software maintenance 08 million commissions paid third party sales agents related marketing expenses 14 million year ended december 31 2010 sga foreign operations 110 million year ended december 31 2010 compared 113 million year ended december 31 2009 net reduction 03 million 27 foreign operations reported increases payroll related expenses 08 million professional fees 04 million noncash stockbased compensation expense 02 million however increases offset reversal december 31 2009 accrual vat tax obligation totaling 06 million settled fourth quarter year reduction operating expenses depreciation amortization consolidated depreciation amortization 633 million year ended december 31 2010 compared 520 million year ended december 31 2009 increase 113 million 217 consolidated depreciation amortization percentage revenue 155 year ended december 31 2010 compared 144 year ended december 31 2009 increase consolidated depreciation amortization primarily attributable additions property equipment year ended december 31 2010 full period effect depreciation property equipment acquired year ended december 31 2009 ii change reduction estimated useful lives certain property equipment effectuated october 1 2009 january 1 2010 interest income interest income substantially earned us decreased 03 million year ended december 31 2009 01 million year ended december 31 2010 decrease 02 million primarily due decline shortterm interest rates year ended december 31 2010 compared year ended december 31 2009 partially offset increase average balances available investment year interest expense interest expense substantially incurred us includes interest expense borrowed amounts secured credit facility availability fees unused portion secured credit facility amortization debt acquisition costs including upfront fees related secured credit facility interest expense related capital lease obligation interest accrued certain tax liabilities interest outstanding balance deferred fair value rent liabilities established fresh start interest accretion relating asset retirement obligations interest expense 52 million year ended december 31 2010 compared 48 million year ended december 31 2009 increase 04 million 83 increase primarily attributable interest incurred balance delayed draw term loan outstanding 2010 funded december 31 2009 income net income net composed primarily income expense nonrecurring transactions comparative trend perspective consolidated income net 20 million year ended december 31 2010 compared 36 million year ended december 31 2009 reduction 16 million us income net 26 million year ended december 31 2010 compared 27 million year ended december 31 2009 decrease 01 million 37 foreign operations expense income net expense 06 million year ended december 31 2010 compared income net 09 million year ended december 31 2009 change decrease 15 million year ended december 31 2010 consolidated income net comprised gains arising settlement reversal certain tax liabilities 22 million gain settlement insurance claim 03 million gains 03 million partially offset net loss foreign currency 06 million net loss sale disposition property equipment 02 million year ended december 31 2009 consolidated income net comprised gains arising settlement reversal certain tax liabilities 29 million gains foreign currency 19 million gains 01 million offset net loss sale disposition property equipment 13 million provision benefit income taxes recorded provision income taxes 418 million year ended december 31 2010 recognized additional deferred tax benefit 73 million associated reduction valuation allowances previously established respect deferred tax assets uk resulted net tax provision 2010 345 million provision income taxes year ended december 31 2010 calculated effective tax rate based upon pretax book income adjusted permanent differences us uk resulting tax provision 383 million plus provision certain capitalbased state taxes 13 million december 31 2009 recognized 1830 million noncash tax benefits result reducing certain valuation allowances previously established respect deferred tax assets us uk believe likely deferred tax assets utilized reduce eliminate tax payments future periods evaluation encompassed review recent history profitability us uk past three years ii review internal financial forecasts demonstrating expected capacity utilize deferred tax assets additionally based ability fully absorb current book income deferred tax assets ability carryback certain portions losses 2008 2007 recorded current federal benefit income taxes 53 million 2009 also provided 07 million state income taxes 2009 results operations year ended december 31 2009 compared year ended december 31 2008 consolidated results dollars millions table set forth nmnot meaningful use term “consolidated” describe total results two geographic segments us uk others throughout document unless otherwise noted amounts discussed consolidated amounts net income net income year ended december 31 2009 2816 million compared 423 million year ended december 31 2008 increase 2393 million reasons increase net income increases revenue 402 million decrease selling general administrative expenses 80 million change increase income expense net 60 million partially offset increase costs revenue 47 million increase depreciation amortization 37 million significant difference change net income tax benefit 1876 million recorded year ended december 31 2009 net income tax provision 83 million recorded year ended december 31 2008 changes discussed fully revenue consolidated revenue 3601 million year ended december 31 2009 compared 3199 million year ended december 31 2008 increase 402 million 126 revenue us operations increased 391 million 136 2882 million year ended december 31 2008 3273 million year ended december 31 2009 principal reason increase due continued growth metro fiber infrastructure wan services continued growth revenue services attributable principally revenue service installations exceeding reductions revenue contract terminations contractual price decreases us revenue metro services increased 264 million 386 684 million year ended december 31 2008 948 million year ended december 31 2009 revenue fiber infrastructure services increased 88 million 59 1495 million year ended december 31 2008 1583 million year ended december 31 2009 revenue wan services increased 173 million 348 497 million year ended december 31 2008 670 million year ended december 31 2009 increases partially offset reduction revenue includes contract termination revenue year ended december 31 2009 compared year ended december 31 2008 revenue foreign operations primarily uk increased 11 million 35 317 million year ended december 31 2008 328 million year ended december 31 2009 primary reason increase due increase revenue local currency uk exceeded decrease translation rate british pounds us dollars year ended december 31 2009 compared year ended december 31 2008 costs revenue consolidated costs revenue year ended december 31 2009 1307 million compared 1260 million year ended december 31 2008 increase 47 million 37 consolidated costs revenue percentage revenue 363 year ended december 31 2009 compared 394 year ended december 31 2008 resulting consolidated gross profit margin 637 606 years ended december 31 2009 2008 respectively costs revenue us operations 1193 million 1166 million years ended december 31 2009 2008 respectively increase 27 million 23 increase domestic costs revenue year ended december 31 2009 compared year ended december 31 2008 attributable principally increase 39 million colocation expenses support ip network services increase presence third party data centers ii increase 23 million payrollrelated expenses primarily related increase headcount network management strategic initiatives fiber operations iii increase 11 million expenses associated third party network costs increases partially offset decrease 28 million long haul expenses 2008 levels included 10 million incurred 2008 respect temporarily needed leased capacity ii decrease 14 million amounts rebilled customers equipment sales corresponding decrease related revenue iii decrease 04 million repairs maintenance charges cable transmission equipment additionally year ended december 31 2009 includes provision equipment impairment relating inventory 12 million compared provision equipment impairment relating inventory 04 million lease abandonment cost 07 million year ended december 31 2008 costs revenue foreign operations 114 million year ended december 31 2009 compared 94 million year ended december 31 2008 increase 20 million 213 increase due primarily increases rightofway third party network costs leased fiber costs repairs maintenance charges needed support increases current future operations selling general administrative expenses “sga” consolidated sga year ended december 31 2009 825 million compared 905 million year ended december 31 2008 decrease 80 million 88 sga percentage revenue 229 year ended december 31 2009 compared 283 year ended december 31 2008 us sga 712 million year ended december 31 2009 compared 796 million year ended december 31 2008 decrease 84 million 106 sga us operations year ended december 31 2009 compared year ended december 31 2008 decreased primarily due 63 million decrease professional fees due normalization financial reporting decrease 30 million domestic noncash stockbased compensation expense 118 million year ended december 31 2008 88 million year ended december 31 2009 primary reasons decrease noncash stockbased compensation expense noncash compensation expense associated acceleration vesting restricted stock units relating termination mr doris’ employment contract ii noncash compensation expense 07 associated modification options purchase common stock connection mr doris’ termination incurred three months ended march 31 2008 see note 13 “employment contract termination” discussion mr doris’ employment contract also impairment charge 23 million respect asset abandonment year ended december 31 2008 see note 4 “property equipment asset abandonment” discussion decreases partially offset increase domestic payroll payrollrelated expenses 19 million 378 million year ended december 31 2008 397 million year ended december 31 2009 primarily due increase headcount increase bonus accrual 04 million partially offset decrease severance expense 07 million addition transactionbased taxes increased 12 million year ended december 31 2009 compared year ended december 31 2008 sga foreign operations 113 million year ended december 31 2009 compared 109 million year ended december 31 2008 increase 04 million 37 respect foreign operations local currency increases payrollrelated expenses prior year adjustment transaction taxes far excess reduction professional fees year ended december 31 2009 compared year ended december 31 2008 net increase local currency exceeded reduction caused strengthening us dollar british pound year ended december 31 2009 compared year ended december 31 2008 depreciation amortization consolidated depreciation amortization 520 million year ended december 31 2009 compared 483 million year ended december 31 2008 increase 37 million 77 consolidated depreciation amortization percentage revenue 144 year ended december 31 2009 compared 151 year ended december 31 2008 depreciation amortization increased result additions property equipment 2009 full year effect depreciation property equipment acquired throughout 2008 increase partially offset elimination depreciation expense associated property equipment sold disposed 2009 2008 property equipment became fully depreciated 2009 interest income interest income substantially earned us decreased 18 million year ended december 31 2008 03 million year ended december 31 2009 decrease 15 million 833 primarily due decrease shortterm interest rates 2009 compared 2008 partially offset increase average balances available investment interest expense interest expense substantially incurred us includes interest expense borrowed amounts secured credit facility availability fees unused portion secured credit facility amortization debt acquisition costs including upfront fees related secured credit facility interest expense related capital lease obligation interest accrued certain tax liabilities interest outstanding balance deferred fair value rent liabilities established fresh start interest accretion relating asset retirement obligations interest expense increased 39 million year ended december 31 2008 48 million year ended december 31 2009 increase 09 million 231 primarily due full year effect interest 24 million portion term loan borrowed february 29 2008 12 million portion term loan borrowed october 1 2008 partially offset quarterly scheduled repayments principal 108 million june 30 2009 september 30 2009 reduced balance interest expense incurred income expense net income expense net composed primarily income expense nonrecurring transactions comparative trend perspective consolidated income expense net income 36 million year ended december 31 2009 compared net expense 24 million year ended december 31 2008 change 60 million us income net 27 million year ended december 31 2009 compared income net 28 million year ended december 31 2008 decrease 01 million foreign operations income expense net income 09 million year ended december 31 2009 compared net expense 52 million year ended december 31 2008 change 61 million year ended december 31 2009 consolidated income net comprised gains arising settlement reversal certain tax liabilities 29 million gains foreign currency 19 million gains 01 million offset net loss sale disposition property equipment 13 million year ended december 31 2008 consolidated expense net comprised loss foreign currency 65 million offset gains arising settlement reversal certain tax liabilities 28 million net gain sale disposition property equipment 09 million gains 04 million benefit income taxes recognized 1830 million noncash tax benefits december 31 2009 result reducing certain valuation allowances previously established respect deferred tax assets us uk believe likely deferred tax assets utilized reduce eliminate tax payments future periods evaluation encompassed review recent history profitability us past three years ii review internal financial forecasts demonstrating expected capacity utilize deferred tax assets additionally based ability fully absorb current book income deferred tax assets ability carryback certain portions losses 2008 2007 recorded current federal benefit income taxes 53 million also provided 07 million state income taxes 2009 liquidity capital resources working capital deficit 85 million december 31 2010 compared working capital 886 million december 31 2009 decrease 971 million decrease primarily attributable decrease unrestricted cash 1037 million 1653 million december 31 2009 616 million december 31 2010 payment special cash dividend december 27 2010 1290 million use cash purchase property equipment 1357 million scheduled debt service payments totaling 76 million partially offset cash provided operating activities 1628 million cash generated exercise stock purchase warrants options purchase shares common stock shares sold employees employee stock purchase plan totaling 64 million working capital also affected increases accounts receivable 74 million ii accrued expenses 34 million iii prepaid costs current assets 13 million partially offset reduction accounts payable 13 million net cash provided operating activities 1628 million year ended december 31 2010 compared 1572 million year ended december 31 2009 increase 56 million net cash provided operating activities year ended december 31 2010 represents net income plus add back net income noncash items deducted determination net income principally depreciation amortization 633 million change deferred tax assets 405 million noncash stockbased compensation expense 125 million plus changes working capital components net cash provided operating activities year ended december 31 2009 resulted primarily add back noncash items deducted determination net income principally depreciation amortization 520 million noncash stockbased compensation expense 97 million provisions equipment impairment 12 million net income plus changes working capital components year increase net cash provided operating activities primarily due increase net income adjusted noncash activities depreciation amortization change deferred tax assets noncash stockbased compensation expense offset difference changes working capital components significant one deferred revenue significant source cash operating activities 2009 period 2009 cash received installation payments amortized estimated customer relationship period exceeded amortization deferred revenue 2010 average customer orders smaller prior years emphasis installation payments decreased resulted amortization deferred revenue exceeding cash collections installation payments net cash used investing activities 1353 million year ended december 31 2010 compared 1184 million year ended december 31 2009 increase 169 million net cash used investing activities year ended december 31 2010 attributable purchases property equipment 1357 million offset proceeds generated sales property equipment 04 million net cash used investing activities year ended december 31 2009 attributable purchases property equipment 1187 million offset proceeds generated sales property equipment 03 million increase capital expenditures 2010 compared 2009 attributable measured growth strategy implemented 2010 high dollar volume orders resulted higher capital expenditures needed provide service net cash used financing activities 1310 million year ended december 31 2010 comprised special cash dividend 500 per common share totaling 1290 million principal payments secured credit facility 76 million purchase treasury stock 08 million offset proceeds exercise warrants 50 million proceeds exercise options purchase shares common stock sale shares employee stock purchase plan 14 million net cash provided financing activities 389 million year ended december 31 2009 comprised 245 million net proceeds received funding delayed draw term loan secured credit facility proceeds exercise options purchase shares common stock 100 million proceeds exercise warrants 87 million offset principal payment secured credit facility 32 million principal payment capital lease obligation 05 million purchase treasury stock 04 million increase restricted cash equivalents 02 million february 29 2008 excluding certain foreign subsidiaries entered secured credit facility comprised 180 million revolver ii 240 million term loan iii 180 million delayed draw term loan secured credit facility scheduled mature fifth anniversary closing date february 28 2013 secured credit facility secured substantially domestic assets september 26 2008 executed joinder agreement secured credit facility added additional lender increased amount secured credit facility 900 million effective october 1 2008 revolver increased 270 million term loan increased 360 million available delayed draw term loan increased 270 million december 31 2010 outstanding balance 497 million connection special cash dividend november 2010 obtained commitment 250 million secured revolving credit facility 250 million secured revolving credit facility closed january 28 2011 drew 550 million closing 499 million used repay outstanding secured credit facility including accrued interest 50 million used pay bank fees related expenses associated 250 million secured revolving credit facility balance used general corporate purposes year ended december 31 2010 generated cash operating activities sufficient fund operating expenses debt service expenditures property equipment discussed paid special cash dividend december 2010 totaling 1290 million reduced liquidity january 2011 repaid secured credit facility comprised term loans 497 million outstanding closed 250 million secured revolving credit facility new facility provides us flexibility capability fund operations required expect cash operations continue exceed operating expenses plan continue use needed net cash operations cash reserves 250 million secured revolving credit facility fund operating expenses future capital projects time commit capital among things customer capital connect customers network ii expansion improvement infrastructure iii equipment also commit capital investments selected markets 2010 january 2011 opened denver market expanded paris amsterdam frankfurt europe additionally connected miami long haul network received favorable ruling canadian authorities regarding ability lease light fiber operations toronto based success markets may increase presence markets may develop markets us internationally believe sufficient financial resources execute plans believe existing cash operating activities funds available 250 million secured revolving credit facility sufficient fund operating expenses planned capital expenditures liquidity requirements least march 31 2012 additionally future may consider making acquisitions companies product lines support growth may finance acquisition companies product lines existing cash balances borrowings 250 million secured revolving credit facility additional borrowings banks institutional lenders andor public private offerings debt andor equity securities cannot provide assurances additional funds available us favorable terms contractual obligations certain facilities equipment leased noncancelable operating capital leases additionally discussed certain longterm obligations rightsofway franchise fees building access fees following schedule fiscal year future minimum rental payments required current operating leases capital lease contractual arrangements december 31 2010 measured december 31 2010 capital commitments 170 million december 31 2010 represent estimated capital costs associated delivery signed customer orders costs complete construction progress table reflects repayment secured credit facility settlement interest rate swap contracts “less 1 year” column table assumes drawdown 550 million 2011 pursuant 250 million secured revolving credit facility related carrying costs interest charges based upon february 4 2011 libor rate 027 plus 225 margin 252 550 million outstanding 0375 unused fee available amount 1950 million 250 million secured revolving credit facility term segment results dollars millions tables set forth results excluding intercompany activity segmented according groupings based geography united states united kingdom others nmnot meaningful segment results years ended december 31 2010 2009 reflect elimination intercompany sales charges united states united kingdom others nmnot meaningful segment results years ended december 31 2009 2008 reflect elimination intercompany sales charges credit risk financial instruments potentially subject us concentration credit risk consist principally temporary cash investments accounts receivable enter financial instruments trading speculative purposes auction rate notes place cash equivalents shortterm investment instruments high quality financial institutions primarily commercial banks us uk domestic account balances generally exceed federally insured limits trade receivables unsecured geographically dispersed throughout us uk include large small corporate entities spanning numerous industries perform ongoing credit evaluations customers’ financial condition offbalance sheet arrangements offbalance sheet arrangements operating leases participate transactions generate relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities “spes” would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes inflation believe business impacted inflation degree general economy recently issued accounting pronouncements august 2009 fasb issued asu 20095 fair value measurements disclosures topic 820 measuring liabilities fair value asu 20095 provides clarification circumstances quoted price active market identical liability available reporting entity required measure fair value using valuation technique uses quoted price identical liability traded asset quoted prices similar liabilities similar liabilities traded assets another valuation technique consistent principles asc topic 820 asu 20095 effective first reporting period including interim periods beginning issuance adoption asu 20095 material impact financial position results operations cash flows october 2009 fasb issued asu 200913 revenue recognition topic 605 multiple deliverable revenue arrangements asu 200913 eliminates residual method allocation requires arrangement consideration allocated inception arrangement deliverables using relative selling price method expands disclosures related multipledeliverable revenue arrangements asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 earlier adoption permitted adoption asu 200913 material impact financial position results operations cash flows january 2010 fasb issued asu 201002 consolidation topic 810 accounting reporting decreases ownership subsidiary scope clarification asu 201002 clarifies scope decrease ownership provisions topic 810 applies subsidiary group assets business subsidiary business transferred equity method investee joint venture exchange group assets constitutes business noncontrolling interest entity apply sales substance real estate asu 201002 effective beginning period entity adopts sfas 160 sfas 160 previously adopted first interim annual period ending december 15 2009 applied retrospectively first period entity adopted sfas 160 adoption asu 201002 material impact financial position results operations cash flows january 2010 fasb issued asu 201006 fair value measurements disclosures topic 820 improving disclosures fair value measurements asu 201006 requires new disclosures regarding transfers level 1 2 activity within level 3 fair value measurements clarifies existing disclosures inputs valuation techniques level 2 3 fair value measurements asu 201006 also includes conforming amendments employers disclosures postretirement benefit plan assets new disclosures clarifications existing disclosures effective interim annual reporting periods beginning december 15 2009 except disclosure activity within level 3 fair value measurements effective fiscal years beginning december 15 2010 interim periods within years adoption asu 201006 material impact financial position results operations cash flows february 2010 fasb issued asu 201009 subsequent events topic 855 amendments certain recognition disclosure requirements asu 201009 requires entity sec filer evaluate subsequent events date financial statements issued removes requirement sec filer disclose date subsequent events evaluated asu 201009 effective upon issuance adoption asu 201009 effect financial position results operations cash flows april 2010 fasb issued asu 201013 compensation stock compensation topic 718 effect denominating exercise price sharebased payment award currency market underlying equity security trades asu 201013 provides amendments topic 718 clarify employee sharebased payment award exercise price denominated currency market substantial portion entitys equity securities trades considered contain condition market performance service condition therefore entity would classify award liability otherwise qualifies equity amendments asu 201013 effective fiscal years interim periods within fiscal years beginning december 15 2010 adoption asu 201013 material impact financial position results operations cash flows item 7a item 7 managements discussion analysis financial condition results operations following discussion analysis relates financial condition results operations three years ended december 31 1998 information read conjunction item 6 selected financial data consolidated financial statements related notes thereto beginning page statement forwardlooking information certain statements section forwardlooking statements read information part special note regarding forwardlooking statements information presentation forwardlooking information general facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure communications carriers corporategovernment customers united states focus operations domestic intracity fiber optic networks clusters 15 largest cities throughout united states based population currently operate highbandwidth fiber optic communications networks new york greater philadelphia area within next two quarters begin operate similar networks washington dc also begun engineering constructing networks chicago san francisco boston within next two years plan complete expansion five additional markets including los angeles seattle dallas houston atlanta expect domestic intracity networks ultimately encompass approximately 810000 fiber miles covering approximately 1896 route miles also built obtained intercity fiber optic capacity links certain intracity networks expect complete construction first 432 cable along 250route mile network new york washington dc first quarter 1999 also obtained rights fiber optic capacity facilitiesproviders obtained fiber optic capacity linking certain metropolitan areas new yorkchicago new yorkboston chicagoseattleportland plan construct intracity networks except portland addition entered joint venture uk telecommunications company connect new york network london also formed joint venture construct highbandwidth fiber optic network connecting 13 major cities germany obtain certain additional fiber optic capacity western europe results operations year ended december 31 1998 compared year ended december 31 1997 revenues 1998 364 million 1356 greater revenues 25 million 1997 increase revenue 1998 versus 1997 reflected higher revenues associated commencement service increased total number customers well revenue recognized related grants indefeasible rights use portions network sales dark fiber classified sales type leases cost sales cost sales 139 million 1998 286 increase cost sales 36 million 1997 cost sales increased 1998 compared 1997 due costs associated commencement service customers higher fixed costs associated operation network service allocated costs network related revenue recognized grants indefeasible rights use portions network sales type leases portions dark fiber classified capital leases costs sales percentages revenue 1998 1997 38 142 respectively declining result significant increase number customers revenues selling general administrative expenses selling general administrative expenses increased 147 million 1998 63 million 1997 increase 84 million 133 increase selling general administrative expenses 1998 compared 1997 resulted primarily increased overhead accommodate network expansion consulting employment incentives expense consulting employment incentives expense 1998 02 million compared 192 million 1997 consulting employment incentives expense incurred 1997 reflects value stock options issued key employees officers directors order attract retain services 1998 amount recorded reflects amortization unvested component options issued 1997 key employees settlement agreement recorded 34 million settlement agreement 1998 amount recorded first quarter 1998 expense associated issuance stock options payment cash related settlement agreement depreciation amortization expense depreciation amortization expense 15 million 1998 compared 08 million 1997 increase 07 million 88 increases depreciation amortization expense resulted increased investment completed fiber optic network property equipment interest income expense interest income 88 million 1998 compared 18 million 1997 increase 70 million 389 interest income 1998 derived investment excess cash received proceeds initial public offering october 1997 additional cash received november 1998 proceeds 650 million note issuance interest expense increased 1998 6861000 compared 741000 1997 increase interest expense reflects interest accrued senior notes issued november 1998 income loss joint venture recorded 146000 loss 50 share ion joint ventures loss 1998 loss primarily represents startup costs operating activities joint venture income taxes recorded provision income taxes 1998 amount 34 million represents estimated effective tax rate federal state taxes 775 net income loss net income 10 million 1998 compared net loss 263 million 1997 1998 basic net income per share 001 compared basic net loss per share 56 1997 diluted basis net income per share 1998 001 improvements results 1998 primarily attributable growth revenues improvements gross margins noted well increase net interest income related investment made metromedia company funds raised initial public offering compared net interest expense year ended december 31 1997 compared year ended december 31 1996 revenues 1997 25 million 1150 increase compared 1996 revenues 02 million revenue increase generated onetime revenues associated commencement services customers well increased recurring lease revenues reflects growth number customers cost sales cost sales 1997 36 million increase 414 compared 07 million recorded cost sales 1996 increase cost sales associated increased revenues cost sales percentage revenues improved 142 1997 296 1996 improvement cost sales percentage revenues reflects increases revenue outdistancing increases cost components cost mostly fixed nature selling general administrative expenses selling general administrative expenses increased 63 million 1997 21 million 1996 200 increase resulted primarily increased legal expenses result increased business activities increased staffing accommodate anticipated growth consulting employment incentives expense consulting employment incentives expense 192 million recorded 1997 compared 37million 1996 1997 expense represents value stock options issued key employees officers directors consultants order attract retain services amount recorded 1996 reflects expense associated issuance stock warrants consultants consideration services rendered depreciation amortization expense depreciation amortization expense 08 million 1997 compared 06 million 1996 increase depreciation amortization expense resulted increased investment fiber optic network interest income expense interest income 18 million 1997 compared interest income 1996 interest income 1997 arose investment excess cash year 1996 excess cash invest accordingly earned interest income interest expense including financing costs decreased 1997 07 million 36 million 1996 decrease interest expense reflects repayment debt year proceeds investment made metromedia company well lower financing costs net loss recorded net loss 262 million 1997 compared net loss 104 million 1996 increase net loss primarily attributable costs associated organizing meet growth objectives particular costs include consulting employment incentive described attract retain key employees officers directors well increased overhead meet growth objectives liquidity capital resources november 3 1997 initial public offering 36432000 shares class common stock generated net proceeds 1339 million deducting underwriters commission expenses relating initial public offering 1998 operating activities generated 180 million cash compared 22 million 1997 increase cash provided operations primarily due increase advance payments received customers well improvement net income result increases revenues interest income 1998 compared 1997 1998 used 2180 million cash investing activities compared 197 million 1997 increase due primarily investments expansion networks related construction progress well capital contributions ion joint venture deposit german network build 1998 received 6304 million net cash financing activities compared 1559 million 1997 cash financing activities 1998 came mainly issuance sale 10 senior notes november 1998 1997 amount related sale securities metromedia fiber network net repayment certain indebtedness cash used operating activities 1996 28 million cash utilized support operations startup phase cash flows used investing activities 11 million 1996 investing activities cash outflows years primarily used building new yorknew jersey network financing activities provided cash flows 43 million 1996 issuance equity debt cash flows financing activities 1996 utilized fund operating investing activities anticipate continue incur net operating losses expand complete existing networks construct additional networks market services expanding customer base anticipate spending approximately 300 million year ending december 31 1999 approximately 200 million year ending december 31 2000 buildout fiber optic networks 11 15 largest cities united states based population planned international networks believe net proceeds issuance sale 6500 million 10 senior notes november 1998 cash hand certain vendor financing cash generated 1999 2000 including advance customer payments sufficient fund planned buildout fiber optic networks working capital needs year ended december 31 2000 indenture notes permits us incur additional indebtedness finance construction networks result may also consider time private public sales additional equity debt securities entering senior credit facilities financings depending upon market conditions order finance continued buildout network cannot assure able successfully consummate financing acceptable terms accordingly expect continue experiencing net operating losses negative cash flows foreseeable future year 2000 system modifications currently working evaluate resolve potential impact year 2000 processing datesensitive information network systems year 2000 problem result computer programs written using two digits rather four define year 2000 could result miscalculations system failures resulting recognition date using 00 year 1900 rather year 2000 delegated responsibility group executives coordinate identification evaluation implementation changes computer systems applications necessary achieve goal year 2000 date conversion would minimize effect customers avoid disruption business operations also focusing hardware software tools programming outside forces may affect operations including vendors banks utility companies analysis year 2000 threat ongoing continuously updated throughout 1999 necessary completed questionnaire project plan systems operating personnel identify business computer applications identify potential compliance problems plan initiate communications significant customers suppliers contractors major systems developers determine plans remedy year 2000 issues arise business us plan compile database information based upon responses expect complete second quarter 1999 extent problems identified implement corrective procedures necessary test applications year 2000 compliance expect complete project prior january 1 2000 based preliminary data estimate year 2000 effort nominal cost impact although make assurances ultimate cost year 2000 effort total cost information systems costs expensed incurred except extent costs incurred purchase lease capital equipment expect make necessary modifications ongoing investment system upgrades believe exposure issue based internal systems somewhat limited fact substantially existing systems purchased replaced since 1996 december 31 1998 incurred nominal consulting costs respect year 2000 conversion effort deferred information systems projects due year 2000 efforts expect source funds year 2000 costs cash hand accordingly devoting necessary resources resolve significant year 2000 issues customers suppliers contractors major systems developers unable resolve year 2000 processing issues timely manner material adverse effect results operations financial condition could result risk factors referred could cause actual results outcomes differ materially expressed forwardlooking statements made us place undue reliance forward looking statements forwardlooking statement speaks date made undertake obligation update forward looking statement statements reflect events circumstances date statement made reflect occurrence unanticipated events new factors emerge time possible us predict arise addition cannot assess impact factor business extent factor combination factors may cause actual results differ materially contained forwardlooking statements item 7a item 7 managements discussion analysis financial condition results operations following discussion analysis relates financial condition results operations company three years ended december 31 1997 information read conjunction item 6 selected financial data companys consolidated financial statements related notes thereto appearing elsewhere document statement forwardlooking information certain information included herein contains statements constitute forwardlooking statements related discussion see part special note regarding forwardlooking statements general company facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure carrier corporategovernment customers primarily form leased fiber optic cables circuits company currently operates 107 route mile fiber optic network within new yorknew jersey metropolitan area consists excess 27000 fiber miles company plans expand existing network within next two years encompass approximately 229000 fiber miles excess 650 route miles concentrated northeastern united states planned buildout include intracity fiber optic networks washington dc chicago philadelphia well intercity network new york washington dc fourth quarter 1997 company entered mfnracal joint venture provide broadband transatlantic communication services respective customers company anticipates initial service include fiber optic international leased line ranging capacity 2mb 45mb available second quarter 1998 see item 1 business results operations year ended december 31 1997 compared year ended december 31 1996 revenues 1997 2524311 969 increase compared 1996 revenues 236082 revenue increase generated one time revenues associated commencement services customers well increased recurring lease revenues reflects growth number customers cost sales 1997 3572005 increase 411 versus 698793 recorded cost sales 1996 increase cost sales associated increased revenues cost sales percentage revenues improved 142 1997 296 1996 improvement cost sales percentage revenues reflects increases revenue outdistancing increases cost components cost mostly fixed nature selling general administrative expenses increased 6303041 1997 2070345 1996 204 increase resulted primarily increased legal expenses result increased business activities within company increased staffing accommodate companys anticipated growth consulting employment incentives expense 19218591 recorded 1997 versus 3652101 1996 1997 expense represents value stock options issued key employees officers directors consultants order attract retain services amount recorded 1996 reflects expense associated issuance stock warrants consultants consideration services rendered depreciation amortization expense 757133 1997 compared 612530 1996 increase depreciation amortization expense resulted increased investment companys fiber optic network interest income 1808007 recorded 1997 versus interest income 1996 interest income 1997 arose investment companys excess cash year 1996 company excess cash invest accordingly earned interest income see item 5 market registrants common equity related stockholder mattersuse proceeds interest expense including financing costs decreased 1997 740786 3561010 1996 decrease interest expense reflects repayment companys debt year proceeds metromedia investment well lower financing costs net loss 26259238 recorded 1997 versus net loss 10358697 1996 increase net loss primarily attributable costs associated organizing meet growth objectives company particular costs include consulting employment incentive described attract retain key employees officers directors well increased overhead meet companys growth objectives year ended december 31 1996 compared year ended december 31 1995 year ended december 31 1995 company early development stage generate first revenues last three months 1995 customers began using companys facilities total revenues increased 236082 year ended december 31 1996 56149 year ended december 31 1995 representing increase 179933 increase revenue due primarily increase number customers cost sales 698793 year ended december 31 1996 cost sales recorded year ended december 31 1995 increase primarily attributable inclusion franchise fees easement costs cost sales 1996 prior years fees classified selling general administrative expense selling general administrative expenses decreased 2070345 year ended december 31 1996 3886568 year ended december 31 1995 representing decrease 1816223 consulting employment incentives 3652101 year ended december 31 1996 versus none 1995 reflecting companys issuance equity instruments consulting services depreciation amortization increased 612530 year ended december 31 1996 161576 year ended december 31 1995 representing increase 450954 certain components depreciation amortization recognized company upon commencement service customers occur late 1995 result depreciation amortization 1996 larger 1995 due inclusion full year depreciation amortization customers interest expense including financing costs increased 3561010 year ended december 31 1996 327106 year ended december 31 1995 representing increase 3233904 increase result additional debt incurred 1996 finance construction ny network fund operations company net loss increased 10358697 year ended december 31 1996 4319101 year ended december 31 1995 representing increase 6039596 increase net loss attributable factors discussed liquidity capital resources november 3 1997 company generated net proceeds 1339 million offering 9108000 shares class common stock deducting underwriters commission expenses relating offering 1997 company utilized approximately 77 million operating activities primarily prepay long term nonexclusive rightofway order buildout portion network also meet growth objectives company portion operating activities funded advance payments received customers addition company utilized approximately 98 million 1997 investing activities primarily buildout companys network 1997 approximately 1559 million cash flows provided financing activities reflecting net proceeds offering discussed equity investment mfn 325 million made metromedia company certain affiliates april 30 1997 portion utilized repay outstanding debt company purchase companys series preferred stock outstanding april 30 1997 cash used operating activities 1996 approximately 275 million compared approximately 13 million 1995 cash utilized years support operations companys startup phase cash flows used investing activities approximately 11 million 1996 approximately 42 million 1995 investing activities cash outflows years primarily used building companys new york city network financing activities provided cash flows approximately 43 million 1996 approximately 52 million 1995 issuance equity 1996 issuance debt 1996 1995 cash flows financing activities 1996 1995 utilized fund companys operating investing activities company anticipates continue incur net operating losses expands ny network constructs additional networks markets services expanding customer base company anticipates spending approximately 1240 million 1998 buildout fiber optic network cash provided operations sufficient fund expansion development networks currently planned result company intends use cash hand net proceeds offering fund expansion development management believes cash hand december 31 1997 along cash generated 1998 including advance customer payments sufficient fund companys planned buildout fiber optic network working capital needs year ended december 31 1998 company may also consider time private public sales additional equity debt securities company bank financings depending upon market conditions order finance continued buildout network assurance company able successfully consummate financing acceptable terms accordingly company expects continue experiencing net operating losses negative cash flows foreseeable future company completed assessment exposure year 2000 computer problem based assessment company believes critical software systems impacted situation systems currently use already year 2000 compliant although company believes taking appropriate precautions disruption systems due year 2000 problem assurance companys suppliers customers adversely affected year 2000 problem nonetheless company believes year 2000 issue material impact mfns business operations financial condition item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read together consolidated financial statements related notes appearing elsewhere annual report form 10k executive summary overview provide data transport services primarily 17 major metropolitan markets us four europe services include highbandwidth fiberoptic connectivity solutions primarily large corporate enterprise clients communication carriers large bandwidth transport requirements including fortune 1000 ftse 500 companies well governmental entities us europe components operating income revenue costs revenue selling general administrative expenses depreciation amortization description components reporting operating income years ended december 31 2011 2010 2009 shown consolidated statements operations included elsewhere annual report form 10k demand highbandwidth data transport services continues increase believe experience provision services customer base robust extensive network enable us take advantage growing demand although competitive landscape industry challenging constantly shifting believe continue well positioned continued growth future strategy see item 1 “business strategy” discussion business strategy key performance indicators senior management reviews group financial nonfinancial performance metrics connection management business metrics facilitate timely effective communication results key decisions allowing management react quickly changing requirements changes key performance indicators key financial indicators use include cash flow monthly expense analysis new customer installations net new revenue booked capital committed expended net revenue attrition define net revenue attrition reduction monthly recurring revenue “mrr” customers net decreases mrr result terminations price declines decreases offset increases divided total revenue excluding contract termination revenue given period important nonfinancial performance metrics measure headcount ip traffic growth installation intervals network service performance levels manage employee headcount changes ensure sufficient resources available service customers control expenses employees categorized managed within integrated groups sales operations engineering finance legal human resources worldwide headcount 713 employees december 31 2011 616 employed us 93 uk one netherlands germany france japan 2011 highlights consolidated revenue increased 628 million 153 4097 million year ended december 31 2010 4725 million year ended december 31 2011 reflected 151 million increase domestic metro services additionally us revenue fiber infrastructure wan services increased 115 million 221 million respectively year ended december 31 2011 compared year ended december 31 2010 consolidated revenue includes contract termination revenue 44 million equipment sales 88 million 132 million year ended december 31 2011 compared 61 million year ended december 31 2010 revenue foreign operations primarily uk increased 70 million year ended december 31 2011 compared year ended december 31 2010 year ended december 31 2011 generated operating income 1181 million compared operating income 1070 million year ended december 31 2010 net income 727 million year ended december 31 2011 compared net income 694 million year ended december 31 2010 december 31 2011 1184 million unrestricted cash compared 616 million unrestricted cash december 31 2010 increase liquidity 568 million increase cash december 31 2011 primarily attributable cash generated operating activities 2069 million less cash used purchase property equipment 1478 million adjusted changes working capital components year ended december 31 2011 cash flow generated operating activities increased compared 2010 result improvement operating results described believe based business plan existing cash operating activities funds available 250 million secured revolving credit facility sufficient fund operations planned capital expenditures liquidity requirements least march 31 2013 significant continuous judgment management required determining provision income tax deferred tax assets liabilities related valuation allowance established deferred tax assets part evaluation deferred tax assets fourth quarter 2011 recognized noncash tax benefit 92 million benefit related release remaining valuation allowance previously established uk total valuation allowance respect deferred tax assets decreased 91 million 2011 comprised reversal 92 million described partially offset 01 million attributable foreign currency translation 2012 outlook believe based upon contracted projects awaiting delivery customers sales pipeline continue add revenue base 2012 access financing 250 million secured revolving credit facility needed sales orders year ended december 31 2011 higher sales orders year ended december 31 2010 slightly internal 2011 sales target churn comprised terminations downgrades orders also higher 2011 internal target net revenue attrition previously defined year ended december 31 2011 line net revenue attrition year ended december 31 2010 percentage revenue cannot predict net revenue attrition sales orders churn 2012 revenue derived fixed term customer contracts meaningful portion revenue generated orders past contractual expiration date provide services billed monthtomonth basis extent fixed term contractual revenue renewed monthtomonth revenue extended put new fixed term contract new sales orders replace revenue loss churn revenue growth rate may lower historical revenue growth rate cash flow may negatively affected early 2011 connected miami long haul network opened denver metro market began providing certain services leased fiber paris amsterdam frankfurt 2012 plan commence operations toronto significantly expand operations atlanta 2011 also increased investments customer capital spent fulfill customer service orders laterals customer locations including enterprise locations data centers backbone network infrastructure existing markets order extend reach networks improve services existing prospective customers increase revenue opportunities 2012 continue make investments customer capital infrastructure increase reach networks december 7 2011 board directors authorized repurchase program purchase 2000 million common stock december 31 2012 february 24 2012 purchased 41157 shares total cost 27 million repurchase program utilize 250 million secured revolving credit facility cash generated operating activities excess cash used purchase property equipment fund repurchase program revenue derived leasing fiber optic data transport infrastructure provision data transport colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income fixed contract term substantial portion revenue derived multiyear contracts services provide often required make initial outlay capital extend network purchase equipment provision services customers terms contracts customer required pay termination fee contractual damages decline contract term contract terminated customer without basis expiration ensure recover initial capital investment plus acceptable return also derive revenues annual monthtomonth contracts costs revenue costs revenue primarily include following real estate expenses operational sites ii costs incurred operate networks licenses rightsofway permit fees professional fees related networks iii third party telecommunications fiber conduit expenses iv repairs maintenance costs incurred connection networks v employeerelated costs relating operation networks selling general administrative expenses “sga” sga primarily consist employeerelated costs salaries benefits employees directly attributable operation networks addition stockbased compensation expenses incentive bonus expenses employees ii real estate expenses administrative sites iii professional consulting audit fees iv certain taxes income taxes including property taxes trust fundrelated taxes passed customers v regulatory costs insurance telecommunications costs professional fees license maintenance fees internal software hardware depreciation amortization depreciation amortization consists ratable measurement use property equipment depreciation amortization network assets commences assets placed service provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted us “us gaap” preparation financial statements conformity us gaap requires management make judgments estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expenses reporting period management continually evaluates judgments estimates assumptions based historical experience available information following discussion items within consolidated financial statements involve significant judgments assumptions uncertainties estimates involved areas considered critical require high levels subjectivity judgment account highly uncertain matters actual results events differ materially contemplated management making estimates impact consolidated financial statements could material full description significant accounting policies see note 2 “basis presentation significant accounting policies” accompanying consolidated financial statements included elsewhere annual report form 10k fresh start accounting emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires us allocate reorganization value assets liabilities based upon estimated fair values accordance fasb asc 85210 developed set financial projections utilized expert assist us estimating fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries 3 calculation enterprise value based upon future cash flows projections adopting fresh start accounting resulted material adjustments historical carrying values assets liabilities reorganization value allocated assets liabilities based upon fair values engaged independent appraiser assist us determining fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination comprehensive loss accumulated deficit accounts revenue recognition follow sec staff accounting bulletin sab 101 “revenue recognition financial statements” known fasb asc 60510 amended sec sab 104 “revenue recognition” also known fasb asc 60510 revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income fixed contract term prior october 1 2009 generally amortized revenue related installation services straightline basis contracted customer relationship two twenty years fourth quarter 2009 completed study historic customer relationship period result commencing october 1 2009 began amortizing revenue related installation services straightline basis generally estimated customer relationship period generally ranging three twenty years contract termination revenue recognized customer discontinues service prior end contract period previously received consideration revenue recognition deferred contract termination revenue also recognized customers made early termination payments us settle contractually committed purchase amounts customer longer expects meet renegotiate discontinue contract customer result longer obligated provide services consideration previously received revenue recognition deferred additionally include receipts bankruptcy claim settlements former customers contract termination revenue received contract termination revenue amounted 44 million 27 million 39 million 2011 2010 2009 respectively accounts receivable reserves sales credit reserves reporting period make estimates potential future sales credits issued respect current revenue related service interruptions customer disputes recorded reduction revenue analyze historical credit activity changes customer demand related current billing service interruptions evaluating credit reserve requirements reserve known service interruptions incurred review customer disputes reserve believe valid claims also estimate sales credit reserve related unknown billing errors disputes based historical credit activity determination general sales credit customer dispute credit reserve requirements involves significant estimations assumptions allowance doubtful accounts reporting period make estimates potential losses resulting inability customers make required payments analyze reserve requirements using several factors including length time particular customer’s receivables past due changes customer’s creditworthiness customer’s payment history length customer’s relationship us current economic climate current industry trends specific reserve requirement review performed customer accounts larger balances reserve analysis also performed accounts subject specific review utilizing factors previously mentioned changes financial viability significant customers worsening economic conditions changes ability meet service level requirements may require changes estimate recoverability receivables revenue previously unrecognized recovered litigation negotiations settlements judgments recognized termination revenue period collected determination specific general allowance doubtful accounts reserve requirements involves significant estimations assumptions property equipment property equipment owned effective date stated estimated fair values effective date based reorganization value net accumulated depreciation amortization incurred since effective date purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress part network infrastructure assets described included property equipment respective balance sheets december 31 2011 december 31 2010 578 million 540 million respectively construction progress certain internal direct labor costs constructing installing property equipment capitalized direct labor determined based upon core group project managers field engineers network infrastructure engineers equipment engineers capitalized direct labor based upon time spent capitalized projects consists salary plus certain related benefits individuals’ capitalized labor costs directly associated construction installation network infrastructure equipment customer installations salaries related benefits nonengineers supporting staff part operations engineering departments considered part pool subject capitalization capitalized direct labor amounted 102 million 100 million 114 million years ended december 31 2011 2010 2009 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful life improvement term lease estimated useful lives property equipment follows property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income time required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances fully depreciate remaining carrying value network infrastructure removed rendered unusable capitalize costs new infrastructure placed service certain circumstances local municipality agency responsible amounts record share relocation costs property equipment record third party portion costs accounts receivable capitalized relocation costs amounting 18 million 15 million 31 million years ended december 31 2011 2010 2009 respectively fully depreciated remaining carrying value network infrastructure rendered unusable original cost basis totaled 031 million 015 million net book value basis year ended december 31 2011 original cost basis totaled 021 million 014 million net book value basis year ended december 31 2010 original cost basis totaled 03 million 02 million net book value basis year ended december 31 2009 extent relocation temporary nature requires movement existing network infrastructure another location construction insignificant portion entire segment related costs included results operations accordance statement financial accounting standards “sfas” 34 “capitalization interest cost” known fasb asc 83520 interest certain construction projects would capitalized amounts considered immaterial accordingly amounts capitalized years ended december 31 2011 2010 2009 accordance sfas 144 “accounting impairment disposal longlived assets” known fasb asc 3601035 periodically evaluate recoverability longlived assets evaluate assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value assets consider various factors determine impairment test necessary factors include consideration overall economic climate technological advances respect equipment strategy capital planning certain operational issues since june 30 2006 event occurred business environment changed trigger impairment test assets revenue service operations also consider removal assets network triggering event performing impairment test item removed service unless redeployed may little future cash flows related performed annual physical counts assets revenue service operations around september 30 year assistance valuation report assets revenue service prepared independent third party basis consistent sfas 157 “fair value measurements” known fasb asc 82010 pursuant fasb asc 3601035 determined fair value certain assets less carrying value accordingly recorded provisions impairment totaling 12 million year ended december 31 2011 05 million year ended december 31 2010 04 million year ended december 31 2009 additionally december 31 2010 recorded 15 million provision impairment respect discreet group assets certain operational issues also recorded provision equipment impairment 08 million year ended december 31 2009 record loss value certain equipment eventually sold unaffiliated third party see note 6 “changes estimate” accompanying consolidated financial statements included elsewhere annual report form 10k asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” known fasb asc 41020 recognize fair value liability asset retirement obligation period incurred reasonable estimate fair value made asset retirement obligations related decommissioning removal equipment restoration leased facilities removal certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities asset retirement obligations generally recorded “other longterm liabilities” capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 81 million 79 million december 31 2011 2010 respectively 45 million 43 million respectively included “accrued expenses” dates 36 million included “other longterm liabilities” dates accretion expense included “interest expense” amounted 027 million years ended december 31 2011 2009 028 million year ended december 31 2010 derivative financial instruments utilized may time future utilize derivative financial instruments known interest rate swaps “derivatives” mitigate exposure interest rate risk purchased first interest rate swap august 4 2008 hedge interest rate initial 240 million original principal term loan secured credit facility purchased second interest rate swap november 14 2008 hedge interest rate additional 120 million original principal term loan secured credit facility provided suntrust bank see note 9 “longterm debt secured credit facility” accompanying consolidated financial statements included elsewhere annual report form 10k accounted derivatives sfas 133 “accounting derivative instruments hedging activities” known fasb asc 815 fasb asc 815 requires derivatives recognized financial statements measured fair value regardless purpose intent holding policy historically entered derivatives trading purposes speculation based criteria defined fasb asc 815 interest rate swaps considered cash flow hedges 100 effective accordingly changes fair value derivatives recorded period accumulated comprehensive loss changes fair value derivatives reported accumulated comprehensive loss reclassified earnings period earnings impacted variability cash flows hedged item ineffective portion hedges recognized current period earnings unrealized net loss recorded accumulated comprehensive loss december 31 2010 06 million interest rate swaps marktomarket value cash flow hedges recorded current assets current liabilities noncurrent assets longterm liabilities applicable offsetting gains losses accumulated comprehensive loss interest rate swaps settled january 2011 january 1 2009 adopted sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” known fasb asc 81510 fasb asc 81510 changes disclosure requirements derivatives hedging activities entities required provide enhanced disclosures entity uses derivatives ii derivatives related hedged items accounted fasb asc 81510 iii derivatives related hedged items affect entity’s financial position cash flows applicable minimized credit risk relating counterparties derivatives transacting multiple high quality counterparties thereby limiting exposure individual counterparties monitoring financial condition counterparties derivatives recorded consolidated balance sheets fair value accounting gains losses resulting changes fair value derivatives depends use derivative whether qualifies hedge accounting accordance fasb asc 81510 december 31 2010 net interest rate swap derivative liabilities 06 million included “accrued expenses” consolidated balance sheet december 31 2009 net interest rate swap derivative liabilities 12 million included “other longterm liabilities” consolidated balance sheet swap agreements settled january 2011 described derivatives recorded fair value consolidated balance sheets december 31 2011 december 31 2010 consisted following derivative liabilities two interest rate swap agreements original three year terms included “accrued expenses” company’s consolidated balance sheet december 31 2010 interest rate swap agreements notional amounts provide indication extent involvement agreements represent exposure market risk following table shows notional amount outstanding maturity date weighted average receive pay rates interest rate swap agreements december 31 2011 2010 interest expense agreements respective debt instruments hedge recorded net effective interest rate hedged transaction notional amounts swap arrangements since reduced amounts corresponding reductions outstanding principal balances swap agreements settled january 2011 connection repayment term loans secured credit facility closing 250 million secured revolving credit facility cost 05 million settle swap agreements included “other expense income net” consolidated statement operations year ended december 31 2011 fair value financial instruments adopted sfas 157 “fair value measurements” “sfas 157” known fasb asc 82010 financial assets liabilities effective january 1 2008 pronouncement defines fair value establishes framework measuring fair value requires expanded disclosures fair value measurements fasb asc 82010 emphasizes fair value marketbased measurement entityspecific measurement defines fair value price would received sell asset transfer liability orderly transaction market participants measurement date fasb asc 82010 discusses valuation techniques market approach comparable market prices income approach present value future income cash flow cost approach cost replace service capacity asset replacement cost based upon observable unobservable inputs observable inputs reflect market data obtained independent sources unobservable inputs reflect market assumptions fasb asc 82010 utilizes fair value hierarchy prioritizes inputs fair value measurement techniques three broad levels level 1 observable inputs quoted prices identical assets liabilities active markets level 2 observable inputs quoted prices directly indirectly observable asset liability including quoted prices similar assets liabilities active markets quoted prices similar identical assets liabilities markets active modelderived valuations whose inputs observable whose significant value drivers observable level 3 unobservable inputs reflect reporting entity’s assumptions investment overnight money market institutional funds amounted 1100 million 482 million december 31 2011 2010 respectively included cash equivalents accompanying balance sheets classified level 1 asset party two interest rate swaps utilized modify interest rate risk recorded marktomarket value interest rate swap contracts 06 million included “accrued expenses” consolidated balance sheet december 31 2010 december 31 2010 used third parties well market analysis determine fair value interest rate swap agreements fair value interest rate swap contracts classified level 2 liabilities swap agreements settled january 2011 connection repayment term loans secured credit facility closing 250 million secured revolving credit facility cost 05 settle swap agreements included “other expense income net” consolidated statement operations year ended december 31 2011 consolidated balance sheets include following financial instruments shortterm cash investments trade accounts receivable trade accounts payable note payable believe carrying amounts financial statements approximate fair value financial instruments due relatively short period time origination instruments expected realization interest rates approximate current market rates concentration credit risk financial instruments potentially subject us concentration credit risk consist principally shortterm cash investments accounts receivable enter financial instruments trading speculative purposes cash equivalents invested investmentgrade shortterm investment instruments high quality financial institutions trade receivables unsecured geographically dispersed single customer accounts greater 10 consolidated revenue accounts receivable net perform ongoing credit evaluations customers’ financial condition allowance noncollection accounts receivable based upon expected collectability accounts receivable place cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits foreign currency translation transactions reporting currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect applicable balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive income foreign exchange transaction gains losses generally included “other income expense net” consolidated statements operations income taxes account income taxes accordance sfas 109 “accounting income taxes” known fasb asc 740 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis net operating losses tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled subject audits various taxing authorities audits may result proposed assessments ultimate resolution results us owing additional taxes required establish reserves fasb interpretation 48 “accounting uncertainty income taxes” known fasb asc 74010 believe uncertainty respect certain positions may succeed realizing tax benefit believe tax return positions appropriate supportable relevant tax law believe estimates assumptions used support evaluation tax benefit realization reasonable accordingly adjustments made consolidated financial statements years ended december 31 2011 2010 2009 deferred taxes current deferred income taxes associated valuation allowances impacted events transactions arising normal course business well special nonrecurring items assessment appropriate amount classification income taxes dependent several factors including estimates timing realization deferred income tax income deductions actual realization deferred tax assets liabilities may materially differ estimates result changes tax laws well unanticipated future transactions impacting related income tax balances assessment valuation allowance deferred tax assets based likelihood portion deferred tax assets realized future periods weight available evidence considered determining realizability deferred tax assets deferred tax liabilities first applied deferred tax assets reducing need valuation allowance part evaluation deferred tax assets fourth quarters 2011 2010 recognized tax benefits 92 million 73 million reported december 31 2011 2010 respectively relating reduction certain valuation allowances established uk part evaluation deferred tax assets fourth quarter 2009 recognized tax benefit 1830 million december 31 2009 relating reduction certain valuation allowances previously established us uk believe likely utilize deferred tax assets reduce eliminate tax payments future periods reduction valuation allowances effect increasing net income 92 million 73 million 1830 million years ended december 31 2011 2010 2009 respectively evaluations encompassed reviews recent history profitability us uk past three years ii reviews internal financial forecasts demonstrating expected capacity utilize deferred tax assets review deferred tax assets liabilities quarterly basis part fasb asc 740 review significant continuous judgment management required determining provision income tax deferred tax assets liabilities related valuation allowances established deferred tax assets possible valuation allowances could adjusted necessary stockbased compensation september 8 2003 adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” known fasb asc 71810 sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” also known fasb asc 71810 provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 12 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k fair value provisions fasb asc 71810 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards historical basis determining volatility expected life assumptions model due limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period recognize related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation plan reorganization outstanding stock options cancelled effective january 1 2006 adopted sfas 123r “sharebased payment” “sfas 123r” known fasb asc 718 using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 permitted companies estimate forfeitures recognize impact forfeitures occurred recognized impact forfeitures occurred sfas 123 adoption sfas 123r resulted change accounting treatment material impact consolidated financial statements description stockbased compensation programs see note 12 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k options purchase shares common stock granted years ended december 31 2011 2010 2009 results operations year ended december 31 2011 compared year ended december 31 2010 consolidated results dollars millions table set forth nmnot meaningful use term “consolidated” describe total results two geographic segments us uk others throughout document unless otherwise noted amounts discussed consolidated amounts net income net income year ended december 31 2011 727 million compared 694 million year ended december 31 2010 increase 33 million primary reasons increase net income increase revenue 628 million partially offset increases costs revenue 199 million selling general administrative expenses 198 million depreciation amortization 120 million changes discussed fully revenue consolidated revenue 4725 million year ended december 31 2011 compared 4097 million year ended december 31 2010 increase 628 million 153 revenue us operations increased 558 million 150 3718 million year ended december 31 2010 4276 million year ended december 31 2011 principal reason increase continued growth metro fiber infrastructure wan services continued growth revenue services attributable principally revenue service installations exceeding reductions revenue contract terminations contractual price reductions us revenue metro services increased 151 million 132 1144 million year ended december 31 2010 1295 million year ended december 31 2011 us revenue fiber infrastructure services increased 115 million 67 1706 million year ended december 31 2010 1821 million year ended december 31 2011 us revenue wan services increased 221 million 274 807 million year ended december 31 2010 1028 million year ended december 31 2011 additionally revenue includes domestic contract termination revenue equipment sales increased 61 million year ended december 31 2010 132 million year ended december 31 2011 revenue foreign operations primarily uk increased 70 million 185 379 million year ended december 31 2010 449 million year ended december 31 2011 primary reason increase due increase provisioning services uk bolstered 37 increase translation rate due strengthening british pound compared us dollar year ended december 31 2011 compared year ended december 31 2010 costs revenue consolidated costs revenue year ended december 31 2011 1627 million compared 1428 million year ended december 31 2010 increase 199 million 139 consolidated costs revenue percentage revenue 344 year ended december 31 2011 compared 349 year ended december 31 2010 resulting consolidated gross profit margin 656 651 years ended december 31 2011 2010 respectively costs revenue us operations 1492 million 1296 million years ended december 31 2011 2010 respectively increase 196 million 151 increase domestic costs revenue year ended december 31 2011 compared year ended december 31 2010 attributable principally increase 47 million amounts rebilled customers equipment sales corresponding increase related revenue ii increase 46 million expenses associated third party network costs iii increase 42 million payrollrelated expenses due headcount added since year ended december 31 2010 iv increase 32 million colocation expenses support ip network services increase presence third party data centers v increase 16 million rightofway expenses vi increase 16 million repairs maintenance charges cable transmission equipment additionally years ended december 31 2011 2010 include provisions equipment impairment respect domestic operations 02 million 20 million respectively costs revenue foreign operations 135 million year ended december 31 2011 compared 132 million year ended december 31 2010 increase 03 million 23 change primarily due increases expenses required support european operations needs existing customers payrollrelated expenses needed support provisioning services repairs maintenance charges offset benefit reversal accruals certain business tax rates installed fiber 30 million additionally uk operating results year ended december 31 2011included provisions equipment impairment totaling 10 million results year ended december 31 2011 compared year ended december 31 2010 reflect 37 increase translation rate british pound compared us dollar selling general administrative expenses “sga” consolidated sga year ended december 31 2011 1164 million compared 966 million year ended december 31 2010 increase 198 million 205 sga percentage revenue 246 year ended december 31 2011 compared 236 year ended december 31 2010 us sga 1022 million year ended december 31 2011 compared 856 million year ended december 31 2010 increase 166 million 194 sga us operations year ended december 31 2011 compared year ended december 31 2010 increased primarily due increase 112 million domestic noncash stockbased compensation expense 114 million year ended december 31 2010 226 million year ended december 31 2011 ii increase 21 million domestic payroll payrollrelated expenses 455 million year ended december 31 2010 476 million year ended december 31 2011 attributable principally increase sales commissions paid sales force due year increase sales iii increase 07 million transaction ad valorem taxes iv increase 05 million occupancyrelated expenses v increase 21 million operating expenses include increases computer software maintenance 05 million commissions paid third party sales agents 13 million attributable increased revenue base generated sales agents sga foreign operations 142 million year ended december 31 2011 compared 110 million year ended december 31 2010 increase 32 million 291 foreign operations reported increases payroll payrollrelated expenses 10 million noncash stockbased compensation expense 06 million provision bad debts 05 million occupancy costs 04 million primarily related relocation london office addition results year ended december 31 2010 included reversal prior year accrual vat tax obligation totaling 06 million finally results year ended december 31 2011 compared year ended december 31 2010 reflect 37 increase translation rate british pound compared us dollar depreciation amortization consolidated depreciation amortization 753 million year ended december 31 2011 compared 633 million year ended december 31 2010 increase 120 million 190 consolidated depreciation amortization percentage revenue 159 year ended december 31 2011 compared 155 year ended december 31 2010 increase consolidated depreciation amortization primarily attributable additions property equipment year ended december 31 2011 full period effect depreciation property equipment placed service year ended december 31 2010 ii change estimated useful lives certain property equipment effectuated october 1 2011 increase partially offset reduction depreciation respect certain assets became fully depreciated two periods interest income interest income substantially earned us 01 million years ended december 31 2011 2010 result relatively low interest rates company’s conservative investment strategy interest expense interest expense substantially incurred us includes interest expense borrowed amounts 250 million secured revolving credit facility commenced january 28 2011 secured credit facility repaid january 28 2011 availability fees unused portion relevant facility respective period amortization debt issuance costs including upfront fees related relevant facility outstanding respective period interest expense related capital lease obligation interest accrued certain tax liabilities interest outstanding balance deferred fair value rent liabilities established fresh start interest accretion relating asset retirement obligations interest expense 45 million year ended december 31 2011 compared 52 million year ended december 31 2010 decrease 07 million 135 income expense net income expense net composed primarily income expense nonrecurring transactions comparative trend perspective consolidated income expense net expense 10 million year ended december 31 2011 compared income net 20 million year ended december 31 2010 change 30 million us income expense net expense 07 million year ended december 31 2011 compared income net 26 million year ended december 31 2010 change 33 million foreign operations income expense net expense 03 million year ended december 31 2011 compared net expense 06 million year ended december 31 2010 change 03 million year ended december 31 2011 consolidated income expense net comprised writeoff unamortized debt issuance costs 11 million settlement two interest rate swaps total cost 05 million associated secured credit facility recorded connection company’s closing 250 million secured revolving credit facility january 28 2011 net loss foreign currency 04 million net loss sale disposition property equipment 02 million offset gains arising settlement reversal certain tax liabilities 04 million net gain arising recovery property taxes previously paid 04 million net gain settlement insurance claim 01 million gains 03 million year ended december 31 2010 consolidated income expense net comprised gains arising settlement reversal certain tax liabilities 22 million net gain settlement insurance claim 03 million gains 03 million partially offset net loss foreign currency 06 million net loss sale disposition property equipment 02 million provision income taxes year ended december 31 2011 recorded provision income taxes 492 million recognized additional deferred tax benefit 92 million associated reversal remaining valuation allowances previously established respect deferred tax assets uk resulted net tax provision 2011 400 million provision income taxes year ended december 31 2011 calculated effective tax rate based upon pretax book income adjusted permanent differences us uk resulting income tax provision 387 million plus provision certain capitalbased state taxes 13 million recorded provision income taxes 418 million year ended december 31 2010 recognized deferred tax benefit 73 million associated reduction valuation allowances previously established respect deferred tax assets uk resulted net tax provision 2010 345 million provision income taxes year ended december 31 2010 calculated effective tax rate based upon pretax book income adjusted permanent differences us uk resulting income tax provision 332 million plus provision certain capitalbased state taxes 13 million results operations year ended december 31 2010 compared year ended december 31 2009 consolidated results dollars millions table set forth nmnot meaningful use term “consolidated” describe total results two geographic segments us uk others throughout document unless otherwise noted amounts discussed consolidated amounts net income net income year ended december 31 2010 694 million compared 2816 million year ended december 31 2009 decrease 2122 million primary reason decrease net income 1876 million change net benefit income taxes recognized 2009 compared provision income taxes 345 million total change 2221 million revenue increased 496 million costs support revenue growth also increased costs revenue increased 121 million selling general administrative expenses increased 141 million depreciation amortization increased 113 million additionally income net decreased 16 million revenue consolidated revenue 4097 million year ended december 31 2010 compared 3601 million year ended december 31 2009 increase 496 million 138 revenue us operations increased 445 million 136 3273 million year ended december 31 2009 3718 million year ended december 31 2010 principal reason increase continued growth metro fiber infrastructure wan services continued growth revenue services attributable principally revenue service installations exceeding reductions revenue contract terminations contractual price reductions us revenue metro services increased 196 million 207 948 million year ended december 31 2009 1144 million year ended december 31 2010 us revenue fiber infrastructure services increased 123 million 78 1583 million year ended december 31 2009 1706 million year ended december 31 2010 us revenue wan services increased 137 million 204 670 million year ended december 31 2009 807 million year ended december 31 2010 increases partially offset decrease 11 million 153 revenue includes domestic contract termination revenue 39 million year ended december 31 2009 25 million year ended december 31 2010 revenue foreign operations primarily uk increased 51 million 155 328 million year ended december 31 2009 379 million year ended december 31 2010 primary reason increase due increase provisioning services uk also contributing increase 02 million contract termination revenue earned year ended december 31 2010 contract termination revenue earned uk year ended december 31 2009 translation rate british pound us dollar year substantially costs revenue consolidated costs revenue year ended december 31 2010 1428 million compared 1307 million year ended december 31 2009 increase 121 million 93 consolidated costs revenue percentage revenue 349 year ended december 31 2010 compared 363 year ended december 31 2009 resulting consolidated gross profit margin 651 637 years ended december 31 2010 2009 respectively costs revenue us operations 1296 million 1193 million years ended december 31 2010 2009 respectively increase 103 million 86 increase domestic costs revenue year ended december 31 2010 compared year ended december 31 2009 attributable principally increase 51 million colocation expenses support ip network services increase presence third party data centers ii increase 27 million payrollrelated expenses iii increase 20 million expenses associated third party network costs iv increase 09 million installation costs additionally years ended december 31 2010 2009 include provision impairment 20 million 12 million respectively increases partially offset decrease 09 million repairs maintenance charges cable transmission equipment ii reversal 04 million rightofway expenses three months ended june 30 2010 due previously accrued rightofway expenses result favorable negotiations relevant jurisdiction costs revenue foreign operations 132 million year ended december 31 2010 compared 114 million year ended december 31 2009 increase 18 million 158 increase primarily increases third party network costs colocation expenses repairs maintenance charges leased fiber costs increases payroll related expenses totaling 27 million needed support provisioning services partially offset onetime benefit reduction certain business tax rates fiber valuation office agency uk effective retroactively back 2005 resulting 11 million benefit 2010 previously described translation rate british pound us dollar year substantially selling general administrative expenses “sga” consolidated sga year ended december 31 2010 966 million compared 825 million year ended december 31 2009 increase 141 million 171 sga percentage revenue 236 year ended december 31 2010 compared 229 year ended december 31 2009 us sga 856 million year ended december 31 2010 compared 712 million year ended december 31 2009 increase 144 million 202 sga us operations year ended december 31 2010 compared year ended december 31 2009 increased primarily due increase 58 million domestic payroll payrollrelated expenses 397 million year ended december 31 2009 455 million year ended december 31 2010 attributable increase annual merit increases domestic employees effectuated march 1 2010 increase sales commissions due increase year sales incentive program effect first quarter 2010 ii increase 26 million domestic noncash stockbased compensation expense 88 million year ended december 31 2009 114 million year ended december 31 2010 iii increase 10 million professional fees iv increase 08 million occupancy charges v increase 07 million transaction ad valorem taxes vi increase 34 million operating expenses primarily due increases computer software maintenance 08 million commissions paid third party sales agents related marketing expenses 14 million year ended december 31 2010 sga foreign operations 110 million year ended december 31 2010 compared 113 million year ended december 31 2009 net reduction 03 million 27 foreign operations reported increases payroll related expenses 08 million professional fees 04 million noncash stockbased compensation expense 02 million however increases offset reversal december 31 2009 accrual vat tax obligation totaling 06 million settled fourth quarter year reduction operating expenses depreciation amortization consolidated depreciation amortization 633 million year ended december 31 2010 compared 520 million year ended december 31 2009 increase 113 million 217 consolidated depreciation amortization percentage revenue 155 year ended december 31 2010 compared 144 year ended december 31 2009 increase consolidated depreciation amortization primarily attributable additions property equipment year ended december 31 2010 full period effect depreciation property equipment acquired year ended december 31 2009 ii change reduction estimated useful lives certain property equipment effectuated october 1 2009 january 1 2010 interest income interest income substantially earned us decreased 03 million year ended december 31 2009 01 million year ended december 31 2010 decrease 02 million primarily due decline shortterm interest rates year ended december 31 2010 compared year ended december 31 2009 partially offset increase average balances available investment year interest expense interest expense substantially incurred us includes interest expense borrowed amounts secured credit facility availability fees unused portion secured credit facility amortization debt acquisition costs including upfront fees related secured credit facility interest expense related capital lease obligation interest accrued certain tax liabilities interest outstanding balance deferred fair value rent liabilities established fresh start interest accretion relating asset retirement obligations interest expense 52 million year ended december 31 2010 compared 48 million year ended december 31 2009 increase 04 million 83 increase primarily attributable interest incurred balance delayed draw term loan outstanding 2010 funded december 31 2009 income net income net composed primarily income expense nonrecurring transactions comparative trend perspective consolidated income net 20 million year ended december 31 2010 compared 36 million year ended december 31 2009 reduction 16 million us income net 26 million year ended december 31 2010 compared 27 million year ended december 31 2009 decrease 01 million 37 foreign operations expense income net expense 06 million year ended december 31 2010 compared income net 09 million year ended december 31 2009 change decrease 15 million year ended december 31 2010 consolidated income net comprised gains arising settlement reversal certain tax liabilities 22 million gain settlement insurance claim 03 million gains 03 million partially offset net loss foreign currency 06 million net loss sale disposition property equipment 02 million year ended december 31 2009 consolidated income net comprised gains arising settlement reversal certain tax liabilities 29 million gains foreign currency 19 million gains 01 million offset net loss sale disposition property equipment 13 million provision benefit income taxes recorded provision income taxes 418 million year ended december 31 2010 recognized additional deferred tax benefit 73 million associated reduction valuation allowances previously established respect deferred tax assets uk resulted net tax provision 2010 345 million provision income taxes year ended december 31 2010 calculated effective tax rate based upon pretax book income adjusted permanent differences us uk resulting tax provision 332 million plus provision certain capitalbased state taxes 13 million december 31 2009 recognized 1830 million noncash tax benefits result reducing certain valuation allowances previously established respect deferred tax assets us uk believe likely deferred tax assets utilized reduce eliminate tax payments future periods evaluation encompassed review recent history profitability us uk past three years ii review internal financial forecasts demonstrating expected capacity utilize deferred tax assets additionally based ability fully absorb current book income deferred tax assets ability carryback certain portions losses 2008 2007 recorded current federal benefit income taxes 53 million 2009 also provided 07 million state income taxes 2009 liquidity capital resources working capital 555 million december 31 2011 compared working capital deficit 85 million december 31 2010 increase 640 million increase primarily attributable increase unrestricted cash 568 million 616 million december 31 2010 1184 million december 31 2011 cash provided operating activities 2069 million excess use cash purchase property equipment 1478 million working capital also affected increases accounts receivable 82 million ii accrued expenses 50 million iii deferred revenue current portion 27 million iv accounts payable 13 million partially offset reduction note payable current portion 76 million prepaid costs current assets 06 million net cash provided operating activities 2069 million year ended december 31 2011 compared 1628 million year ended december 31 2010 increase 441 million net cash provided operating activities year ended december 31 2011 represents net income plus add back net income noncash items deducted determination net income principally depreciation amortization 753 million change deferred tax assets 387 million noncash stockbased compensation expense 244 million plus changes working capital components net cash provided operating activities year ended december 31 2010 represents net income plus add back net income noncash items deducted determination net income principally depreciation amortization 633 million change deferred tax assets 332 million noncash stockbased compensation expense 125 million plus changes working capital components year increase net cash provided operating activities primarily due increase net income adjusted noncash activities depreciation amortization change deferred tax assets noncash stockbased compensation expense change use working capital components december 31 2011 period compared december 31 2010 period net cash used investing activities 1477 million year ended december 31 2011 compared 1353 million year ended december 31 2010 increase 124 million net cash used investing activities year ended december 31 2011 attributable purchases property equipment 1478 million offset proceeds generated sales property equipment 01 million net cash used investing activities year ended december 31 2010 attributable purchases property equipment 1357 million offset proceeds generated sales property equipment 04 million increase capital expenditures 2011 compared 2010 attributable continued investment network year ended december 31 2011 higher level orders implemented resulted higher capital expenditures needed provide service net cash used financing activities 27 million year ended december 31 2011 comprised payoff outstanding principal secured credit facility 497 million change restricted cash equivalents 10 million purchase treasury stock 22 million payment debt issuance costs 05 million principal payment capital lease obligation 02 million offset net proceeds borrowing 250 million secured revolving credit facility 500 million proceeds issuance stock pursuant employee stock purchase plan 06 million proceeds exercise options purchase shares common stock 03 million net cash used financing activities 1310 million year ended december 31 2010 comprised special cash dividend 500 per common share totaling 1290 million principal payments secured credit facility 76 million purchase treasury stock 08 million offset proceeds exercise warrants 50 million proceeds exercise options purchase shares common stock sale shares employee stock purchase plan 14 million february 29 2008 excluding certain foreign subsidiaries entered secured credit facility comprised 180 million revolver ii 240 million term loan iii 180 million delayed draw term loan secured credit facility scheduled mature fifth anniversary closing date february 28 2013 secured credit facility secured substantially domestic assets september 26 2008 executed joinder agreement secured credit facility added additional lender increased amount secured credit facility 900 million effective october 1 2008 revolver increased 270 million term loan increased 360 million available delayed draw term loan increased 270 million december 31 2010 outstanding balance 497 million connection special cash dividend november 2010 obtained commitment 250 million secured revolving credit facility 250 million secured revolving credit facility closed january 28 2011 drew 550 million closing 499 million used repay outstanding secured credit facility including accrued interest 50 million used pay bank fees related expenses associated 250 million secured revolving credit facility balance used general corporate purposes december 7 2011 board directors authorized repurchase program purchase 2000 million common stock december 31 2012 february 24 2012 purchased 41157 shares repurchase program total cost 27 million year ended december 31 2011 generated cash operating activities sufficient fund operating expenses debt service expenditures property equipment discussed paid special cash dividend december 2010 totaling 1290 million reduced liquidity january 2011 repaid secured credit facility comprised term loans 497 million outstanding closed 250 million secured revolving credit facility new facility provides us flexibility capability fund operations required expect cash operations continue exceed operating expenses plan continue use needed net cash operations cash reserves 250 million secured revolving credit facility fund operating expenses future capital projects repurchase program time commit capital among things customer capital connect customers network ii expansion improvement infrastructure iii equipment also commit capital investments selected markets 2010 january 2011 opened denver market expanded paris amsterdam frankfurt europe additionally connected miami long haul network received favorable ruling canadian authorities regarding ability lease light fiber operations toronto based success markets may increase presence markets may develop markets us internationally believe sufficient financial resources execute plans believe existing cash operating activities funds available 250 million secured revolving credit facility sufficient fund operating expenses planned capital expenditures liquidity requirements including repurchase program least march 31 2013 additionally future may consider making acquisitions companies product lines support growth may finance acquisition companies product lines existing cash balances borrowings 250 million secured revolving credit facility additional borrowings banks institutional lenders andor public private offerings debt andor equity securities cannot provide assurances additional funds available us favorable terms contractual obligations certain facilities equipment leased noncancelable operating capital leases additionally discussed certain longterm obligations rightsofway franchise fees building access fees network operating contracts following schedule fiscal year future minimum rental payments required current operating leases capital lease contractual arrangements december 31 2011 measured december 31 2011 capital commitments 177 million december 31 2011 represent estimated capital costs associated delivery signed customer orders costs complete construction progress table reflects 550 million outstanding pursuant 250 million secured revolving credit facility related carrying costs interest charges based upon 253 rate december 31 2011 unused fee available amount 1950 million 250 million secured revolving credit facility term segment results dollars millions tables set forth results excluding intercompany activity segmented according groupings based geography united states united kingdom others nmnot meaningful segment results years ended december 31 2011 2010 reflect elimination intercompany sales charges united states united kingdom others nmnot meaningful segment results years ended december 31 2010 2009 reflect elimination intercompany sales charges credit risk financial instruments potentially subject us concentration credit risk consist principally temporary cash investments accounts receivable enter financial instruments trading speculative purposes auction rate notes place cash equivalents shortterm investment instruments high quality financial institutions primarily commercial banks us uk domestic account balances generally exceed federally insured limits trade receivables unsecured geographically dispersed throughout us uk include large small corporate entities spanning numerous industries perform ongoing credit evaluations customers’ financial condition offbalance sheet arrangements offbalance sheet arrangements operating leases participate transactions generate relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities spes would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes inflation believe business impacted inflation degree general economy recently issued accounting pronouncements august 2009 fasb issued asu 20095 fair value measurements disclosures topic 820 measuring liabilities fair value asu 20095 provides clarification circumstances quoted price active market identical liability available reporting entity required measure fair value using valuation technique uses quoted price identical liability traded asset quoted prices similar liabilities similar liabilities traded assets another valuation technique consistent principles asc topic 820 asu 20095 effective first reporting period including interim periods beginning issuance adoption asu 20095 material impact financial position results operations cash flows october 2009 fasb issued asu 200913 revenue recognition topic 605 multiple deliverable revenue arrangements asu 200913 eliminates residual method allocation requires arrangement consideration allocated inception arrangement deliverables using relative selling price method expands disclosures related multipledeliverable revenue arrangements asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 earlier adoption permitted adoption asu 200913 material impact financial position results operations cash flows january 2010 fasb issued asu 201002 consolidation topic 810 accounting reporting decreases ownership subsidiary scope clarification asu 201002 clarifies scope decrease ownership provisions topic 810 applies subsidiary group assets business subsidiary business transferred equity method investee joint venture exchange group assets constitutes business noncontrolling interest entity apply sales substance real estate asu 201002 effective beginning period entity adopts sfas 160 sfas 160 previously adopted first interim annual period ending december 15 2009 applied retrospectively first period entity adopted sfas 160 adoption asu 201002 material impact financial position results operations cash flows january 2010 fasb issued asu 201006 fair value measurements disclosures topic 820 improving disclosures fair value measurements asu 201006 requires new disclosures regarding transfers level 1 2 activity within level 3 fair value measurements clarifies existing disclosures inputs valuation techniques level 2 3 fair value measurements asu 201006 also includes conforming amendments employers disclosures postretirement benefit plan assets new disclosures clarifications existing disclosures effective interim annual reporting periods beginning december 15 2009 except disclosure activity within level 3 fair value measurements effective fiscal years beginning december 15 2010 interim periods within years adoption asu 201006 material impact financial position results operations cash flows february 2010 fasb issued asu 201009 subsequent events topic 855 amendments certain recognition disclosure requirements asu 201009 requires entity sec filer evaluate subsequent events date financial statements issued removes requirement sec filer disclose date subsequent events evaluated asu 201009 effective upon issuance adoption asu 201009 effect financial position results operations cash flows april 2010 fasb issued asu 201013 compensation stock compensation topic 718 effect denominating exercise price sharebased payment award currency market underlying equity security trades asu 201013 provides amendments topic 718 clarify employee sharebased payment award exercise price denominated currency market substantial portion entitys equity securities trades considered contain condition market performance service condition therefore entity would classify award liability otherwise qualifies equity amendments asu 201013 effective fiscal years interim periods within fiscal years beginning december 15 2010 adoption asu 201013 material impact financial position results operations cash flows item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read together consolidated financial statements related notes appearing elsewhere annual report form 10k executive summary overview provide telecommunications services primarily 14 major metropolitan markets us one uk london services include high bandwidth fiberoptic connectivity solutions primarily large corporate enterprise clients communication carriers including fortune ftse 500 companies us uk components operating income loss revenue costs revenue selling general administrative expenses depreciation amortization description components reporting operating income year ended december 31 2007 operating losses years ended december 31 2006 2005 shown consolidated statements operations included elsewhere annual report form 10k industry demand high bandwidth telecommunications services continues increase believe experience provision services customer base robust extensive network enable us take advantage growing demand although competitive landscape telecommunications industry constantly shifting believe well positioned continued growth future strategy see item 1 “business strategy” discussion business strategy key performance indicators senior management reviews group financial nonfinancial performance metrics connection management business metrics facilitate timely effective communication results key decisions allowing management react quickly changing requirements changes key performance indicators key financial indicators use include cash flow incremental contractual booking new customer business new customer installations churn existing business capital committed expended important nonfinancial performance metrics measure headcount traffic growth installation intervals manage employee headcount changes ensure sufficient resources available service customers control expenses employees categorized managed within integrated groups sales operations engineering finance legal human resources worldwide headcount 549 december 31 2007 482 employed us 65 uk one netherlands one japan highlights consolidated revenue increased 2007 169 million 71 2367 million 2006 2536 million 2007 due principally growth domestic metro transport services increased 223 million 2007 compared 2006 additionally us revenue dark fiber services increased 111 million 2007 compared 2006 domestic ip network services increased 26 million 2007 compared 2006 revenue foreign operations primarily uk increased 70 million 2007 compared 2006 comparative increases partially offset fact 2006 results included revenue 245 million domestic data centers sold fourth quarter 2006 2007 generated net income 138 million december 31 2007 458 million unrestricted cash compared 707 million unrestricted cash december 31 2006 decrease liquidity 249 million decrease attributable primarily cash used investing activities purchases property equipment 908 million cash used financing activities primarily purchase 97 million common stock employees certain cases exemployees respect vested restricted stock units delivered partially offset cash generated operating activities see item 7 “liquidity capital resources” discussion 2007 cash flow generated operating activities increased result improvement operating results described unrestricted cash equivalents balance declined 2007 compared 2006 due increased capital expenditures consistent growth strategy 908 million 2007 compared 717 million 2006 97 million cash used repurchase common stock connection delivery shares underlying vested restricted stock units believe based business plan existing cash operating activities funds available credit facility sufficient fund operations planned capital expenditures liquidity requirements including liability arising gvn litigation least third quarter 2009 see item 7 “liquidity capital resources” information relating credit facility outlook expect revenue increase 2008 compared 2007 large percentage costs fixed expect costs grow slower rate revenue anticipating improved operating results 2008 favorably impacted noncash settlement dispute sbc 35 million partially offset writeoff investment new information technology platform 23 million see item 3 “legal proceedings” note 13 “litigation” note 16 “subsequent events litigation” “subsequent events asset abandonment” accompanying consolidated financial statements included elsewhere annual report form 10k additionally 2008 capital expenditures expected increase line expected increase new bookings revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue subsequently amortized income related service period substantial portion revenue derived multiyear contracts services provide often required make initial outlay capital extend network purchase equipment provision services customers terms contracts customer required pay termination fee declines contract term contract terminated customer without basis expiration ensure recover initial capital investment plus acceptable return costs revenue costs revenue primarily include following real estate expenses operational sites ii costs incurred operate networks licenses rightofway permit fees professional fees related networks iii third party telecommunications fiber conduit expenses iv repairs maintenance costs incurred connection networks v employeerelated costs relating operation networks selling general administrative expenses “sga” sga primarily consist employeerelated costs salaries benefits stockbased compensation expense employees directly attributable operation networks ii real estate expenses administrative sites iii professional consulting audit fees iv taxes income taxes including property taxes trust fundrelated taxes gross receipts taxes v restructuring costs vi regulatory costs insurance telecommunications costs professional fees license maintenance fees internal software hardware depreciation amortization depreciation amortization consists ratable measurement use property equipment depreciation amortization network assets commences assets placed service provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted us “us gaap” preparation financial statements conformity us gaap requires management make judgments estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expenses reporting period management continually evaluates judgments estimates assumptions based historical experience available information following discussion items within consolidated financial statements involve significant judgments assumptions uncertainties estimates involved areas considered critical require high levels subjectivity judgment account highly uncertain matters actual results events differ materially contemplated management making estimates impact consolidated financial statements could material full description significant accounting policies see note 2 “basis presentation significant accounting policies” accompanying consolidated financial statements included elsewhere annual report form 10k misstatements connection audit financial statements year ended december 31 2006 determined certain errors primarily related income taxes depreciation certain accruals included financial statements previously issued years ended december 31 2005 2004 period ended december 31 2003 including fresh start balance sheet september 8 2003 adjustments made applicable period effect adjustments would increase net loss 09 million 009 per basic diluted share year ended december 31 2005 increase net loss 01 million 001 per basic diluted share year ended december 31 2004 decrease net loss 02 million 002 per basic diluted share period ended december 31 2003 management believe based upon qualitative quantitative analysis errors material require restatement previously issued financial statements accordingly corrections reflected financial statements year ended december 31 2006 resulted reduction net income 03 million 003 per basic diluted share reclassification february 29 2008 filed current report form 8k among things included consolidated statement operations year ended december 31 2006 consolidated statement operations year ended december 31 2006 included elsewhere annual report form 10k annual report form 10k year ended december 31 2006 reflects change classification certain expenses amounts recorded consolidated statement operations included current report form 8k dated february 29 2008 change resulted costs revenue decreasing 93 million 1312 million 1219 million selling general administrative expenses increasing 93 million 618 million 711 million year ended december 31 2006 reclassification affect operating loss net income earnings per share basic diluted assets liabilities shareholders’ equity year ended december 31 2006 fresh start accounting emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires us allocate reorganization value assets liabilities based upon estimated fair values accordance statement position 907 “financial reporting entities reorganization bankruptcy code” “sop 907” developed set financial projections utilized expert assist us estimating fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries 3 calculation enterprise value based upon future cash flows based upon projections adopting fresh start accounting resulted material adjustments historical carrying values assets liabilities reorganization value allocated assets liabilities based upon fair values engaged independent appraiser assist us determining fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination comprehensive loss accumulated deficit accounts revenue recognition revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income related service period accordance sec staff accounting bulletin 101 “revenue recognition financial statements” amended sec staff accounting bulletin 104 “revenue recognition” generally amortize revenue related installation services straightline basis contracted customer relationship generally ranges two twenty years termination revenue recognized customer discontinues service prior end contract period previously received consideration revenue recognition deferred termination revenue also recognized customers made early termination payments us settle contractually committed purchase amounts customer longer expects meet renegotiate contract customer result longer obligated provide services consideration previously received revenue recognition deferred 2007 2006 2005 included receipts bankruptcy claim settlements former customers termination revenue termination revenue reported manner original service provided amounted 85 million 83 million 121 million 2007 2006 2005 respectively accounts receivable reserves sales credit reserves reporting period must make estimates potential future sales credits issued respect current revenue related billing errors service interruptions customer disputes recorded reduction revenue analyze historical credit activity changes customer demand related current billing service interruptions evaluating credit reserve requirements reserve known billing errors service interruptions incurred review customer disputes reserve believe valid claims also estimate sales credit reserve related unknown billing errors disputes based historical credit activity determination general sales credit customer dispute credit reserve requirements involves significant estimation assumption allowance doubtful accounts reporting period must make estimates potential losses resulting inability customers make required payments analyze reserve requirements using several factors including length time particular customer’s receivables past due changes customer’s creditworthiness customer’s payment history length customer’s relationship us current economic climate current industry trends specific reserve requirement review performed customer accounts larger balances reserve analysis also performed accounts subject specific review utilizing factors previously mentioned due current economic climate competitive environment telecommunications sector volatility financial strength particular customer segments including resellers clecs collectability receivables credit worthiness customers may become difficult unpredictable changes financial viability significant customers worsening economic conditions changes ability meet service level requirements may require changes estimate recoverability receivables revenue previously unrecognized recovered litigation negotiations settlements judgments recognized termination revenue period collected determination specific general allowance doubtful accounts reserve requirements involves significant estimations assumptions property equipment property equipment stated preliminary estimated fair values effective date based reorganization value purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress included network infrastructure assets respective balance sheets certain internal direct labor costs constructing installing property equipment capitalized direct labor determined based upon core group field engineers ip engineers reflects capitalized salary plus related benefits based upon allocation time capitalized noncapitalized projects individuals’ salaries considered costs directly associated construction certain infrastructure customer build outs salaries related benefits nonengineers supporting staff part engineering departments considered part pool subject capitalization capitalized direct labor amounted 86 million 51 million 47 million years ended december 31 2007 2006 2005 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease estimated useful lives company’s property equipment follows building except certain storage huts 20 years 375 years network infrastructure assets years software computer equipment 4 years transmission equipment 7 years furniture fixtures equipment 10 years leasehold improvements lesser estimated useful life lease term property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income loss time required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances fully depreciate remaining carrying value network infrastructure removed rendered unusable capitalize new fiber associated construction costs relocation placed service reduced reimbursements received costs capitalized relocation costs amounting 22 million 89 million 20 million years ended december 31 2007 2006 2005 respectively fully depreciated remaining carrying value network infrastructure rendered unusable amounting 03 million 16 million 04 million original cost basis years ended december 31 2007 2006 2005 respectively accordance sfas 144 “accounting impairment disposal longlived assets” periodically evaluate recoverability longlived assets evaluate assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value asset included costs revenue year ended december 31 2007 provision equipment impairment 22 million recorded recognize loss value certain equipment held inventory impairment amounts provided years ended december 31 2006 2005 asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” recognize fair value liability asset retirement obligation period incurred reasonable estimate fair value made asset retirement obligations related decommissioning electronics leased facilities removal leasehold improvements certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities asset retirement obligations generally recorded “other longterm liabilities” capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 61 million 56 million december 31 2007 2006 respectively 33 million 31 million respectively included “accrued expenses” 28 million 25 million respectively included “other longterm liabilities” accretion expense included “interest expense” amounted 02 million years ended december 31 2007 2006 2005 foreign currency translation transactions functional currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect applicable balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive income loss foreign exchange transaction gains losses generally included “other income” consolidated statements operations income taxes company accounts income taxes accordance sfas 109 “accounting income taxes” “sfas 109” deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases net operating loss tax credit carryforwards tax contingencies deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled company records valuation allowance deferred tax assets extent likely portion deferred tax assets realized subject audit various taxing authorities audits may result proposed assessments ultimate resolution results us owing additional taxes required establish reserves fasb interpretation 48 “accounting uncertainty income taxes” “interpretation 48” despite belief tax return positions appropriate supportable appropriate tax law believe uncertainty respect certain positions may succeed realizing tax position evaluated tax positions items uncertainty accordance interpretation 48 determined tax positions highly certain within meaning interpretation 48 believe estimates assumptions used support evaluation tax benefit realization reasonable accordingly adjustments made consolidated financial statements year ended december 31 2007 deferred taxes current deferred income taxes associated valuation allowances impacted events transactions arising normal course business well special nonrecurring items assessment appropriate amount classification income taxes dependent several factors including estimates timing realization deferred income tax income deductions actual realization deferred tax assets liabilities may materially differ estimates result changes tax laws well unanticipated future transactions impacting related income tax balances assessment valuation allowance deferred tax assets based weight available evidence portion entire deferred tax asset realized deferred tax liabilities first applied deferred tax assets reducing need valuation allowance future utilization remaining net deferred tax asset would require ability forecast future earnings based past performance resulting net loss positions sufficient evidence exists require valuation allowance net deferred tax asset balance result bankruptcy estimates made impact deferred tax balances factors resulting estimation include limited fresh start valuation assets liabilities implications cancellation indebtedness income various factors stockbased compensation september 8 2003 adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 9 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k fair value provisions sfas 123 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards historical basis determining volatility expected life assumptions model due limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period recognize related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation plan reorganization outstanding stock options cancelled effective january 1 2006 adopted sfas 123r “sharebased payment” “sfas 123r” using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 permitted companies estimate forfeitures recognize impact forfeitures occur recognized impact forfeitures occurred upon adoption sfas 123 adoption sfas 123r resulted change accounting treatment material impact consolidated financial statements following assumptions used company calculate weighted average fair value stock options granted description stockbased compensation programs see note 9 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k results operations year ended december 31 2007 compared year ended december 31 2006 consolidated results millions nmnot meaningful use term “consolidated” describe total results two geographic segments us uk others throughout document unless otherwise noted amounts discussed consolidated amounts revenue consolidated revenue 2007 2536 million compared 2367 million 2006 increase 169 million 71 revenue us operations increased 99 million 45 2176 million 2006 2275 million 2007 principal reason increase due continued growth fiber services metro transport services 2007 us revenue fiber services increased 111 million 92 1203 million 2006 1314 million 2007 revenue metro transport services increased 223 million 791 282 million 2006 505 million 2007 increases offset decrease data center revenue 237 million 967 245 million 2006 08 million 2007 due sale domestic data centers fourth quarter 2006 four october 2006 one november 2006 revenue foreign operations primarily uk increased 70 million 366 191 million 2006 261 million 2007 increase primarily due change currency translation rates 2007 compared 2006 focus core businesses uk costs revenue consolidated costs revenue 2007 1103 million compared 1219 million 2006 decrease 116 million 95 consolidated costs revenue percentage revenue 435 2007 compared 515 2006 resulting consolidated gross profit margin 565 485 2007 2006 respectively costs revenue us operations 1019 million 1136 million 2007 2006 respectively decrease 117 million 103 decrease domestic costs revenue 2007 compared 2006 attributable principally sale domestic data centers resulted decrease costs revenue 154 million 2007 compared 2006 additionally costs revenue reduced due amount salaries capitalized domestic capitalized labor increased 40 million 2006 79 million 2007 decreases costs revenue partially offset provision equipment impairment 22 million increase 28 million long haul fiber lease expense increase 11 million colocation operating expense increase 10 million third party network costs revenue foreign operations 84 million 2007 compared 83 million 2006 increase 01 million 12 selling general administrative expenses “sga” consolidated sga 2007 809 million compared 711 million 2006 increase 98 million 138 sga percentage revenue 319 2007 compared 300 2006 us sga 693 million 2007 compared 634 million 2006 increase 59 million 93 sga us operations 2007 compared 2006 increased primarily due increase noncash stockbased compensation expense principally related restricted stock units granted 2007 34 million 2006 80 million 2007 additionally payroll payrollrelated expenses increased 75 million 257 million 2006 332 million 2007 due increases salaries headcount increases partially offset reduction professional fees 46 million reduction transactionbased taxes 14 million sga foreign operations 2007 116 million compared 77 million 2006 increase 39 million 506 due primarily increase payroll payrollrelated expenses 31 million ii increase occupancy costs 10 million due lease new office space uk 2007 iii increase operating costs 13 million increases partially offset decreases professional fees 12 million due decline auditrelated fees ii stockbased compensation expense 03 million depreciation amortization consolidated depreciation amortization 2007 475 million compared 472 million 2006 increase 03 million 06 consolidated depreciation amortization percentage revenue 187 2007 compared 199 2006 depreciation amortization increased result additions property equipment 2007 full year effect depreciation property equipment acquired throughout 2006 increase partially offset elimination depreciation expense associated property equipment sold disposed 2006 primarily data centers late 2006 property equipment became fully depreciated 2007 loss litigation 2007 recorded loss litigation 117 million respect gvn litigation amount 08 million paid 2007 109 million accrued december 31 2007 see item 3 “legal proceedings” item 8 financial statements note 13 consolidated financial statements “litigation” gain reversal foreign currency translation adjustments liquidation subsidiaries recognized noncash gain reversal foreign currency translation adjustments 103 million previously included comprehensive income statements shareholders’ equity connection liquidation metromedia fiber network bv metromedia fiber network services ltd sitesmith ltd whollyowned subsidiary fourth quarter 2007 interest income interest income substantially earned us increased 24 million 33 million 2007 increase 09 million 375 primarily due additional funds available investment following sales domestic data centers fourth quarter higher shortterm interest rates interest expense interest expense substantially incurred us includes interest expense related capital lease obligation interest accrued certain tax liabilities interest outstanding balance deferred fair value rent liabilities established fresh start interest accretion relating certain asset retirement obligations interest expense decreased 58 million 23 million 2007 decrease 35 million 603 primarily due decrease interest expense fair market value rent liabilities 39 million 2006 06 million 2007 due reduction balances primarily due sale domestic data centers fourth quarter 2006 income net income net composed primarily income nonrecurring transactions comparative trend perspective consolidated income net 38 million 2007 compared 21 million 2006 increase 17 million us income net 27 million 2007 compared net loss 14 million 2006 increase 41 million foreign operations income net 11 million 2007 compared 35 million 2006 decrease 24 million 2007 consolidated income net comprised primarily gains arising reversal certain tax liabilities 22 million gain legal settlement 06 million gains 04 million offset losses dispositions property equipment 05 million loss sale certain investments 04 million 2006 consolidated income net comprised primarily gains arising reversal certain tax liabilities 32 million gain foreign currency 20 million gains 15 million offset losses disposition property equipment 46 million gain sales data centers gain sales domestic data centers 482 million 2006 represented excess proceeds received sale totaling 431 million plus reversal deferred fair value rent liability sfas 13 liability associated related parties totaling 280 million 60 million respectively carrying value related assets sold comparable sale 2007 income discontinued operations net taxes income discontinued operations net taxes year ended december 31 2006 includes loss discontinued operations 09 million gain sale abovenet uk london 39 million discontinued operations year ended december 31 2007 results operations year ended december 31 2006 compared year ended december 31 2005 consolidated results millions nmnot meaningful revenue consolidated revenue 2006 2367 million compared 2197 million 2005 increase 170 million 77 revenue us operations increased 135 million 66 2041 million 2005 2176 million 2006 principal reason increase due continued growth fiber services metro transport services 2006 us revenue fiber services increased 101 million 92 1102 million 2005 1203 million 2006 revenue metro transport services increased 133 million 893 149 million 2005 282 million 2006 increases offset decrease data center revenue 45 million 155 290 million 2005 245 million 2006 due sale domestic data centers fourth quarter 2006 four october 2006 one november 2006 decrease termination revenue 38 million 314 121 million 2005 83 million 2006 revenue foreign operations primarily uk increased 35 million 224 156 million 2005 191 million 2006 due primarily focus core business strategic investment infrastructure costs revenue consolidated costs revenue 2006 1219 million compared 1192 million 2005 increase 27 million 23 consolidated costs revenue percentage revenue 515 2006 compared 543 2005 resulting consolidated gross profit margin 485 457 2006 2005 respectively cost revenue us operations 1136 million 1124 million 2006 2005 respectively increase 12 million 11 cost revenue foreign operations 83 million 68 million 2006 2005 respectively increase 15 million 221 increase costs revenue represents increases variable costs associated revenue streams substantial increase revenue significant percentage costs revenue fixed increased slower rate revenue additionally spreading costs larger revenue base improved gross profit margins 2006 compared 2005 selling general administrative expenses “sga” consolidated sga 2006 711 million compared 696 million 2005 increase 15 million 22 sga percentage revenue 300 2006 compared 317 2005 us sga 634 million 2006 compared 631 million 2005 increase 03 million 05 sga us operations 2006 compared 2005 primarily result increase audit fees financial consulting fees 24 million 21 million respectively attributable extra costs incurred efforts become timely financial reporting net increase general administrative expenses 08 million increases partially offset reduction domestic transaction taxes 50 million attributable billing certain taxes customers commenced first quarter 2006 sga foreign operations 77 million 65 million 2006 2005 respectively increase 12 million 185 due primarily increase payroll payrollrelated expenses 12 million ii increase professional fees 13 million 07 million related extra costs incurred efforts become timely financial reporting become compliant requirements sarbanesoxley act 2002 increases partially offset decrease operating costs 12 million depreciation amortization consolidated depreciation amortization 2006 472 million compared 431 million 2005 increase 41 million 95 consolidated depreciation amortization percentage revenue 199 2006 compared 196 2005 depreciation amortization increased result additions property equipment 2006 full year effect depreciation property equipment acquired throughout 2005 increase partially offset elimination depreciation expense associated property equipment sold disposed 2005 gain sales data centers gain sales domestic data centers 482 million 2006 represented excess proceeds received sale totaling 431 million plus reversal deferred fair value rent liability sfas 13 liability associated related parties totaling 280 million 60 million respectively carrying value related assets sold 2005 loss 13 million incurred sale domestic data center interest income interest income substantially earned us increased 13 million 24 million 2006 increase 11 million 846 primarily due additional funds available investment following sales domestic data centers fourth quarter 2006 increase shortterm interest rates 2006 interest expense interest expense substantially incurred us includes interest related capital lease obligation interest accrued certain tax liabilities interest accretion relating certain asset retirement obligations interest expense decreased 59 million 58 million 2006 decrease 01 million 17 primarily due decrease interest expense fair market value rent liabilities due reduction balances primarily due sale domestic data centers income net income net composed primarily nonrecurring transactions comparative trend perspective consolidated income net 21 million 2006 compared 109 million 2005 decrease 88 million us income net loss 14 million 2006 compared net gain 38 million 2005 decrease 52 million foreign operations income net gain 35 million 2006 compared net gain 71 million 2005 decrease 36 million 2006 consolidated income net comprised primarily gains arising reversal certain tax liabilities 32 million gain foreign currency 20 million gains 15 million offset losses disposition property equipment 46 million 2005 consolidated income net comprised noncash gain settlement contractual obligation 90 million gain settlement lease 35 million offset loss foreign currency 12 million losses totaling 04 million income loss discontinued operations net taxes discussed note 7 “discontinued operations dispositions” accompanying consolidated financial statements included elsewhere annual report form 10k sold liquidated six european subsidiaries years ended december 31 2005 2004 operating results entities well gain loss sale disposition included income loss discontinued operations net taxes related statements operations periods presented additionally operating results abovenet uk sold november 2006 included income loss discontinued operations net taxes periods presented liquidity capital resources working capital deficit december 31 2007 256 million compared working capital 174 million december 31 2006 cash equivalent balances december 31 2007 458 million compared 707 million december 31 2006 decrease 249 million decrease working capital december 31 2007 primarily attributable use cash payments purchases property equipment 908 million cash 97 million utilized repurchase shares connection delivery vested restricted stock units accrual litigation costs 109 million partially offset cash generated operating activities decrease cash due primarily excess cash used purchases property equipment cash used purchase shares cash generated operating activities net cash provided operating activities 697 million 2007 compared 513 million 2006 net cash provided operating activities 2007 resulted primarily add back noncash items deducted determination net income principally depreciation amortization 475 million stockbased compensation expense 82 million provision equipment impairment 22 million partially offset noncash gain 103 million reversal foreign currency translation adjustments liquidation certain subsidiaries net cash provided operating activities 2006 resulted primarily add back noncash items deducted determination net income principally depreciation amortization 472 million stockbased compensation expense 39 million offset net gain sale data centers 482 million included determination net income accounts payable december 31 2007 79 million compared 146 million december 31 2006 reduction 67 million due upgrade accounting system december 31 2007 required us close accounts payable process earlier prior year accrued expenses 783 million december 31 2007 compared 566 million december 31 2006 increase 217 million increase attributable accrued litigation costs 109 million increase accrued capital expenditures 72 million increase overall accruals required early closing accounts payable process december 31 2007 discussed net cash used investing activities 2007 893 million compared 272 million 2006 net cash used investing activities 2007 primarily attributable purchases property equipment 908 million net cash used investing activities 2006 reflects proceeds generated sales property equipment 432 million 431 million related sales domestic data centers proceeds sale stock abovenet uk 13 million offset cash used purchase property equipment totaling 717 million purchase property equipment year relates capital required connect new customers networks build infrastructure increase 2007 compared 2006 primarily due upgrade long haul network next generation technology dramatically improved long haul networks capacity upgrade core router network major hubs juniper’s flagship tseries platform net cash used financing activities 54 million 2007 composed 97 million utilized buy back shares employees connection delivery vested restricted stock units principal payment capital lease obligation 01 million offset proceeds exercise warrants 11 million excess tax benefit realized sharebased payment arrangements 28 million reduction restricted cash 05 million net cash used financing activities 10 million 2006 reflects change restricted cash equivalents 11 million principal payment capital lease obligation 01 million offset proceeds exercise warrants 02 million 2007 generated cash operations sufficient fund operating expenses 2007 capital expenditures exceeded net cash generated operations thus reducing liquidity additionally december 2007 connection delivery restricted stock units paid aggregate 97 million purchase shares common stock fund estimated tax obligations see item 11 “executive compensation” note 9 “stockbased compensation restricted stock units” accompanying consolidated financial statements included elsewhere annual report form 10k expect cash operations continue exceed operating expenses plan continue fund portion future capital projects existing business growth net cash operations february 29 2008 closed 60 million senior secured credit facility “credit facility” comprised 18 million revolving working capital line “revolver” ii 24 million term loan “term loan” iii 18 million delayed draw term loan “delayed draw term loan” available closing date including 270th day thereafter credit facility matures fifth anniversary closing date february 28 2013 credit facility secured substantially assets paid 09 million upfront fees lenders 03 million financial advisors assisted us obtaining credit facility ability draw upon available commitments revolver subject compliance covenants contained credit agreement continued ability make certain representations warranties among things covenants restrict ability pay dividends limit annual capital expenditures 2008 2009 2010 require maintain minimum 20 million cash deposits times provide net total funded debt ratio cannot time exceed specified amount require maintain minimum consolidated fixed charges coverage ratio august 31 2008 24 million outstanding credit facility september 26 2008 executed joinder agreement credit facility adds additional lender increases amount credit facility 90 million effective october 1 2008 subject terms joinder agreement including payment 045 million fee closing 01 million advisory fee availability revolver increased 27 million term loan increased 36 million available delayed draw term loan increased 27 million additionally delayed draw term loan option available credit facility originally scheduled expire november 25 2008 extended june 30 2009 believe existing cash operating activities funds available credit facility sufficient fund operating expenses planned capital expenditures liquidity requirements including liability arising gvn litigation least third quarter 2009 december 31 2007 109 million accrued respect gvn lawsuit 86 million paid august 31 2008 december 31 2007 08 million gvn liability paid 109 million included accrued expenses consolidated balance sheet date see item 3 “legal proceedings” item 8 “financial statements supplementary data” note 13 “litigation” addition future may consider making acquisitions companies product lines support growth strategy may finance acquisition companies product lines existing cash balances borrowings banks institutional lenders andor public private offerings debt andor equity securities cannot provide assurance funds available us favorable terms contractual obligations certain facilities equipment leased noncancelable operating capital leases additionally discussed certain longterm obligations rightsofway franchise fees building access fees following schedule fiscal year future minimum rental payments required current operating leases capital lease contractual arrangements december 31 2007 measured december 31 2007 excluded table capital commitments relate 2008 totaled 260 million december 31 2007 excluded table contractual obligations incurred respect certain severance arrangements entered 2008 including modification termination contract mr doris former senior vice president chief financial officer march 4 2008 see item 8 financial statements supplementary data note 16 “subsequent events employment contract termination employment contracts” discussion excluded table obligations related credit facility consummated february 29 2008 see item 8 financial statements supplementary data note 16 “subsequent events bank financing” discussion segment results millions results excluding intercompany activity segmented according groupings based geography united states united kingdom others united states united kingdom others nmnot meaningful credit risk financial instruments potentially subject us concentration credit risk consist principally temporary cash investments accounts receivable enter financial instruments trading speculative purposes auction rate notes place cash equivalents shortterm investment instruments high quality financial institutions us uk trade receivables unsecured geographically dispersed throughout us uk include large small corporate entities spanning numerous industries perform ongoing credit evaluations customers’ financial condition place cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits given recent developments financial markets exposure customers financial services industry ability collect contractual amounts due certain customers severely impacted developments may negatively impacted offbalance sheet arrangements offbalance sheet arrangements operating leases participate transactions generate relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities “spes” would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes inflation believe business impacted inflation degree general economy recently issued accounting pronouncements june 2006 fasb issued interpretation 48 “accounting uncertainty income taxes interpretation sfas 109” “interpretation 48” interpretation clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 interpretation prescribed recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken income tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition interpretation 48 material impact consolidated financial position results operations cash flows year ended december 31 2007 june 2006 emerging issues task force “eitf” ratified consensus eitf 063 “how taxes collected customers remitted governmental authorities presented income statement gross versus net presentation” “eitf 063” eitf 063 requires companies disclose accounting policies regarding gross net presentation certain taxes within scope eitf 063 taxes assessed governmental authority directly imposed revenueproducing transaction seller customer may include limited sales use value added excise taxes addition taxes significant presented gross basis amounts taxes disclosed company adopted eitf 063 effective january 1 2007 policy record taxes within scope eitf 063 net basis september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” effective fiscal years beginning november 15 2007 interim periods within fiscal years sfas 157 establishes framework measuring fair value accounting principles generally accepted us expands disclosures fair value measurement february 2008 fasb deferred adoption sfas 157 one year applies certain items including assets liabilities initially measured fair value business combination reporting units certain assets liabilities measured fair value connection goodwill impairment tests accordance sfas 142 “goodwill intangible assets” longlived assets measured fair value impairment assessments sfas 144 “accounting impairment disposal longlived assets” sfas 157 requires among things enhanced disclosures investments measured reported fair value establishes hierarchical disclosure framework prioritizes ranks level market price observability used measuring investments fair value three levels fair value hierarchy sfas 157 described level 1 valuations based quoted prices active markets identical assets liabilities entity ability access level 2 valuations based quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable data substantially full term assets liabilities level 3 valuations based inputs supported little market activity significant fair value assets liabilities financial instrument’s level within fair value hierarchy based lowest level input significant fair value measurement currently evaluating impact adoption sfas 157 financial position results operations february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” “sfas 159” sfas 159 gives entities option carry financial assets liabilities fair value changes fair value recorded earnings statement effective first quarter fiscal 2009 expected material impact consolidated financial position results operations cash flows december 2007 fasb issued sfas 141r “business combination revised” “sfas 141r” replace sfas 141 “business combinations” sfas 141r requires use acquisition method accounting defines acquirer establishes acquisition date broadens scope transactions events one entity obtains control one businesses statement effective business combinations transactions entered fiscal years beginning december 15 2008 still evaluating impact sfas 141r however adoption statement expected material impact financial position results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” “sfas 160” sfas 160 establishes accounting reporting standards noncontrolling interest subsidiary retained interest gain loss subsidiary deconsolidated statement effective financial statements issued fiscal years beginning december 15 2008 still evaluating impact sfas 160 expect material impact financial position results operations february 2008 fasb issued fasb staff position fas 1572 “fsp fas 1572” fsp fas 1572 permits delay effective date sfas 157 fiscal years beginning november 15 2008 nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis least annually delay intended allow fasb constituents additional time consider effect various implementation issues arisen may arise application sfas 157 march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” “sfas 161” requires additional disclosures objectives using derivative instruments method derivative instruments related hedged items accounted fasb statement 133 related interpretations effect derivative instruments related hedged items financial position financial performance cash flows sfas 161 also requires disclosure fair values derivative instruments gains losses tabular format sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 early adoption encouraged currently assessing impact adoption sfas 161 financial position results operations april 2008 fasb issued eitf 0705 “determining whether instrument embedded feature indexed entity’s stock” “eitf 0705” eitf 0705 provides guidance determining types instruments embedded features instrument held reporting entity considered indexed stock purpose evaluating first criteria scope exception paragraph 11 sfas 133 eitf 0705 effective financial statements issued fiscal years beginning december 15 early application permitted still evaluating effect eitf 0705 financial position results operations june 2008 fasb issued eitf 083 “accounting lessees maintenance deposits lease agreements” “eitf 083” eitf 083 mandates nonrefundable maintenance deposits accounted deposit underlying maintenance performed deposit expensed capitalized accordance lessee’s maintenance accounting policy eitf 083 effective fiscal years interim periods within fiscal years beginning december 15 2008 expect adoption material impact financial position results operations june 2008 fasb issued eitf 0361 “determining whether instruments granted sharedbased payment transactions participating securities” “eitf 0361” eitf 0361 provides unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities shall included computation earnings per share pursuant twoclass method eitf 0361 effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years upon adoption company required retrospectively adjust earnings per share date including amounts related interim periods summaries earnings selected financial data conform provisions eitf 0361 currently evaluating impact adoption eitf 0361 financial position results operations item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read together consolidated financial statements related notes appearing elsewhere annual report form 10k executive summary overview provide telecommunications services primarily 15 major metropolitan markets us one uk london services include highbandwidth fiberoptic connectivity solutions primarily large corporate enterprise clients communication carriers including fortune 1000 ftse 500 companies us uk components operating income revenue costs revenue selling general administrative expenses depreciation amortization description components reporting operating income years ended december 31 2009 2008 2007 shown consolidated statements operations included elsewhere annual report form 10k industry demand highbandwidth telecommunications services continues increase believe experience provision services customer base robust extensive network enable us take advantage growing demand although competitive landscape telecommunications industry challenging constantly shifting current economic environment could adversely affect demand believe well positioned continued growth future strategy see item 1 “business strategy” discussion business strategy key performance indicators senior management reviews group financial nonfinancial performance metrics connection management business metrics facilitate timely effective communication results key decisions allowing management react quickly changing requirements changes key performance indicators key financial indicators use include cash flow monthly expense analysis new customer installations net new revenue booked capital committed expended important nonfinancial performance metrics measure headcount ip traffic growth installation intervals network service performance levels manage employee headcount changes ensure sufficient resources available service customers control expenses employees categorized managed within integrated groups sales operations engineering finance legal human resources worldwide headcount 646 december 31 2009 567 employed us 77 uk one netherlands one japan 2009 highlights consolidated revenue increased 402 million 126 3199 million year ended december 31 2008 3601 million year ended december 31 2009 due principally 264 million increase domestic metro services additionally us revenue fiber infrastructure wan services increased 88 million 173 million respectively year ended december 31 2009 compared year ended december 31 2008 revenue includes contract termination revenue 72 million year ended december 31 2009 compared 206 million year ended december 31 2008 revenue foreign operations primarily uk increased 11 million year ended december 31 2009 compared year ended december 31 2008 year ended december 31 2009 generated operating income 949 million compared operating income 551 million year ended december 31 2008 net income 2816 million year ended december 31 2009 compared 423 million year ended december 31 2008 december 31 2009 1653 million unrestricted cash compared 871 million unrestricted cash december 31 2008 increase liquidity 782 million increase cash december 31 2009 primarily attributable cash generated operating activities 1572 million plus proceeds 245 million provided borrowings company’s secured credit facility cash provided exercise stock purchase warrants options purchase shares common stock totaling 187 million offset cash used purchase property equipment 1187 million 2009 cash flow generated operating activities increased result improvement operating results described believe based business plan existing cash operating activities funds available secured credit facility sufficient fund operations planned capital expenditures liquidity requirements least march 31 2011 revenue increased 2009 compared 2008 due principally increase monthly recurring revenue partially offset reduction contract termination revenue 154 million 2008 39 million 2009 operating costs 2009 aggregate less 2008 due principally year reduction general administrative expenses associated normalization financial reporting writeoff investment new information technology platform 23 million recorded third quarter 2008 see item 8 “financial statements supplementary data” note 4 “property equipment asset abandonment” revenue grew 2009 revenue growth slower 2008 largely due impact increased customer terminations downgrades 2009 significant continuous judgment management required determining provision income tax deferred tax assets liabilities related valuation allowance established deferred tax assets part evaluation deferred tax assets fourth quarter 2009 recognized noncash tax benefits 1830 million december 31 2009 benefit relates partial release valuation allowances previously established us uk recognition noncash tax benefits effect increasing net income 1830 million year ended december 31 2009 experienced shift composition customer orders increased number smaller value customer orders sold 2010 outlook 2010 outlook tempered overall difficult economic environment believe based upon contracted projects awaiting delivery customers continue add revenue base 2010 additionally strong cash position access financing secured credit facility needed 2010 revenue growth negatively effected full year impact higher 2009 customer terminations downgrades compared 2008 additionally cannot predict impact 2010 customer terminations downgrades fourth quarter 2009 reduced valuation allowance respect certain deferred tax assets deferred tax assets expected used reduce income tax payments 2010 future years provisions income tax expense 2010 reported based upon pretax book income plus permanent differences effective state federal foreign income tax rates applicable tax provisions effect reducing net income earnings per share revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue subsequently amortized income related service period substantial portion revenue derived multiyear contracts services provide often required make initial outlay capital extend network purchase equipment provision services customers terms contracts customer required pay termination fee contractual damages decline contract term contract terminated customer without basis expiration ensure recover initial capital investment plus acceptable return also derive portion revenues annual monthtomonth contracts late 2008 modified service groupings related revenue accurately reflect focus delivering highbandwidth services new groups fiber infrastructure services metro services wan services recasted revenue groupings applicable 2007 2006 comparative purposes trend analysis however revenue 2007 compared 2006 included item 7 “management’s discussion analysis financial condition results operations” reflects original service groupings reported annual report form 10k year ended december 31 2007 groupings consisted fiber services metro transport services ip services long haul services costs revenue costs revenue primarily include following real estate expenses operational sites ii costs incurred operate networks licenses rightofway permit fees professional fees related networks iii third party telecommunications fiber conduit expenses iv repairs maintenance costs incurred connection networks v employeerelated costs relating operation networks selling general administrative expenses “sga” sga primarily consist employeerelated costs salaries benefits stockbased compensation expense employees directly attributable operation networks ii real estate expenses administrative sites iii professional consulting audit fees iv certain taxes income taxes including property taxes trust fundrelated taxes passed customers v regulatory costs insurance telecommunications costs professional fees license maintenance fees internal software hardware depreciation amortization depreciation amortization consists ratable measurement use property equipment depreciation amortization network assets commences assets placed service provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted us “us gaap” preparation financial statements conformity us gaap requires management make judgments estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expenses reporting period management continually evaluates judgments estimates assumptions based historical experience available information following discussion items within consolidated financial statements involve significant judgments assumptions uncertainties estimates involved areas considered critical require high levels subjectivity judgment account highly uncertain matters actual results events differ materially contemplated management making estimates impact consolidated financial statements could material full description significant accounting policies see note 2 “basis presentation significant accounting policies” accompanying consolidated financial statements included elsewhere annual report form 10k 2007 reclassifications certain reclassifications made consolidated financial statements years ended december 31 2008 2007 conform classifications used year ended december 31 2009 fresh start accounting emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires us allocate reorganization value assets liabilities based upon estimated fair values accordance fasb asc 85210 developed set financial projections utilized expert assist us estimating fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries 3 calculation enterprise value based upon future cash flows projections adopting fresh start accounting resulted material adjustments historical carrying values assets liabilities reorganization value allocated assets liabilities based upon fair values engaged independent appraiser assist us determining fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination comprehensive loss accumulated deficit accounts revenue recognition follow sec staff accounting bulletin sab 101 “revenue recognition financial statements” known fasb asc 60510 amended sec sab 104 “revenue recognition” also known fasb asc 60510 revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income fixed contract term prior october 1 2009 generally amortized revenue related installation services straightline basis contracted customer relationship two twenty years fourth quarter 2009 completed study historic customer relationship period result commencing october 1 2009 began amortizing revenue related installation services straightline basis generally estimated customer relationship period generally ranging three twenty years contract termination revenue recognized customer discontinues service prior end contract period previously received consideration revenue recognition deferred contract termination revenue also recognized customers made early termination payments us settle contractually committed purchase amounts customer longer expects meet renegotiate discontinue contract customer result longer obligated provide services consideration previously received revenue recognition deferred 2009 2008 2007 included receipts bankruptcy claim settlements former customers contract termination revenue contract termination revenue reported together service revenue amounted 39 million 154 million 85 million 2009 2008 2007 respectively accounts receivable reserves sales credit reserves reporting period make estimates potential future sales credits issued respect current revenue related service interruptions customer disputes recorded reduction revenue analyze historical credit activity changes customer demand related current billing service interruptions evaluating credit reserve requirements reserve known service interruptions incurred review customer disputes reserve believe valid claims also estimate sales credit reserve related unknown billing errors disputes based historical credit activity determination general sales credit customer dispute credit reserve requirements involves significant estimations assumptions allowance doubtful accounts reporting period make estimates potential losses resulting inability customers make required payments analyze reserve requirements using several factors including length time particular customer’s receivables past due changes customer’s creditworthiness customer’s payment history length customer’s relationship us current economic climate current industry trends specific reserve requirement review performed customer accounts larger balances reserve analysis also performed accounts subject specific review utilizing factors previously mentioned due current economic climate competitive environment telecommunications sector volatility financial strength particular customer segments including resellers clecs collectability receivables creditworthiness customers may become difficult unpredictable changes financial viability significant customers worsening economic conditions changes ability meet service level requirements may require changes estimate recoverability receivables revenue previously unrecognized recovered litigation negotiations settlements judgments recognized termination revenue period collected determination specific general allowance doubtful accounts reserve requirements involves significant estimations assumptions property equipment property equipment owned effective date stated estimated fair values effective date based reorganization value net accumulated depreciation amortization incurred since effective date purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress part network infrastructure assets described included property equipment respective balance sheets december 31 2009 december 31 2008 269 million 148 million respectively construction progress certain internal direct labor costs constructing installing property equipment capitalized direct labor determined based upon core group field engineers ip engineers reflects capitalized salary plus related benefits based upon allocation time capitalized noncapitalized projects individuals’ salaries considered costs directly associated construction certain infrastructure customer installations salaries related benefits nonengineers supporting staff part engineering departments considered part pool subject capitalization capitalized direct labor amounted 114 million 107 million 86 million years ended december 31 2009 2008 2007 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease estimated useful lives property equipment follows property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income time required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances fully depreciate remaining carrying value network infrastructure removed rendered unusable capitalize new fiber associated construction costs relocation placed service reduced reimbursements received costs capitalized relocation costs amounting 31 million 26 million 22 million years ended december 31 2009 2008 2007 respectively fully depreciated remaining carrying value network infrastructure rendered unusable original cost basis totaled 03 million 02 million net book value basis years ended december 31 2009 2008 2007 respectively extent relocation requires movement existing network infrastructure another location related costs included results operations accordance statement financial accounting standards “sfas” 34 “capitalization interest cost” known fasb asc 83520 interest certain construction projects would capitalized amounts considered immaterial accordingly amounts capitalized years ended december 31 2009 2008 2007 accordance sfas 144 “accounting impairment disposal longlived assets” known fasb asc 3601035 periodically evaluate recoverability longlived assets evaluate assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value assets consider various factors determine impairment test necessary factors include consideration overall economic climate technological advances respect equipment strategy capital planning since june 30 2006 event occurred business environment changed trigger impairment test assets revenue service operations also consider removal assets network triggering event performing impairment test item removed service unless redeployed may little future cash flows related performed annual physical counts assets revenue service operations eg inventory primarily spare parts september 30 2009 2008 assistance valuation report assets inventory prepared independent third party basis consistent sfas 157 “fair value measurements” known fasb asc 82010 pursuant fasb asc 3601035 determined fair value certain assets less carrying value thus recorded provision equipment impairment 04 million 04 million 22 million years ended december 31 2009 2008 2007 respectively company also recorded provision equipment impairment 08 million year ended december 31 2009 record loss value certain equipment eventually sold unaffiliated third party see note 6 “change estimate” accompanying consolidated financial statements included elsewhere annual report form 10k asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” known fasb asc 41020 recognize fair value liability asset retirement obligation period incurred reasonable estimate fair value made asset retirement obligations related decommissioning removal equipment restoration leased facilities removal certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities asset retirement obligations capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 72 million 71 million december 31 2009 2008 respectively 38 million 39 million respectively included “accrued expenses” 34 million 32 million respectively included “other longterm liabilities” dates accretion expense included “interest expense” amounted 03 million years ended december 31 2009 2008 02 million year ended december 31 2007 derivative financial instruments utilize interest rate swaps derivative financial instruments “derivatives” mitigate exposure interest rate risk purchased first interest rate swap august 4 2008 hedge interest rate 24 million original principal portion term loan purchased second interest rate swap november 14 2008 hedge interest rate additional 12 million original principal portion term loan provided suntrust bank see note 9 “longterm debt” accompanying consolidated financial statements included elsewhere annual report form 10k accounted derivatives sfas 133 “accounting derivative instruments hedging activities” known fasb asc 815 fasb asc 815 requires derivatives recognized financial statements measured fair value regardless purpose intent holding policy historically entered derivatives trading purposes speculation based criteria defined fasb asc 815 interest rate swaps considered cash flow hedges 100 effective accordingly changes fair value derivatives recorded period accumulated comprehensive loss changes fair value derivatives reported accumulated comprehensive loss reclassified earnings period earnings impacted variability cash flows hedged item ineffective portion hedges recognized current period earnings unrealized net loss recorded accumulated comprehensive loss december 31 2009 december 31 2008 12 million 16 million respectively interest rate swaps marktomarket value cash flow hedges recorded noncurrent assets longterm liabilities applicable offsetting gains losses accumulated comprehensive loss january 1 2009 adopted sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” known fasb asc 81510 fasb asc 81510 changes disclosure requirements derivatives hedging activities entities required provide enhanced disclosures entity uses derivatives ii derivatives related hedged items accounted fasb asc 815 iii derivatives related hedged items affect entity’s financial position cash flows minimize credit risk relating counterparties derivatives transacting multiple highquality counterparties thereby limiting exposure individual counterparties monitoring financial condition counterparties enter derivatives trading speculative purposes derivatives recorded consolidated balance sheets fair value accounting gains losses resulting changes fair value derivatives depends use derivative whether qualifies hedge accounting accordance fasb asc 81510 december 31 2009 december 31 2008 consolidated balance sheets included net interest rate swap derivative liabilities 12 million 16 million respectively derivatives recorded fair value consolidated balance sheets december 31 2009 december 31 2008 consisted following derivative liabilities two interest rate swap agreements original three year terms considered longterm liabilities financial statement purposes interest rate swap agreements notional amounts provide indication extent involvement agreements represent exposure market risk following table shows notional amount outstanding maturity date weighted average receive pay rates interest rate swap agreements december 31 2009 interest expense agreements respective debt instruments hedge recorded net effective interest rate hedged transaction fair value financial instruments adopted sfas 157 “fair value measurements” known fasb asc 82010 financial assets liabilities effective january 1 2008 pronouncement defines fair value establishes framework measuring fair value requires expanded disclosures fair value measurements fasb asc 82010 emphasizes fair value marketbased measurement entityspecific measurement defines fair value price would received sell asset transfer liability orderly transaction market participants measurement date fasb asc 82010 discusses valuation techniques market approach comparable market prices income approach present value future income cash flow cost approach cost replace service capacity asset replacement cost based upon observable unobservable inputs observable inputs reflect market data obtained independent sources unobservable inputs reflect market assumptions fasb asc 82010 utilizes fair value hierarchy prioritizes inputs fair value measurement techniques three broad levels level 1 observable inputs quoted prices identical assets liabilities active markets level 2 observable inputs quoted prices directly indirectly observable asset liability including quoted prices similar assets liabilities active markets quoted prices similar identical assets liabilities markets active modelderived valuations whose inputs observable whose significant value drivers observable level 3 unobservable inputs reflect reporting entity’s assumptions investment overnight money market institutional funds amounted 1541 million 819 million december 31 2009 december 31 2008 respectively included cash equivalents accompanying balance sheets classified level 1 asset party two interest rate swaps utilized modify interest rate risk recorded marktomarket value interest rate swap contracts 12 million 16 million longterm liabilities consolidated balance sheets december 31 2009 december 31 2008 respectively used third parties value interest rate swap agreements december 31 2009 december 31 2008 well market analysis determine fair value fair value interest rate swap contracts classified level 2 liabilities consolidated balance sheets include following financial instruments shortterm cash investments trade accounts receivable trade accounts payable note payable believe carrying amounts financial statements approximate fair value financial instruments due relatively short period time origination instruments expected realization interest rates approximate current market rates concentration credit risk financial instruments potentially subject us concentration credit risk consist principally temporary cash investments accounts receivable enter financial instruments trading speculative purposes cash equivalents invested investmentgrade shortterm investment instruments high quality financial institutions trade receivables unsecured geographically dispersed single customer accounts greater 10 consolidated revenue accounts receivable net perform ongoing credit evaluations customers’ financial condition allowance noncollection accounts receivable based upon expected collectability accounts receivable place cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits foreign currency translation transactions functional currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect applicable balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive income foreign exchange transaction gains losses generally included “other income expense net” consolidated statements operations income taxes account income taxes accordance sfas 109 “accounting income taxes” known fasb asc 740 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases net operating loss tax credit carryforwards tax contingencies deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled subject audit various taxing authorities audits may result proposed assessments ultimate resolution results us owing additional taxes required establish reserves fasb interpretation 48 “accounting uncertainty income taxes” known fasb asc 74010 believe uncertainty respect certain positions may succeed realizing tax position believe tax return positions appropriate supportable appropriate tax law evaluated tax positions items uncertainty accordance fasb asc 74010 determined tax positions highly certain within meaning fasb asc 74010 believe estimates assumptions used support evaluation tax benefit realization reasonable accordingly adjustments made consolidated financial statements years ended december 31 2009 2008 deferred taxes current deferred income taxes associated valuation allowance impacted events transactions arising normal course business well special nonrecurring items assessment appropriate amount classification income taxes dependent several factors including estimates timing realization deferred income tax income deductions actual realization deferred tax assets liabilities may materially differ estimates result changes tax laws well unanticipated future transactions impacting related income tax balances assessment valuation allowance deferred tax assets based likelihood portion deferred tax assets realized future periods weight available evidence considered determining realizability deferred tax assets deferred tax liabilities first applied deferred tax assets reducing need valuation allowance future utilization remaining net deferred tax assets would require ability forecast future earnings based past performance management’s estimation future income believe sufficient evidence exists release entire valuation allowance december 31 2009 recognized 1830 million noncash tax benefits december 31 2009 result reducing certain valuation allowances previously established respect deferred tax assets us uk additionally based ability fully absorb current book income deferred tax assets well capacity carryback certain losses 2008 2007 current federal benefit income taxes 53 million additionally provided 07 million state income taxes 2009 part evaluation deferred tax assets fourth quarter 2009 recognized tax benefit 1830 million december 31 2009 relating reduction certain valuation allowances previously established us uk believe likely utilize deferred tax assets reduce eliminate tax payments future periods reduction valuation allowance effect increasing net income 1830 million year ended december 31 2009 evaluation encompassed review recent history profitability us uk past three years ii review internal financial forecasts demonstrating expected capacity utilize deferred tax assets stockbased compensation september 8 2003 adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” known fasb asc 71810 sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” also known fasb asc 71810 provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 12 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k fair value provisions sfas 123 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards historical basis determining volatility expected life assumptions model due limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period recognize related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation plan reorganization outstanding stock options cancelled effective january 1 2006 adopted sfas 123r “sharebased payment” “sfas 123r” known fasb asc 718 using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 permitted companies estimate forfeitures recognize impact forfeitures occurred recognized impact forfeitures occurred sfas 123 adoption sfas 123r resulted change accounting treatment material impact consolidated financial statements following assumptions used company calculate weighted average fair value stock options granted description stockbased compensation programs see note 12 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k options purchase shares common stock granted 2009 results operations year ended december 31 2009 compared year ended december 31 consolidated results dollars millions table set forth nmnot meaningful use term “consolidated” describe total results two geographic segments us uk others throughout document unless otherwise noted amounts discussed consolidated amounts net income net income year ended december 31 2009 2816 million compared 423 million year ended december 31 2008 increase 2393 million reasons increase net income increases revenue 402 million decrease selling general administrative expenses 80 million change increase income expense net 60 million partially offset increase costs revenue 47 million increase depreciation amortization 37 million significant difference change net income tax benefit 1876 million recorded year ended december 31 2009 net income tax provision 83 million recorded year ended december 31 2008 changes discussed fully revenue consolidated revenue 3601 million year ended december 31 2009 compared 3199 million year ended december 31 2008 increase 402 million 126 revenue us operations increased 391 million 136 2882 million year ended december 31 2008 3273 million year ended december 31 2009 principal reason increase due continued growth metro fiber infrastructure wan services continued growth revenue services attributable principally revenue service installations exceeding reductions revenue contract terminations contractual price decreases us revenue metro services increased 264 million 386 684 million year ended december 31 2008 948 million year ended december 31 2009 revenue fiber infrastructure services increased 88 million 59 1495 million year ended december 31 2008 1583 million year ended december 31 2009 revenue wan services increased 173 million 348 497 million year ended december 31 2008 670 million year ended december 31 2009 increases partially offset reduction revenue includes contract termination revenue year ended december 31 2009 compared year ended december 31 2008 revenue foreign operations primarily uk increased 11 million 35 317 million year ended december 31 2008 328 million year ended december 31 2009 primary reason increase due increase revenue local currency uk exceeded decrease translation rate british pounds us dollars year ended december 31 2009 compared year ended december 31 costs revenue consolidated costs revenue year ended december 31 2009 1307 million compared 1260 million year ended december 31 2008 increase 47 million 37 consolidated costs revenue percentage revenue 363 year ended december 31 2009 compared 394 year ended december 31 2008 resulting consolidated gross profit margin 637 606 years ended december 31 2009 2008 respectively costs revenue us operations 1193 million 1166 million years ended december 31 2009 2008 respectively increase 27 million 23 increase domestic costs revenue year ended december 31 2009 compared year ended december 31 2008 attributable principally increase 39 million colocation expenses support ip network services increase presence third party data centers ii increase 23 million payrollrelated expenses primarily related increase headcount network management strategic initiatives fiber operations iii increase 11 million expenses associated third party network costs increases partially offset decrease 28 million long haul expenses 2008 levels included 10 million incurred 2008 respect temporarily needed leased capacity ii decrease 14 million amounts rebilled customers equipment sales corresponding decrease related revenue iii decrease 04 million repairs maintenance charges cable transmission equipment additionally year ended december 31 2009 includes provision equipment impairment relating inventory 12 million compared provision equipment impairment relating inventory 04 million lease abandonment cost 07 million year ended december 31 2008 costs revenue foreign operations 114 million year ended december 31 2009 compared 94 million year ended december 31 2008 increase 20 million 213 increase due primarily increases rightofway third party network costs leased fiber costs repairs maintenance charges needed support increases current future operations selling general administrative expenses “sga” consolidated sga year ended december 31 2009 825 million compared 905 million year ended december 31 2008 decrease 80 million 88 sga percentage revenue 229 year ended december 31 2009 compared 283 year ended december 31 2008 us sga 712 million year ended december 31 2009 compared 796 million year ended december 31 2008 decrease 84 million 106 sga us operations year ended december 31 2009 compared year ended december 31 2008 decreased primarily due 63 million decrease professional fees due normalization financial reporting decrease 30 million domestic noncash stockbased compensation expense 118 million year ended december 31 2008 88 million year ended december 31 2009 primary reasons decrease noncash stockbased compensation expense noncash compensation expense associated acceleration vesting restricted stock units relating termination mr doris’ employment contract ii noncash compensation expense 07 associated modification options purchase common stock connection mr doris’ termination incurred three months ended march 31 2008 see note 13 “employment contract termination” discussion mr doris’ employment contract also impairment charge 23 million respect asset abandonment year ended december 31 2008 see note 4 “property equipment asset abandonment” discussion decreases partially offset increase domestic payroll payrollrelated expenses 19 million 378 million year ended december 31 2008 397 million year ended december 31 2009 primarily due increase headcount increase bonus accrual 04 million partially offset decrease severance expense 07 million addition transactionbased taxes increased 12 million year ended december 31 2009 compared year ended december 31 2008 sga foreign operations 113 million year ended december 31 2009 compared 109 million year ended december 31 2008 increase 04 million 37 respect foreign operations local currency increases payrollrelated expenses prior year adjustment transaction taxes far excess reduction professional fees year ended december 31 2009 compared year ended december 31 2008 net increase local currency exceeded reduction caused strengthening us dollar british pound year ended december 31 2009 compared year ended december 31 2008 depreciation amortization consolidated depreciation amortization 520 million year ended december 31 2009 compared 483 million year ended december 31 2008 increase 37 million 77 consolidated depreciation amortization percentage revenue 144 year ended december 31 2009 compared 151 year ended december 31 2008 depreciation amortization increased result additions property equipment 2009 full year effect depreciation property equipment acquired throughout 2008 increase partially offset elimination depreciation expense associated property equipment sold disposed 2009 2008 property equipment became fully depreciated 2009 interest income interest income substantially earned us decreased 18 million year ended december 31 2008 03 million year ended december 31 2009 decrease 15 million 833 primarily due decrease shortterm interest rates 2009 compared 2008 partially offset increase average balances available investment interest expense interest expense substantially incurred us includes interest expense borrowed amounts secured credit facility availability fees unused portion secured credit facility amortization debt acquisition costs including upfront fees related secured credit facility interest expense related capital lease obligation interest accrued certain tax liabilities interest outstanding balance deferred fair value rent liabilities established fresh start interest accretion relating asset retirement obligations interest expense increased 39 million year ended december 31 2008 48 million year ended december 31 2009 increase 09 million 231 primarily due full year effect interest 24 million portion term loan borrowed february 29 2008 12 million portion term loan borrowed october 1 2008 partially offset quarterly scheduled repayments principal 108 million june 30 2009 september 30 2009 reduced balance interest expense incurred income expense net income expense net composed primarily income expense nonrecurring transactions comparative trend perspective consolidated income expense net income 36 million year ended december 31 2009 compared net expense 24 million year ended december 31 2008 change 60 million us income net 27 million year ended december 31 2009 compared income net 28 million year ended december 31 2008 decrease 01 million foreign operations income expense net income 09 million year ended december 31 2009 compared net expense 52 million year ended december 31 2008 change 61 million year ended december 31 2009 consolidated income net comprised gains arising settlement reversal certain tax liabilities 29 million gains foreign currency 19 million gains 01 million offset net loss sale disposition property equipment 13 million year ended december 31 2008 consolidated expense net comprised loss foreign currency 65 million offset gains arising settlement reversal certain tax liabilities 28 million net gain sale disposition property equipment 09 million gains 04 million benefit income taxes recognized 1830 million noncash tax benefits december 31 2009 result reducing certain valuation allowances previously established respect deferred tax assets us uk believe likely deferred tax assets utilized reduce eliminate tax payments future periods evaluation encompassed review recent history profitability us past three years ii review internal financial forecasts demonstrating expected capacity utilize deferred tax assets additionally based ability fully absorb current book income deferred tax assets ability carryback certain portions losses 2008 2007 recorded current federal benefit income taxes 53 million also provided 07 million state income taxes 2009 results operations year ended december 31 2008 compared year ended december 31 consolidated results dollars millions table set forth nmnot meaningful use term “consolidated” describe total results two geographic segments us uk others throughout document unless otherwise noted amounts discussed consolidated amounts revenue consolidated revenue 3199 million year ended december 31 2008 compared 2536 million year ended december 31 2007 increase 663 million 261 revenue us operations increased 607 million 267 2275 million year ended december 31 2007 2882 million year ended december 31 2008 principal reason increase due continued growth metro fiber infrastructure wan services us revenue metro services increased 254 million 591 430 million year ended december 31 2007 684 million year ended december 31 2008 revenue fiber infrastructure services increased 125 million 91 1370 million year ended december 31 2007 1495 million year ended december 31 2008 revenue wan services increased 129 million 351 368 million year ended december 31 2007 497 million year ended december 31 2008 significant portion growth attributable new contracts existing customers revenue foreign operations primarily uk increased 56 million 215 261 million year ended december 31 2007 317 million year ended december 31 2008 increase primarily due continued focus increasing existing services uk costs revenue consolidated costs revenue year ended december 31 2008 1260 million compared 1103 million year ended december 31 2007 increase 157 million 142 consolidated costs revenue percentage revenue 394 year ended december 31 2008 compared 435 year ended december 31 2007 resulting consolidated gross profit margin 606 year ended december 31 2008 compared 565 year ended december 31 2007 costs revenue us operations 1166 million 1019 million years ended december 31 2008 2007 respectively increase 147 million 144 increase domestic costs revenue year ended december 31 2008 compared year ended december 31 2007 attributable principally increase 49 million colocation expenses support ip network services increase presence third party data centers ii increase 36 million repairs maintenance charges cable transmission equipment iii increase 32 million payroll related expenses primarily related increase headcount operations’ technical services systems engineering groups iv increase 20 million expenses associated third party circuits additionally year ended december 31 2008 includes provision equipment impairment relating inventory 04 million lease abandonment cost 07 million compared provision equipment impairment 22 million lease abandonment cost 03 million year ended december 31 2007 costs revenue foreign operations 94 million year ended december 31 2008 compared 84 million year ended december 31 2007 increase 10 million 119 selling general administrative expenses “sga” consolidated sga year ended december 31 2008 905 million compared 809 million year ended december 31 2007 increase 96 million 119 sga percentage revenue 283 year ended december 31 2008 compared 319 year ended december 31 2007 us sga 796 million year ended december 31 2008 compared 693 million year ended december 31 2007 increase 103 million 149 sga us operations year ended december 31 2008 compared year ended december 31 2007 increased primarily due increase 38 million noncash stockbased compensation expense 80 million year ended december 31 2007 118 million year ended december 31 2008 reasons increase expense associated restricted stock units granted 2008 plan ii 07 million expense associated modification options purchase common stock connection mr doris’ termination recognized three months ended march 31 2008 iii compensation expense 09 million associated repurchase shares recipients restricted stock units excess minimum withholding requirements additionally payroll payrollrelated expenses increased 46 million 332 million year ended december 31 2007 378 million year ended december 31 2008 primarily due increase bonus accrual 12 million increase severance expense 06 million increase commission expense 06 million increase salaries 22 million due year salary increases headcount 2008 also provided impairment 23 million respect asset abandonment see note 4 “property equipment asset abandonment” discussion increases partially offset reduction transactionbased taxes 05 million reduction professional fees 24 million sga foreign operations 109 million year ended december 31 2008 compared 116 million year ended december 31 2007 decrease 07 million 60 depreciation amortization consolidated depreciation amortization 2008 483 million compared 475 million 2007 increase 08 million 17 consolidated depreciation amortization percentage revenue 151 2008 compared 187 2007 depreciation amortization increased result additions property equipment 2008 full year effect depreciation property equipment acquired throughout 2007 increase partially offset elimination depreciation expense associated property equipment sold disposed 2008 2007 property equipment became fully depreciated 2008 interest income interest income substantially earned us decreased 33 million 2007 18 million 2008 decrease 15 million 455 primarily due decrease shortterm interest rates 2008 compared 2007 partially offset slight increase average balances available investment interest expense interest expense substantially incurred us includes interest expense borrowed amounts secured credit facility availability fees unused portion secured credit facility amortization debt acquisition costs including front fees related secured credit facility interest expense related capital lease obligation interest accrued certain tax liabilities interest outstanding balance deferred fair value rent liabilities established fresh start interest accretion relating asset retirement obligations interest expense increased 23 million 2007 39 million 2008 increase 16 million 696 primarily due interest expense incurred relating secured credit facility partially offset decrease interest expense fair market value rent liabilities 06 million 2007 04 million 2008 expense income net expense income net composed primarily expense income nonrecurring transactions comparative trend perspective consolidated expense income net expense 24 million year ended december 31 2008 compared net income 38 million year ended december 31 2007 decrease 62 million us income net 28 million year ended december 31 2008 compared income net 27 million year ended december 31 2007 increase 01 million foreign operations income net expense 52 million year ended december 31 2008 compared income net 11 million year ended december 31 2007 decrease 63 million year ended december 31 2008 consolidated expense net comprised loss foreign currency 65 million offset gains arising settlement reversal certain tax liabilities 28 million net gain sale disposition property equipment 09 million gains 04 million year ended december 31 2007 consolidated income net comprised gains arising settlement reversal certain tax liabilities 22 million gain legal settlement 06 million recovery occupancy taxes previously paid 05 million gains foreign currency 03 million gain leased asset termination 03 million gains 04 million offset net loss sale disposition property equipment 05 million liquidity capital resources working capital 886 million december 31 2009 compared working capital 118 million december 31 2008 increase 768 million increase primarily attributable increase unrestricted cash 782 million 871 million december 31 2008 1653 december 31 2009 increase unrestricted cash december 31 2009 primarily attributable cash provided operating activities 1572 million proceeds borrowings secured credit facility net financing costs 245 million cash generated exercise stock purchase warrants options purchase shares common stock totaling 187 million partially offset use cash purchase property equipment 1187 million net cash provided operating activities 1572 million 2009 compared 1161 million 2008 increase 411 million net cash provided operating activities 2009 resulted primarily add back noncash items deducted determination net income principally depreciation amortization 520 million stockbased compensation expense 97 million provisions equipment impairment asset abandonment 12 million net income plus changes working capital components net cash provided operating activities 2008 resulted primarily add back noncash items deducted determination net income principally depreciation amortization 483 million stockbased compensation expense 125 million provisions equipment impairment asset abandonment 27 million net income plus changes working capital components net cash used investing activities 1184 million 2009 compared 1156 million 2008 increase 28 million net cash used investing activities 2009 attributable purchases property equipment 1187 million offset proceeds generated sales property equipment 03 million net cash used investing activities 2008 attributable purchases property equipment 1172 million offset proceeds generated sales property equipment 16 million property equipment purchased period used primarily connect new customers networks build infrastructure net cash provided financing activities 389 million 2009 comprised 245 million net proceeds received funding delayed draw term loan secured credit facility proceeds exercise options purchase shares common stock 100 million proceeds exercise warrants 87 million offset principal payment secured credit facility 32 million principal payment capital lease obligation 05 million purchase treasury stock 04 million increase restricted cash equivalents 02 million net cash provided financing activities 426 million 2008 composed 336 million net proceeds received funding term loans secured credit facility proceeds exercise warrants 107 million release restricted cash equivalents 14 million offset purchase employees shares underlying vested restricted stock units 29 million principal payment capital lease obligation 02 million 2009 generated cash operations sufficient fund operating expenses also generated 187 million exercise stock purchase warrants options purchase shares common stock borrowed 245 million secured credit facility 2009 used 1187 million capital expenditures additionally 2009 paid aggregate 04 million repurchase shares common stock underlying vested restricted stock units fund minimum tax withholding obligations see item 11 “executive compensation” note 10 “shareholders’ equity stock purchase agreements” note 12 “stockbased compensation restricted stock units” accompanying consolidated financial statements included elsewhere annual report form 10k expect cash operations continue exceed operating expenses plan continue fund portion future capital projects existing business growth net cash operations february 29 2008 entered secured credit facility comprised 18 million revolver ii 24 million term loan iii 18 million delayed draw term loan initial lenders secured credit facility societe generale cit lending services corporation secured credit facility matures fifth anniversary closing date february 28 2013 secured credit facility secured substantially domestic assets paid 09 million upfront fees lenders 03 million financial advisors assisted us obtaining secured credit facility ability draw upon available commitments revolver subject compliance covenants contained credit agreement continued ability make certain representations warranties among things covenants limit annual capital expenditures 2008 2009 2010 provide net total funded debt ratio cannot time exceed specified amount require maintain minimum consolidated fixed charges coverage ratio originally required maintain minimum 20 million cash deposits times minimum cash deposit requirement removed addition secured credit facility prohibits us paying dividends shares equity securities making certain payments including payments acquire equity securities specified circumstances include repurchase equity securities employees directors aggregate amount exceed 15 million september 26 2008 executed joinder agreement secured credit facility added suntrust bank additional lender increased amount secured credit facility 90 million effective october 1 2008 connection joinder agreement paid 045 million fee closing aggregate 025 million advisory fees availability revolver increased 27 million term loan increased 36 million available delayed draw term loan increased 27 million additionally delayed draw term loan option available secured credit facility originally scheduled expire november 25 2008 extended june 30 2009 subsequently extended december 31 2009 december 31 2009 borrowed 2457 million delayed draw term loan party two interest rate swaps utilized modify interest rate risk 24 million term loan 12 million term loan chosen 30 day libor interest rate term interest rate swaps 30 day libor 023531 december 31 2009 believe existing cash operating activities funds available secured credit facility sufficient fund operating expenses planned capital expenditures liquidity requirements least march 31 2011 additionally december 31 2009 26 million available revolver addition future may consider making acquisitions companies product lines support growth may finance acquisition companies product lines existing cash balances borrowings banks institutional lenders andor public private offerings debt andor equity securities cannot provide assurance funds available us favorable terms contractual obligations certain facilities equipment leased noncancelable operating capital leases additionally discussed certain longterm obligations rightsofway franchise fees building access fees following schedule fiscal year future minimum rental payments required current operating leases capital lease contractual arrangements december 31 2009 measured december 31 2009 excluded table estimated capital commitments 167 million december 31 2009 comprised principally customer buildouts based upon contracts recorded fourth quarter 2009 construction progress note payable outstanding term loans currently hedged three year terms expires august 2011 november 2011 table assumes interest rate fixed hedges entire term secured credit facility amounts outstanding delayed draw term loan hedged table assumes 30 day libor rate effective december 29 2009 table excludes unused fees 05 unused balances segment results dollars millions tables set forth results excluding intercompany activity segmented according groupings based geography united states united kingdom others nmnot meaningful united states united kingdom others nmnot meaningful segment results 2009 2008 2007 reflect elimination intercompany sales charges credit risk financial instruments potentially subject us concentration credit risk consist principally temporary cash investments accounts receivable enter financial instruments trading speculative purposes auction rate notes place cash equivalents shortterm investment instruments high quality financial institutions us uk trade receivables unsecured geographically dispersed throughout us uk include large small corporate entities spanning numerous industries perform ongoing credit evaluations customers’ financial condition place cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits given recent developments financial markets exposure customers financial services industry ability collect contractual amounts due certain customers severely impacted developments may adversely affected offbalance sheet arrangements offbalance sheet arrangements operating leases participate transactions generate relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities “spes” would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes inflation believe business impacted inflation degree general economy recently issued accounting pronouncements third quarter 2009 adopted fasb accounting standards update 200901 “amendments based sfas 168 fasb accounting standards codification tm hierarchy generally accepted accounting principles” “codification” codification became single source authoritative gaap us rules interpretative releases issued sec codification reorganized gaap topical format eliminates previous gaap hierarchy instead established two levels guidance authoritative nonauthoritative nongrandfathered nonsec accounting literature included codification became nonauthoritative adoption codification change previous gaap rather simplified user access authoritative literature related particular accounting topic one place accordingly adoption impact financial position results operations cash flows references previous gaap citations consolidated financial statements updated new references codification september 2006 fasb issued sfas 157 “the fair value measurements” “sfas 157” known fasb asc 82010 effective fiscal years beginning november 15 2007 interim periods within fiscal years fasb asc 82010 establishes framework measuring fair value accounting principles generally accepted us expands disclosures fair value measurement february 2008 fasb deferred adoption statement provided fasb staff position fas 1572 also known fasb asc 82010 one year applies certain items including assets liabilities initially measured fair value business combination reporting units certain assets liabilities measured fair value connection goodwill impairment tests accordance sfas 142 “goodwill intangible assets” known fasb asc 350 longlived assets measured fair value impairment assessments sfas 144 “accounting impairment disposal longlived assets” known fasb asc 3601035 adopted statement january 1 2008 respect financial assets liabilities discussed february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” known fasb asc 825 fasb asc 825 gives entities option carry financial assets liabilities fair value changes fair value recorded earnings statement effective first quarter fiscal 2009 material impact consolidated financial position results operations cash flows december 2007 fasb issued sfas 141r “business combinations revised” “sfas 141r” known fasb asc 805 replace sfas 141 “business combinations” fasb asc 805 requires use acquisition method accounting defines acquirer establishes acquisition date broadens scope transactions events one entity obtains control one businesses statement effective business combinations transactions entered fiscal years beginning december 15 2008 adoption statement material impact financial position results operations cash flows december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” “sfas 160” known fasb asc 8101065 fasb asc 8101065 establishes accounting reporting standards noncontrolling interest subsidiary retained interest gain loss subsidiary deconsolidated statement effective financial statements issued fiscal years beginning december 15 2008 adoption statement material impact financial position results operations cash flows december 2007 sec issued sab 110 “certain assumptions used valuation methods expected term” known fasb asc 71810 fasb asc 71810 allows companies continue use simplified method defined sab 107 “sharebased payment” also known fasb asc 71810 estimate expected term stock options certain circumstances simplified method estimating expected term uses midpoint vesting term contractual term stock option analyzed circumstances use simplified method allowed opted use simplified method stock options granted 2008 management believes sufficient historical exercise data provide reasonable basis upon estimate expected term due limited period time shares common stock publicly traded options purchase shares common stock granted year ended december 31 2009 march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” “sfas 161” known fasb asc 815 requires additional disclosures objectives using derivative instruments method derivative instruments related hedged items accounted fasb statement 133 also known fasb asc 815 related interpretations effect derivative instruments related hedged items financial position financial performance cash flows fasb asc 815 also requires disclosure fair values derivative instruments gains losses tabular format statement effective financial statements issued fiscal years interim periods beginning november 15 2008 early adoption encouraged adoption statement material impact financial position results operations cash flows april 2008 fasb issued eitf 075 “determining whether instrument embedded feature indexed entity’s stock” “eitf 075” known fasb asc 81540 fasb asc 81540 provides guidance determining types instruments embedded features instrument held reporting entity considered indexed stock purpose evaluating first criteria scope exception paragraph 11 sfas 133 issue effective financial statements issued fiscal years beginning december 15 2008 early application permitted adoption issue material impact financial position results operations cash flows june 2008 fasb issued eitf 083 “accounting lessees maintenance deposits lease agreements” “eitf 083” known fasb asc 84010 fasb asc 84010 mandates nonrefundable maintenance deposits accounted deposit underlying maintenance performed deposit expensed capitalized accordance lessee’s maintenance accounting policy issue effective fiscal years interim periods within fiscal years beginning december 15 2008 adoption issue material impact financial position results operations cash flows june 2008 fasb issued eitf 0361 “determining whether instruments granted sharedbased payment transactions participating securities” “eitf 0361” known fasb asc 26010 fasb asc 26010 provides unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities shall included computation earnings per share pursuant twoclass method issue effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years upon adoption company required retrospectively adjust earnings per share date including amounts related interim periods summaries earnings selected financial data conform provisions fasb asc 26010 adoption issue material impact financial position results operations cash flows april 2009 fasb issued staff position fas 1071 apb 281 “interim disclosures fair value financial instruments” “fsp fas 1071 apb 281” known fasb asc 825 statement amends sfas 107 “disclosures fair value financial instruments” known fasb asc 82510 require disclosures fair value financial instruments interim well annual financial statements statement also amends apb opinion 28 “interim financial reporting” known fasb asc 2701050 require disclosures interim financial results financial position financial statement disclosures statement became effective us three months ended june 30 2009 statement material impact financial position results operations cash flows may 2009 fasb issued sfas 165 subsequent events sfas 165 known fasb asc 85510 effective interim annual financial periods ending june 15 2009 calendar year entities sfas 165 became effective three months ended june 30 2009 objective fasb asc 85510 establish general standards accounting disclosure events occur balance sheet date financial statements issued available issued particular fasb asc 85510 sets forth 1 period balance sheet date management reporting entity evaluate events transactions may occur potential recognition disclosure financial statements 2 circumstances entity recognize events transactions occurring balance sheet date financial statements 3 disclosures entity make events transactions occurred balance sheet date adoption statement material impact financial position results operations cash flows august 2009 fasb issued asu 20095 fair value measurements disclosures topic 820 measuring liabilities fair value asu 20095 provides clarification circumstances quoted price active market identical liability available reporting entity required measure fair value using valuation technique uses quoted price identical liability traded asset quoted prices similar liabilities similar liabilities traded assets another valuation technique consistent principles asc topic 820 asu 20095 effective first reporting period including interim periods beginning issuance adoption asu 20095 material impact financial position results operations cash flows october 2009 fasb issued asu 200913 revenue recognition topic 605 multiple deliverable revenue arrangements asu 200913 eliminates residual method allocation requires arrangement consideration allocated inception arrangement deliverables using relative selling price method expands disclosures related multipledeliverable revenue arrangements asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 earlier adoption permitted adoption asu 200913 material impact financial position results operations cash flows january 2010 fasb issued asu 201002 consolidation topic 810 accounting reporting decreases ownership subsidiary scope clarification asu 201002 clarifies scope decrease ownership provisions topic 810 applies subsidiary group assets business subsidiary business transferred equity method investee joint venture exchange group assets constitutes business noncontrolling interest entity apply sales substance real estate asu 201002 effective beginning period entity adopts sfas 160 sfas 160 previously adopted first interim annual period ending december 15 2009 applied retrospectively first period entity adopted sfas 160 adoption asu 201002 impact financial position results operations cash flows january 2010 fasb issued asu 201006 fair value measurements disclosures topic 820 improving disclosures fair value measurements asu 201006 requires new disclosures regarding transfers level 1 2 activity within level 3 fair value measurements clarifies existing disclosures inputs valuation techniques level 2 3 fair value measurements asu 201006 also includes conforming amendments employers disclosures postretirement benefit plan assets new disclosures clarifications existing disclosures effective interim annual reporting periods beginning december 15 2009 except disclosure activity within level 3 fair value measurements effective fiscal years beginning december 15 2010 interim periods within years item 7a item 7 managements discussion analysis financial condition results operations following discussion analysis relates financial condition results operations three years ended december 31 2000 read information conjunction item 6 selected consolidated financial data consolidated financial statements related notes thereto beginning page statement forwardlooking information statements section forwardlooking statements read information part special note regarding forwardlooking statements information presentation forwardlooking information general provide dedicated fiber optic infrastructure highbandwidth internet connectivity managed internet infrastructure services communications intensive customers facilitiesbased provider endtoend optical solutions offer virtually unlimited unmetered bandwidth fixed cost communications carrier corporate government customers united states europe abovenet communications inc subsidiary provide internet infrastructure customers combined company facilitates growth ecommerce advanced internet communications applications delivering secure reliable scaleable optical networks ip services internet content service providers communications carriers enterprise users worldwide expanding presence approximately 50 cities united states 17 international cities date 14 cities operational 30 cities currently construction balance engineering phase existing intracity networks consist approximately 1045000 fiber miles covering excess 1900 route miles united states intercity network consists approximately 281000 fiber miles primarily covering 255 routemile network built new york city washington dc also built contracted acquire nationwide dark fiber network linking intracity networks constructing 16 intracity networks throughout europe existing intracity international network consists approximately 98000 fiber miles covering approximately 248 route miles intercity international network consists approximately 8000 fiber miles circe network connects number european markets additionally entered agreement carrier 1 holdings ltd viatel inc jointly build dark fiber intercity network selected cities throughout germany completed german intercity network consist approximately 320000 fiber miles covering excess 1450 route miles connect 14 germanys largest cities hamburg berlin munich frankfurt dusseldorf separately also entered contract acquire rights dark fiber network facilities toronto canada september 8 1999 completed acquisition abovenet holders abovenet common stock received 235 shares class common stock share abovenet common stock abovenet leading provider facilitiesbased managed services customerowned web servers related equipment known colocation high performance internet connectivity solutions electronic commerce business critical internet operations paix abovenets wholly owned subsidiary serves packet switching center internet service providers paix also offers secure faulttolerant colocation services internet service providers acquisition recorded purchase method accounting abovenets results included results operations subsequent acquisition date october 7 1999 entered securities purchase agreement verizon communications verizon communications purchased approximately 511 million newly issued shares class common stock purchase price 1400 per share convertible subordinated note approximately 9753 million convertible shares class common stock conversion price 1700 per share transaction closed march 6 2000 assuming conversion convertible subordinated note investment would represent 197 outstanding shares february 8 2001 completed merger sitesmith pursuant agreement plan merger dated october 9 2000 acquired outstanding shares sitesmith total purchase price paid shares class common stock approximately 11 billion holders sitesmith common stock options warrants received 13404 shares class common stock options warrants respectively company recorded acquisition using purchase method accounting excess purchase price fair values net assets acquired approximately 10 billion preliminarily allocated goodwill pending final determination certain intangible assets sitesmith provider comprehensive internet infrastructure management services designed maximize performance reliability security largescale complex internet sites sitesmith designs architects infrastructure customers internet operations installs necessary hardware software recommends establishes network connectivity performs ongoing monitoring security services relying sitesmith manage internet operations businesses focus core competencies contracts provision dark fiber accounted operating leases recognize recurring monthly revenues contracts recognize revenue percentage completion method provision dark fiber effective june 30 1999 financial accounting standards board issued fasb interpretation 43 real estate sales known fin43 requires sales leases integral equipment subsequent june 30 1999 accounted accordance real estate accounting rules believe staff securities exchange commission requires classification dark fiber cables ground integral equipment defined fin 43 accounting dark fiber leases defined fin 43 change economics contracts requires us however recognize revenue leases operating leases term contract opposed prior method recognizing revenue period deliver fiber result change accounting treatment reduces revenue income recognize earlier years contract spreads life contract regardless cash received delivery fiber took place way example entered agreement 25 year lease dark fiber customer pays 1000 million cash contract signed contract provided delivery fiber five year period previously recorded average revenues 200 million five years delivered dark fiber contrast real estate accounting rules fin 43 would require us recognize revenue 40 million per year 25 year term contract even though would receive cash payment 1000 million contract signed implemented method accounting contracts entered june 30 1999 method required although change economics contracts timing cash received us impact change accounting resulted metromedia fiber recording substantially less revenue dates july 1 1999 december 31 2000 would recorded change imposed stock splits august 28 1998 december 22 1998 may 19 1999 april 17 2000 completed twoforone stock splits class b common stock form 100 percent stock dividends stockholders record specified dates share per share amounts presented herein give retroactive effect four stock splits effected 1998 1999 2000 results operations year ended december 31 2000 compared year ended december 31 1999 revenues 2000 1882 million 150 greater revenues 752 million period 1999 increase reflected higher revenues associated commencement service increased total number customers inclusion abovenets revenue full year 2000 revenue recognized using percentage completion method salestype leases portions network contracts entered june 30 1999 325000 compared 403 million year ended december 31 1999 order compare results consistent basis accounting change described effective january 1 1999 increase revenues would greater cost sales cost sales 1890 million 2000 286 increase cost sales 490 million 1999 cost sales increased 2000 compared period 1999 due costs related inclusion abovenets operations full year costs associated greater number customers well higher fixed costs initially incurred related operation maintenance companys fiber optic network internet connectivity services assets placed service costs sales percentages revenue 2000 1999 100 65 respectively increasing result higher fixed costs related operation maintenance fiber optic network well higher fixed costs related internet connectivity services accounting change described also impacted cost sales cost sales 2000 related percentage completion method 48000 compared 107 million 1999 order compare results consistent basis accounting change described effective january 1 1999 cost sales percentage revenue would decreased 2000 compared 1999 selling general administrative expenses selling general administrative expenses increased 1492 million 2000 533 million 1999 increase 959 million 180 increase selling general administrative expenses resulted primarily increased overhead accommodate network expansion acquisition abovenet inclusion full years results percentage revenue selling general administrative expenses increased 79 revenue 2000 71 comparable period 1999 order compare results consistent basis accounting change described effective january 1 1999 selling general administrative expenses would decreased percentage revenue 2000 compared 1999 earnings interest taxes depreciation amortization ebitda consists earnings losses income taxes plus net interest expense incomeexpense depreciation amortization expense losses joint ventures although ebitda measure financial performance generally accepted accounting principles widely used financial measure potential capacity company incur service debt also believe calculation provides relevant useful information evaluating performance however ebitda considered alternative measures operating performance determined generally accepted accounting principles calculated identically companies reported ebitda may comparable similarly titled measures used companies addition may significant factors trends ebitda fails capture year ended december 31 2000 recognized ebitda loss 1501 million compared ebitda loss 271 million year ended december 31 1999 increase ebitda loss primarily due inclusion abovenet full year well impact accounting change described depreciation amortization recorded depreciation amortization 1785 million 2000 versus 460 million 1999 increase 1325 million increase depreciation amortization expense resulted primarily amortization goodwill relating acquisition abovenet increased investment completed fiber optic network additional property equipment acquired loss operations year ended december 31 2000 loss operations 3286 million 2555 million increase 731 million loss comparable period 1999 loss greater due inclusion abovenet full year well impact accounting change described interest income interest income 1107 million 2000 compared 321 million comparable 1999 period increase 786 million 245 interest income increased result investment certain proceeds issuance sale 10 senior notes interest expense net interest expense increased 2000 1854 million compared 724 million period 1999 increase interest expense reflects issuance sale 10 senior notes issued october 1999 well convertible subordinated notes issued march 2000 loss joint ventures year ended december 31 2000 recorded 39 million loss joint ventures compared 16 million loss year ended december 31 1999 increase attributable losses incurred abovenets joint venture investees net loss net loss 4072 million 2000 versus net loss 1149 million comparable period 1999 year ended december 31 2000 basic net loss per share 076 versus basic net loss per share 028 period 1999 net losses primarily attributable amortization goodwill related abovenet acquisition results operations abovenet since date acquisition increase net interest expense related issuance sale 10 senior notes issued october 1999 well convertible subordinated notes issued march 2000 accounting change described year ended december 31 1999 compared year ended december 31 1998 revenues 1999 752 million 107 greater revenues 364 million 1998 increase reflected higher revenues associated commencement service increased total number customers well revenue recognized related salestype leases portions network contracts entered june 30 1999 inclusion abovenets revenue period september 9 1999 december 31 1999 revenue recognized 1999 using percentage completion method 403 million compared 328 million 1998 impact accounting change described became effective june 30 1999 increase revenues would greater cost sales cost sales 490 million 1999 253 increase cost sales 139 million 1998 cost sales increased 1999 due costs related inclusion abovenets operations since acquisition date costs associated greater number customers well higher fixed costs associated operation maintenance networks costs sales percentages revenue 1999 1998 65 38 respectively increasing result higher fixed costs related operation maintenance fiber optic network well higher fixed costs related internet connectivity services cost sales 1999 related percentage completion method 107 million compared 112 million 1998 cost sales also impacted direct result aforementioned accounting change effective june 30 1999 selling general administrative expenses selling general administrative expenses increased 510 million 1999 147 million 1998 increase 363 million 247 increase selling general administrative expenses resulted primarily increased overhead accommodate network expansion acquisition abovenet percentage revenue selling general administrative expenses increased 68 revenue 1999 40 comparable period 1998 selling general administrative expenses percentage revenue also impacted direct result aforementioned accounting change effective june 30 1999 settlement agreement recorded 19 million 34 million settlement agreements 1999 1998 respectively earnings interest taxes depreciation amortization ebitda year ended december 31 1999 recognized loss interest taxes depreciation amortization 271 million compared income interest taxes depreciation amortization year ended december 31 1998 41 million change ebitda primarily due acquisition abovenet accounting change described depreciation amortization recorded depreciation amortization 460 million 1999 versus 15 million 1998 increase 445 million increase depreciation amortization expense resulted primarily amortization goodwill relating acquisition abovenet increased investment completed fiber optic network additional property equipment acquired income loss operations year ended december 31 1999 loss operations 731 million 757 million change 26 million income operations 1998 loss resulted acquisition abovenet accounting change described interest income interest income 321 million 1999 compared 88 million comparable 1998 period increase 233 million 265 interest income increased result investment portion proceeds issuance sale 10 senior notes due 2008 2009 interest expense net interest expense increased 1999 724 million compared 69 million 1998 increase interest expense reflects issuance sale 10 senior notes due 2008 2009 issued november 1998 october 1999 respectively income loss joint ventures year ended december 31 1999 recorded 16 million loss joint ventures compared 146000 loss year ended december 31 1998 increase attributable losses incurred abovenets joint venture investees net loss net loss 1149 million 1999 versus net income 986000 1998 year ended december 31 1999 basic net loss per share 028 versus basic net income per share 000 period 1998 net losses primarily attributable amortization goodwill related abovenet acquisition results operations abovenet since date acquisition increase net interest expense related issuance sale 10 senior notes due 2008 2009 issued november 1998 october 1999 respectively accounting change described liquidity capital resources initial public offering october 28 1997 145728000 shares class common stock generated net proceeds 1339 million deducting underwriters commission expenses relating initial public offering addition november 25 1998 issued sold 10 senior notes due 2008 generated net proceeds 6300 million also october 25 1999 issued sold 10 senior notes due 2009 generated net proceeds 9742 million october 7 1999 entered securities purchase agreement verizon communications verizon communications purchased shares class common stock convertible subordinated note agreement closed march 6 2000 generated net proceeds approximately 17 billion cash provided operating activities 539 million year ended december 31 2000 compared 597 million provided operations 1999 year ended december 31 2000 used 19 billion cash investing activities compared 3448 million 1999 increase due primarily investments expansion networks related construction progress year ended december 31 2000 financing activities provided 18 billion primarily verizon communications investment compared 9869 million cash provided 1999 may 9 2000 finalized agreement pacific gateway exchange inc purchase pacific gateway ownership position two transoceanic fiberoptic consortia one transactions closed june 2000 closed august 2000 terms sale paid approximately 520 million net cash proceeds pge primarily reimburse payments consortia respective closing dates assumed pges payment obligations cable consortia arising subsequent closing dates anticipate continue incur net operating losses expand complete existing networks construct additional network market services expanding customer base incur operating expenses related business sitesmith anticipate spending approximately 34 billion year ending december 31 2001 expansion fiber optic networks internet service exchanges 50 major cities united states 17 international cities amount incurred approximately 22 billion expansion december 31 2000 believe net proceeds investment verizon communications net proceeds senior notes cash hand vendor financing proceeds senior credit facilities described cash generated operations including advance customer payments enable us fully fund planned buildout networks internet service exchanges working capital needs year ended december 31 2001 indentures governing debt obligations permit us incur additional indebtedness finance engineering construction installation acquisition lease development improvement telecommunications assets result may also consider time private public sales additional equity debt securities entering credit facilities financings depending upon market conditions order finance continued buildout network recently entered commitment letter citicorp usa inc salomon smith barney provides senior credit facilities aggregate amount 3500 million upon execution delivery definitive documentation commitment letter provides revolving credit facility 1500 million term loan facility 2000 million commitment citicorp salomon smith barney subject customary conditions expire may 15 2001 entered definitive documentation senior credit facilities date cannot assure however able successfully consummate senior credit facilities borrowings senior credit facilities bear interest rates depend market conditions time closing obligations senior credit facilities guaranteed existing future subsidiaries secured assets guarantor extent permitted trust indentures governing outstanding senior notes senior credit facilities contain customary provisions relating prepayments representations warranties covenants events default borrowings senior credit facilities subject customary conditions filed universal shelf registration statement form s3 declared effective october 1999 registration statement approximately 490 million aggregate principal amount securities remain eligible sold primary offerings approximately 91 million shares class common stock remain eligible resold secondary offerings may issue sell shares class common stock debt securities facilitate sale shares class common stock existing stockholders addition february 13 2001we filed universal shelf registration statement form s3 register primary offering approximately 10 billion debt equity securities plans present time issue securities pursuant registration statements however market conditions change could issue securities expect continue experience negative cash flows foreseeable future addition part acquisition abovenet recorded approximately 16 billion goodwill intangible assets amortizing periods twenty years excess cost sitesmith acquisition fair value net tangible assets acquired approximately 10 billion preliminarily allocated goodwill intangible assets amortized periods ten years accordingly expect report net operating losses foreseeable future item 7a item 7 management’s discussion analysis financial condition results operations following discussion analysis read together consolidated financial statements related notes appearing elsewhere annual report form 10k executive summary overview provide telecommunications services primarily 14 major metropolitan markets us one uk london services include high bandwidth fiberoptic connectivity solutions primarily large corporate enterprise clients communication carriers including fortune 1000 ftse 500 companies us uk january 2009 announced plans open austin texas fifteenth domestic market components operating income loss revenue costs revenue selling general administrative expenses depreciation amortization description components reporting operating income years ended december 31 2008 2007 operating loss year ended december 31 2006 shown consolidated statements operations included elsewhere annual report form 10k industry demand high bandwidth telecommunications services continues increase believe experience provision services customer base robust extensive network enable us take advantage growing demand although competitive landscape telecommunications industry challenging constantly shifting current economic environment could adversely affect demand believe well positioned continued growth future strategy see item 1 “business strategy” discussion business strategy key performance indicators senior management reviews group financial nonfinancial performance metrics connection management business metrics facilitate timely effective communication results key decisions allowing management react quickly changing requirements changes key performance indicators key financial indicators use include cash flow monthly expense analysis incremental contractual booking new customer business new customer installations churn existing business capital committed expended important nonfinancial performance metrics measure headcount ip traffic growth installation intervals network service performance levels manage employee headcount changes ensure sufficient resources available service customers control expenses employees categorized managed within integrated groups sales operations engineering finance legal human resources worldwide headcount 615 december 31 2008 537 employed us 76 uk one netherlands one japan 2008 highlights consolidated revenue increased 663 million 261 2536 million 3199 million year ended december 31 2008 compared year ended december 31 2007 due principally 254 million increase domestic metro services additionally us revenue fiber infrastructure wan services increased 140 million 120 million respectively year ended december 31 2008 compared year ended december 31 2007 revenue foreign operations primarily uk increased 56 million year ended december 31 2008 compared year ended december 31 2007 year ended december 31 2008 generated operating income 551 million compared operating income 32 million year ended december 31 2007 net income 423 million year ended december 31 2008 compared 138 million year ended december 31 2007 operating income 2007 includes 117 loss litigation net income 2007 also includes noncash gain reversal currency translation adjustments 103 million december 31 2008 871 million unrestricted cash compared 458 million unrestricted cash december 31 2007 increase liquidity 413 million required maintain unrestricted cash balance least 20 million times accordance secured credit facility increase cash december 31 2008 primarily attributable cash generated operating activities 1161 million plus cash net debt acquisition costs 336 million provided draw downs company’s secured credit facility cash provided exercise stock purchase warrants totaling 107 million offset cash used purchase property equipment 1172 million 2008 cash flow generated operating activities increased result improvement operating results described believe based business plan existing cash operating activities funds available secured credit facility sufficient fund operations planned capital expenditures liquidity requirements least march 31 2010 revenue increased 2008 compared 2007 costs period grew slower rate revenue resulted improvement operating income operating results 2008 favorably impacted noncash settlement dispute sbc 35 million recognized third quarter 2008 collection termination fee 82 million recognized fourth quarter 2008 included termination revenue 154 million year ended december 31 2008 exceeded 85 million generated year ended december 31 2007 offsetting positive impacts writeoff investment new information technology platform 23 million recorded third quarter 2008 see item 8 “financial statements supplementary data” note 4 “property equipment asset abandonment” note 16 “litigation” accompanying consolidated financial statements included elsewhere annual report form 10k 2007 operating results include loss litigation 117 million 2009 outlook 2009 outlook tempered overall negative economic trends weakness financial services industry provide services significant number customers believe based upon contracted projects awaiting delivery customers continue add revenue base first half 2009 additionally strong cash position access financing secured credit facility needed however cannot predict impact customer terminations reductions orders financial performance 2009 thereafter revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue subsequently amortized income related service period substantial portion revenue derived multiyear contracts services provide often required make initial outlay capital extend network purchase equipment provision services customers terms contracts customer required pay termination fee contractual damages decline contract term contract terminated customer without basis expiration ensure recover initial capital investment plus acceptable return also derive portion revenues annual monthtomonth contracts late 2008 modified service groupings related revenue accurately reflect focus delivering high bandwidth services new groups fiber infrastructure services metro services wan services recasted revenue groupings applicable 2007 2006 comparative purposes trend analysis however revenue 2007 compared 2006 included item 7 “management’s discussion analysis financial condition results operations” reflects original service groupings reported annual report form 10k year ended december 31 2007 groupings consisted fiber services metro transport services ip services long haul services data centers represented fifth service sold 2006 costs revenue costs revenue primarily include following real estate expenses operational sites ii costs incurred operate networks licenses rightofway permit fees professional fees related networks iii third party telecommunications fiber conduit expenses iv repairs maintenance costs incurred connection networks v employeerelated costs relating operation networks selling general administrative expenses “sga” sga primarily consist employeerelated costs salaries benefits stockbased compensation expense employees directly attributable operation networks ii real estate expenses administrative sites iii professional consulting audit fees iv taxes income taxes including property taxes trust fundrelated taxes gross receipts taxes v restructuring costs vi regulatory costs insurance telecommunications costs professional fees license maintenance fees internal software hardware depreciation amortization depreciation amortization consists ratable measurement use property equipment depreciation amortization network assets commences assets placed service provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted us “us gaap” preparation financial statements conformity us gaap requires management make judgments estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements well reported amounts revenue expenses reporting period management continually evaluates judgments estimates assumptions based historical experience available information following discussion items within consolidated financial statements involve significant judgments assumptions uncertainties estimates involved areas considered critical require high levels subjectivity judgment account highly uncertain matters actual results events differ materially contemplated management making estimates impact consolidated financial statements could material full description significant accounting policies see note 2 “basis presentation significant accounting policies” accompanying consolidated financial statements included elsewhere annual report form 10k corrections prior years’ misstatements connection audit financial statements year ended december 31 2006 determined certain errors primarily related income taxes depreciation certain accruals included financial statements previously issued years ended december 31 2005 2004 period ended december 31 2003 including fresh start balance sheet september 8 2003 adjustments made applicable period effect adjustments would increase net loss 09 million 009 per basic diluted share year ended december 31 2005 increase net loss 01 million 001 per basic diluted share year ended december 31 2004 decrease net loss 02 million 002 per basic diluted share period ended december 31 2003 management believe based upon qualitative quantitative analysis errors material require restatement previously issued financial statements accordingly corrections reflected financial statements year ended december 31 2006 resulted reduction net income 03 million 003 per basic diluted share reclassification february 29 2008 filed current report form 8k among things included consolidated statement operations year ended december 31 2006 consolidated statement operations year ended december 31 2006 included elsewhere annual report form 10k annual report form 10k year ended december 31 2006 reflects change classification certain expenses amounts recorded consolidated statement operations included current report form 8k dated february 29 2008 change resulted costs revenue decreasing 93 million 1312 million 1219 million selling general administrative expenses increasing 93 million 618 million 711 million year ended december 31 2006 reclassification affect operating loss net income earnings per share basic diluted assets liabilities shareholders’ equity year ended december 31 2006 reclassification certain reclassifications made consolidated financial statements year ended december 31 2007 conform classifications used year ended december 31 2008 fresh start accounting emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires us allocate reorganization value assets liabilities based upon estimated fair values accordance statement position 907 “financial reporting entities reorganization bankruptcy code” “sop 907” developed set financial projections utilized expert assist us estimating fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries 3 calculation enterprise value based upon future cash flows based upon projections adopting fresh start accounting resulted material adjustments historical carrying values assets liabilities reorganization value allocated assets liabilities based upon fair values engaged independent appraiser assist us determining fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination comprehensive loss accumulated deficit accounts revenue recognition revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income related service period accordance sec staff accounting bulletin sab 101 “revenue recognition financial statements” amended sec sab 104 “revenue recognition” generally amortize revenue related installation services straightline basis contracted customer relationship generally ranges two twenty years termination revenue recognized customer discontinues service prior end contract period previously received consideration revenue recognition deferred termination revenue also recognized customers made early termination payments us settle contractually committed purchase amounts customer longer expects meet renegotiate contract customer result longer obligated provide services consideration previously received revenue recognition deferred 2008 2007 2006 included receipts bankruptcy claim settlements former customers termination revenue termination revenue reported together service revenue amounted 154 million 85 million 83 million 2008 2007 2006 respectively accounts receivable reserves sales credit reserves reporting period must make estimates potential future sales credits issued respect current revenue related billing errors service interruptions customer disputes recorded reduction revenue analyze historical credit activity changes customer demand related current billing service interruptions evaluating credit reserve requirements reserve known billing errors service interruptions incurred review customer disputes reserve believe valid claims also estimate sales credit reserve related unknown billing errors disputes based historical credit activity determination general sales credit customer dispute credit reserve requirements involves significant estimation assumption allowance doubtful accounts reporting period must make estimates potential losses resulting inability customers make required payments analyze reserve requirements using several factors including length time particular customer’s receivables past due changes customer’s creditworthiness customer’s payment history length customer’s relationship us current economic climate current industry trends specific reserve requirement review performed customer accounts larger balances reserve analysis also performed accounts subject specific review utilizing factors previously mentioned due current economic climate competitive environment telecommunications sector volatility financial strength particular customer segments including resellers clecs collectability receivables credit worthiness customers may become difficult unpredictable changes financial viability significant customers worsening economic conditions changes ability meet service level requirements may require changes estimate recoverability receivables revenue previously unrecognized recovered litigation negotiations settlements judgments recognized termination revenue period collected determination specific general allowance doubtful accounts reserve requirements involves significant estimations assumptions property equipment property equipment owned effective date stated estimated fair values effective date based reorganization value purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress included network infrastructure assets respective balance sheets certain internal direct labor costs constructing installing property equipment capitalized direct labor determined based upon core group field engineers ip engineers reflects capitalized salary plus related benefits based upon allocation time capitalized noncapitalized projects individuals’ salaries considered costs directly associated construction certain infrastructure customer buildouts salaries related benefits nonengineers supporting staff part engineering departments considered part pool subject capitalization capitalized direct labor amounted 107 million 86 million 51 million years ended december 31 2008 2007 2006 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease estimated useful lives company’s property equipment follows property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income loss time required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances fully depreciate remaining carrying value network infrastructure removed rendered unusable capitalize new fiber associated construction costs relocation placed service reduced reimbursements received costs capitalized relocation costs amounting 26 million 22 million 89 million years ended december 31 2008 2007 2006 respectively fully depreciated remaining carrying value network infrastructure rendered unusable original cost basis totaled 03 million 03 million 16 million 02 million 02 million 16 million net book value basis years ended december 31 2008 2007 2006 respectively extent relocation requires movement existing network infrastructure another location related costs included results operations accordance statement financial accounting standards “sfas” 34 “capitalization interest cost” capitalize interest certain construction projects amounts capitalized years ended december 31 2008 2007 2006 accordance sfas 144 “accounting impairment disposal longlived assets” periodically evaluate recoverability longlived assets evaluate assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value asset included costs revenue years ended december 31 2008 2007 provisions equipment impairment 04 million 22 million respectively recorded recognize loss value certain equipment held inventory provision impairment amounts provided year ended december 31 2006 asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” recognize fair value liability asset retirement obligation period incurred reasonable estimate fair value made asset retirement obligations related decommissioning removal equipment restoration leased facilities removal certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities asset retirement obligations capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 71 million 61 million december 31 2008 2007 respectively 40 million 33 million respectively included “accrued expenses” 31 million 28 million respectively included “other longterm liabilities” dates accretion expense included “interest expense” amounted 03 million year ended december 31 2008 02 million years ended december 31 2007 2006 derivative financial instruments utilized interest rate swaps derivative instruments mitigate exposure interest rate risk purchased first interest rate swap august 4 2008 hedge interest rate 24 million portion term loan purchased second interest rate swap november 14 2008 hedge interest rate additional 12 million portion term loan provided suntrust bank see note 10 “longterm debt” accompanying consolidated financial statements included elsewhere annual report form 10k accounted derivative instruments sfas 133 “accounting derivative instruments hedging activities” “sfas 133” sfas 133 requires derivative instruments recognized financial statements measured fair value regardless purpose intent holding policy historically entered derivative financial instruments trading purposes speculation based criteria defined sfas 133 interest rate swap considered cash flow hedge 100 effective accordingly changes fair value derivatives recorded period accumulated comprehensive income loss changes fair value derivative instruments reported accumulated comprehensive income loss reclassified earnings period earnings impacted variability cash flows hedged item ineffective portion hedges recognized current period earnings unrealized net loss recorded accumulated comprehensive income loss december 31 2008 16 million interest rate swaps amount reclassified earnings underlying forecasted transactions occur marktomarket value cash flow hedge recorded noncurrent assets longterm liabilities offsetting gains losses accumulated comprehensive loss interest rate swap agreements notional amounts provide indication extent involvement agreements represent exposure market risk following table shows notional amount outstanding maturity date weighted average receive pay rates interest rate swap agreement december 31 2008 interest expense agreements respective debt instruments hedge recorded net effective interest rate hedged transaction fair value financial instruments adopted sfas 157 “fair value measurements” “sfas 157” financial assets liabilities effective january 1 2008 pronouncement defines fair value establishes framework measuring fair value requires expanded disclosures fair value measurements sfas 157 emphasizes fair value marketbased measurement entityspecific measurement defines fair value price would received sell asset transfer liability orderly transaction market participants measurement date sfas 157 discusses valuation techniques market approach comparable market prices income approach present value future income cash flow cost approach cost replace service capacity asset replacement cost based upon observable unobservable inputs observable inputs reflect market data obtained independent sources unobservable inputs reflect market assumptions sfas 157 utilizes fair value hierarchy prioritizes inputs fair value measurement techniques three broad levels level 1 observable inputs quoted prices identical assets liabilities active markets level 2 observable inputs quoted prices directly indirectly observable asset liability including quoted prices similar assets liabilities active markets quoted prices similar identical assets liabilities markets active modelderived valuations whose inputs observable whose significant value drivers observable level 3 unobservable inputs reflect reporting entity’s assumptions investment overnight money market institutional funds amounted 819 million 409 million december 31 2008 december 31 2007 respectively included cash equivalents accompanying balance sheets classified level 1 asset party two interest rate swaps utilized modify interest rate risk recorded marktomarket value interest rate swaps 16 million longterm liabilities consolidated balance sheet december 31 2008 consolidated balance sheets include following financial instruments shortterm cash investments trade accounts receivable trade accounts payable believe carrying amounts financial statements approximate fair value financial instruments due relatively short period time origination instruments expected realization interest rates approximate current market rates consolidated balance sheet also includes fair value interest rate swap contract classified level 2 liability concentration credit risk financial instruments potentially subject us concentration credit risk consist principally temporary cash investments accounts receivable enter financial instruments trading speculative purposes cash equivalents invested investmentgrade shortterm investment instruments high quality financial institutions trade receivables unsecured geographically dispersed single customer accounts greater 10 consolidated revenue accounts receivable net perform ongoing credit evaluations customers’ financial condition allowance noncollection accounts receivable based upon expected collectability accounts receivable place cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits given recent developments financial markets exposure customers financial services industry ability collect contractual amounts due certain customers severely impacted developments may adversely affected foreign currency translation transactions functional currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect applicable balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive income loss foreign exchange transaction gains losses generally included “other income” consolidated statements operations income taxes account income taxes accordance sfas 109 “accounting income taxes” “sfas 109” deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases net operating loss tax credit carryforwards tax contingencies deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled record valuation allowance deferred tax assets extent likely portion deferred tax assets realized subject audit various taxing authorities audits may result proposed assessments ultimate resolution results us owing additional taxes required establish reserves financial accounting standards board “fasb” interpretation 48 “accounting uncertainty income taxes” “interpretation 48” despite belief tax return positions appropriate supportable appropriate tax law believe uncertainty respect certain positions may succeed realizing tax position evaluated tax positions items uncertainty accordance interpretation 48 determined tax positions highly certain within meaning interpretation 48 believe estimates assumptions used support evaluation tax benefit realization reasonable accordingly adjustments made consolidated financial statements years ended december 31 2008 2007 deferred taxes current deferred income taxes associated valuation allowances impacted events transactions arising normal course business well special nonrecurring items assessment appropriate amount classification income taxes dependent several factors including estimates timing realization deferred income tax income deductions actual realization deferred tax assets liabilities may materially differ estimates result changes tax laws well unanticipated future transactions impacting related income tax balances assessment valuation allowance deferred tax assets based weight available evidence portion entire deferred tax asset realized deferred tax liabilities first applied deferred tax assets reducing need valuation allowance future utilization remaining net deferred tax asset would require ability forecast future earnings based past performance resulting net loss positions sufficient evidence exists require valuation allowance net deferred tax asset balance result bankruptcy estimates made impact deferred tax balances factors resulting estimation include limited fresh start valuation assets liabilities implications cancellation indebtedness income various factors stockbased compensation september 8 2003 adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 13 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k fair value provisions sfas 123 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards historical basis determining volatility expected life assumptions model due limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period recognize related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation plan reorganization outstanding stock options cancelled effective january 1 2006 adopted sfas 123r “sharebased payment” “sfas 123r” using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 permitted companies estimate forfeitures recognize impact forfeitures occured recognized impact forfeitures occurred sfas 123 adoption sfas 123r resulted change accounting treatment material impact consolidated financial statements following assumptions used company calculate weighted average fair value stock options granted description stockbased compensation programs see note 13 “stockbased compensation” accompanying consolidated financial statements included elsewhere annual report form 10k results operations year ended december 31 2008 compared year ended december 31 consolidated results dollars millions table set forth nmnot meaningful use term “consolidated” describe total results two geographic segments us uk others throughout document unless otherwise noted amounts discussed consolidated amounts revenue consolidated revenue 3199 million year ended december 31 2008 compared 2536 million year ended december 31 2007 increase 663 million 261 revenue us operations increased 607 million 267 2275 million year ended december 31 2007 2882 million year ended december 31 2008 principal reason increase due continued growth metro fiber infrastructure wan services us revenue metro services increased 254 million 591 430 million year ended december 31 2007 684 million year ended december 31 2008 revenue fiber infrastructure services increased 140 million 102 1370 million year ended december 31 2007 1510 million year ended december 31 2008 revenue wan services increased 120 million 326 368 million year ended december 31 2007 488 million year ended december 31 2008 significant portion growth attributable new contracts existing customers revenue foreign operations primarily uk increased 56 million 215 261 million year ended december 31 2007 317 million year ended december 31 2008 increase primarily due continued focus increasing existing services uk costs revenue consolidated costs revenue year ended december 31 2008 1260 million compared 1103 million year ended december 31 2007 increase 157 million 142 consolidated costs revenue percentage revenue 394 year ended december 31 2008 compared 435 year ended december 31 2007 resulting consolidated gross profit margin 606 year ended december 31 2008 compared 565 year ended december 31 2007 costs revenue us operations 1166 million 1019 million years ended december 31 2008 2007 respectively increase 147 million 144 increase domestic costs revenue year ended december 31 2008 compared year ended december 31 2007 attributable principally increase 49 million colocation expenses support ip network services increase presence third party data centers ii increase 36 million repairs maintenance charges cable transmission equipment iii increase 32 million payroll related expenses primarily related increase headcount operations technical services systems engineering groups iv increase 20 million expenses associated third party circuits additionally year ended december 31 2008 includes provision equipment impairment relating inventory 04 million lease abandonment cost 07 million compared provision equipment impairment 22 million lease abandonment cost 03 million year ended december 31 2007 costs revenue foreign operations 94 million year ended december 31 2008 compared 84 million year ended december 31 2007 increase 10 million 119 consistent revenue growth selling general administrative expenses “sga” consolidated sga year ended december 31 2008 905 million compared 809 million year ended december 31 2007 increase 96 million 119 sga percentage revenue 283 year ended december 31 2008 compared 319 year ended december 31 2007 us sga 796 million year ended december 31 2008 compared 693 million year ended december 31 2007 increase 103 million 149 sga us operations year ended december 31 2008 compared year ended december 31 2007 increased primarily due increase 38 million noncash stockbased compensation expense 80 million year ended december 31 2007 118 million year ended december 31 2008 reasons increase expense associated restricted stock units granted 2008 plan ii 07 million expense associated modification options purchase common stock connection mr doris’ termination recognized three months ended march 31 2008 iii compensation expense 09 million associated repurchase shares recipients restricted stock units excess minimum withholding requirements additionally payroll payrollrelated expenses increased 46 million 332 million year ended december 31 2007 378 million year ended december 31 2008 primarily due increase bonus accrual 12 million increase severance expense 06 million increase commission expense 06 million increase salaries 22 million due year salary increases headcount 2008 also provided impairment 23 million respect asset abandonment see note 4 “property equipment asset abandonment” discussion increases partially offset reduction transactionbased taxes 05 million reduction professional fees 24 million sga foreign operations 109 million year ended december 31 2008 compared 116 million year ended december 31 2007 decrease 07 million 60 depreciation amortization consolidated depreciation amortization 2008 483 million compared 475 million 2007 increase 08 million 17 consolidated depreciation amortization percentage revenue 151 2008 compared 187 2007 depreciation amortization increased result additions property equipment 2008 full year effect depreciation property equipment acquired throughout 2007 increase partially offset elimination depreciation expense associated property equipment sold disposed 2008 2007 property equipment became fully depreciated 2008 interest income interest income substantially earned us decreased 33 million 2007 18 million 2008 decrease 15 million 455 primarily due decrease shortterm interest rates 2008 compared 2007 partially offset slight increase average balances available investment interest expense interest expense substantially incurred us includes interest expense borrowed amounts secured credit facility availability fees unused portion secured credit facility amortization debt acquisition costs including front fees related secured credit facility interest expense related capital lease obligation interest accrued certain tax liabilities interest outstanding balance deferred fair value rent liabilities established fresh start interest accretion relating asset retirement obligations interest expense increased 23 million 2007 39 million 2008 increase 16 million 696 primarily due interest expense incurred relating secured credit facility partially offset decrease interest expense fair market value rent liabilities 06 million 2007 04 million 2008 expense income net expense income net composed primarily expense income nonrecurring transactions comparative trend perspective consolidated expense income net expense 24 million year ended december 31 2008 compared net income 38 million year ended december 31 2007 decrease 62 million us income net 28 million year ended december 31 2008 compared income net 27 million year ended december 31 2007 increase 01 million foreign operations income net expense 52 million year ended december 31 2008 compared income net 11 million year ended december 31 2007 decrease 63 million year ended december 31 2008 consolidated expense net comprised loss foreign currency 65 million offset gains arising settlement reversal certain tax liabilities 28 million net gain sale disposition property equipment 09 million gains 04 million year ended december 31 2007 consolidated income net comprised gains arising settlement reversal certain tax liabilities 22 million gain legal settlement 06 million recovery occupancy taxes previously paid 05 million gains foreign currency 03 million gain leased asset termination 03 million gains 04 million offset net loss sale disposition property equipment 05 million results operations year ended december 31 2007 compared year ended december 31 consolidated results dollars millions table set forth nmnot meaningful revenue consolidated revenue 2007 2536 million compared 2367 million 2006 increase 169 million 71 revenue us operations increased 99 million 45 2176 million 2006 2275 million 2007 principal reason increase due continued growth fiber services metro transport services 2007 us revenue fiber services increased 111 million 92 1203 million 2006 1314 million 2007 revenue metro transport services increased 223 million 791 282 million 2006 505 million 2007 increases offset decrease data center revenue 237 million 967 245 million 2006 08 million 2007 due sale domestic data centers fourth quarter 2006 four october 2006 one november 2006 revenue foreign operations primarily uk increased 70 million 366 191 million 2006 261 million 2007 increase primarily due change currency translation rates 2007 compared 2006 focus core businesses uk costs revenue consolidated costs revenue 2007 1103 million compared 1219 million 2006 dec rease 116 million 95 consolidated costs revenue percentage revenue 435 2007 compared 515 2006 resulting consolidated gross profit margin 565 485 2007 2006 respectively costs revenue us operations 1019 million 1136 million 2007 2006 respectively decrease 117 million 103 decrease domestic costs revenue 2007 compared 2006 attributable principally sale domestic data centers resulted decrease costs revenue 154 million 2007 compared 2006 additionally costs revenue reduced due amount salaries capitalized domestic capitalized labor increased 40 million 2006 79 million 2007 decreases costs revenue partially offset provision equipment impairment 22 million increase 28 million long haul fiber lease expense increase 11 million colocation operating expense increase 10 million third party network costs revenue foreign operations 84 million 2007 compared 83 million 2006 increase 01 million 12 selling general administrative expenses “sga” consolidated sga 2007 809 million compared 711 million 2006 increase 98 million 138 sga percentage revenue 319 2007 compared 300 2006 us sga 693 million 2007 compared 634 million 2006 increase 59 million 93 sga us operations 2007 compared 2006 increased primarily due increase noncash stockbased compensation expense principally related restricted stock units granted 2007 34 million 2006 80 million 2007 additionally payroll payrollrelated expenses increased 75 million 257 million 2006 332 million 2007 due increases salaries headcount increases partially offset reduction professional fees 46 million reduction transactionbased taxes 14 million sga foreign operations 2007 116 million compared 77 million 2006 increase 39 million 506 due primarily increase payroll payrollrelated expenses 31 million ii increase occupancy costs 10 million due lease new office space uk 2007 iii increase operating costs 13 million increases partially offset decreases professional fees 12 million due decline auditrelated fees ii stockbased compensation expense 03 million depreciation amortization consolidated depreciation amortization 2007 475 million compared 472 million 2006 increase 03 million 06 consolidated depreciation amortization percentage revenue 187 2007 compared 199 2006 depreciation amortization increased result additions property equipment 2007 full year effect depreciation property equipment acquired throughout 2006 increase partially offset elimination depreciation expense associated property equipment sold disposed 2007 2006 primarily data centers late 2006 property equipment became fully depreciated 2007 loss litigation 2007 recorded loss litigation 117 million respect gvn litigation amount 08 million paid 2007 109 million accrued december 31 2007 see item 3 “legal proceedings” item 8 “financial statements supplementary data” note 16 “litigation” accompanying consolidated financial statements included elsewhere annual report form 10k gain reversal foreign currency translation adjustments liquidation subsidiaries recognized noncash gain reversal foreign currency translation adjustments 103 million previously included comprehensive income statements shareholders’ equity connection liquidation metromedia fiber network bv metromedia fiber network services ltd sitesmith ltd whollyowned subsidiary fourth quarter 2007 interest income interest income substantially earned us increased 24 million 2006 33 million 2007 increase 09 million 375 primarily due additional funds available investment following sales domestic data centers fourth quarter 2006 higher shortterm interest rates interest expense interest expense substantially incurred us includes interest expense related capital lease obligation interest accrued certain tax liabilities interest outstanding balance deferred fair value rent liabilities established fresh start interest accretion relating certain asset retirement obligations interest expense decreased 58 million 2006 23 million 2007 decrease 35 million 603 primarily due decrease interest expense fair market value rent liabilities 39 million 2006 06 million 2007 due reduction balances primarily due sale domestic data centers fourth quarter 2006 income net income net composed primarily income nonrecurring transactions comparative trend perspective consolidated income net 38 million 2007 compared 21 million 2006 increase 17 million us income net 27 million 2007 compared net expense 14 million 2006 increase 41 million foreign operations income net 11 million 2007 compared 35 million 2006 decrease 24 million 2007 consolidated income net comprised primarily gain arising reversal certain tax liabilities 22 million gain legal settlement 06 million gains 04 million offset loss sale disposition property equipment 05 million loss sale certain investments 04 million 2006 consolidated income net comprised primarily gain arising reversal certain tax liabilities 32 million gain foreign currency 20 million gains 15 million offset loss sale disposition property equipment 46 million gain sales data centers gain sales domestic data centers 482 million 2006 represented excess proceeds received sale totaling 431 million plus reversal deferred fair value rent liability sfas 13 “accounting leases” liability associated related parties totaling 280 million 60 million respectively carrying value related assets sold comparable sale 2007 income discontinued operations net taxes income discontinued operations net taxes year ended december 31 2006 includes loss discontinued operations 09 million gain sale abovenet uk london 39 million discontinued operations year ended december 31 2007 liquidity capital resources working capital 118 million december 31 2008 compared working capital deficit 261 million december 31 2007 increase working capital due primarily increase cash equivalent balances december 31 2008 871 million compared 458 million december 31 2007 increase 413 million required maintain unrestricted cash balance least 20 million times accordance secured credit facility increase cash december 31 2008 primarily attributable proceeds borrowings secured credit facility net financing costs 336 million cash generated operating activities 1161 million release restricted cash equivalents 14 million 10 million secured pledge revolver secured credit facility partially offset use cash purchase property equipment 1172 million net cash provided operating activities 1161 million 2008 compared 697 million 2007 increase 464 million net cash provided operating activities 2008 resulted primarily add back noncash items deducted determination net income principally depreciation amortization 483 million stockbased compensation expense 125 million provisions equipment impairment asset abandonment 27 million net cash provided operating activities 2007 resulted primarily add back noncash items deducted determination net income principally depreciation amortization 475 million stockbased compensation expense 82 million provision equipment impairment 22 million partially offset noncash gain 103 million reversal foreign currency translation adjustments liquidation certain subsidiaries net cash used investing activities 2008 1156 million compared 893 million 2007 increase 263 million net cash used investing activities 2008 primarily attributable purchases property equipment 1172 million partially offset proceeds generated sales property equipment 16 million net cash used investing activities 2007 reflects cash used purchases property equipment totaling 908 million partially offset receipt 13 million cash connection 2006 sale abovenet uk proceeds generated sales property equipment 02 million property equipment purchased period used primarily connect new customers networks build infrastructure net cash provided financing activities 426 million 2008 composed 336 million net proceeds received funding 360 million term loan secured credit facility proceeds exercise warrants 107 million release restricted cash equivalents 14 million partially offset purchase employees shares underlying vested restricted stock units 29 million principal payment capital lease obligation 02 million net cash used financing activities 54 million 2007 composed 97 million utilized buy back shares employees connection delivery vested restricted stock units principal payment capital lease obligation 01 million offset proceeds exercise warrants 11 million excess tax benefit realized sharebased payment arrangements 28 million reduction restricted cash equivalents 05 million 2008 generated cash operations sufficient fund operating expenses generated 107 million exercise stock purchase warrants drew 360 million 336 million deducting debt acquisition costs secured credit facility 2008 used 1172 capital expenditures additionally 2008 paid aggregate 20 million repurchase shares common stock underlying vested restricted stock units fund estimated tax obligations certain cases minimum withholding obligations 09 million purchase stock employees see item 11 “executive compensation” note 11 “equity stock purchase agreements” note 13 “stockbased compensation restricted stock units” accompanying consolidated financial statements included elsewhere annual report form 10k expect cash operations continue exceed operating expenses plan continue fund portion future capital projects existing business growth net cash operations february 29 2008 entered 60 million secured credit facility comprised 18 million revolver ii 24 million term loan iii 18 million delayed draw term loan initial lenders secured credit facility societe generale cit lending services corporation secured credit facility matures fifth anniversary closing date february 28 2013 secured credit facility secured substantially domestic assets paid 09 million upfront fees lenders 03 million financial advisors assisted us obtaining secured credit facility ability draw upon available commitments revolver subject compliance covenants contained credit agreement continued ability make certain representations warranties among things covenants restrict ability pay dividends limit annual capital expenditures 2008 2009 2010 require maintain minimum 20 million cash deposits times provide net total funded debt ratio cannot time exceed specified amount require maintain minimum consolidated fixed charges coverage ratio august 31 2008 24 million outstanding secured credit facility september 26 2008 executed joinder agreement secured credit facility added suntrust bank additional lender increased amount secured credit facility 90 million effective october 1 2008 connection joinder agreement paid 045 million fee closing aggregate 025 million advisory fees availability revolver increased 27 million term loan increased 36 million available delayed draw term loan increased 27 million additionally delayed draw term loan option available secured credit facility originally scheduled expire november 25 2008 extended june 30 2009 party two interest rate swaps utilized modify interest rate risk secured credit facility chosen 30 day libor interest rate term interest rate swaps 30 day libor 190 december 31 2008 believe existing cash operating activities funds available secured credit facility sufficient fund operating expenses planned capital expenditures liquidity requirements least march 31 2010 addition future may consider making acquisitions companies product lines support growth strategy may finance acquisition companies product lines existing cash balances borrowings banks institutional lenders andor public private offerings debt andor equity securities cannot provide assurance funds available us favorable terms contractual obligations certain facilities equipment leased noncancelable operating capital leases additionally discussed certain longterm obligations rightsofway franchise fees building access fees following schedule fiscal year future minimum rental payments required current operating leases capital lease contractual arrangements december 31 2008 measured december 31 2008 excluded table estimated capital commitments 174 million december 31 2008 comprised principally customer buildouts based upon contracts recorded fourth quarter 2008 work progress additionally early january 2009 announced plans open austin texas fifteenth domestic metro market significant portion austin texas metro market built prior 2003 committed approximately 36 million capital expenditures complete metro network buildout acquire long haul fiber equipment connect austin network networks dallas houston note payable currently hedged three year terms table assumes interest rate fixed hedge entire term secured credit facility table excludes unused fees 05 unused balances additionally december 31 2008 53 million available secured credit facility 27 million represents delayed draw term loan expires june 30 2009 unless extended 26 million revolver segment results dollars millions tables set forth results excluding intercompany activity segmented according groupings based geography united states united kingdom others united states united kingdom others increase decrease increase decrease nmnot meaningful segment results 2008 2007 2006 reflect elimination intercompany sales charges credit risk financial instruments potentially subject us concentration credit risk consist principally temporary cash investments accounts receivable enter financial instruments trading speculative purposes auction rate notes place cash equivalents shortterm investment instruments high quality financial institutions us uk trade receivables unsecured geographically dispersed throughout us uk include large small corporate entities spanning numerous industries perform ongoing credit evaluations customers’ financial condition place cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits given recent developments financial markets exposure customers financial services industry ability collect contractual amounts due certain customers severely impacted developments may adversely affected offbalance sheet arrangements offbalance sheet arrangements operating leases participate transactions generate relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities “spes” would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes inflation believe business impacted inflation degree general economy recently issued accounting pronouncements september 2006 fasb issued sfas 157 “the fair value measurements” “sfas 157” effective fiscal years beginning november 15 2007 interim periods within fiscal years sfas 157 establishes framework measuring fair value accounting principles generally accepted us expands disclosures fair value measurement february 2008 fasb deferred adoption sfas 157 provided fasb staff position fas 1572 “fsp fas 1572” one year applies certain items including assets liabilities initially measured fair value business combination reporting units certain assets liabilities measured fair value connection goodwill impairment tests accordance sfas 142 “goodwill intangible assets” longlived assets measured fair value impairment assessments sfas 144 “accounting impairment disposal longlived assets” company adopted sfas 157 january 1 2008 respect financial assets liabilities february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” “sfas 159” sfas 159 gives entities option carry financial assets liabilities fair value changes fair value recorded earnings statement effective first quarter fiscal 2009 material impact consolidated financial position results operations cash flows december 2007 fasb issued sfas 141r “business combinations revised” “sfas 141r” replace sfas 141 “business combinations” sfas 141r requires use acquisition method accounting defines acquirer establishes acquisition date broadens scope transactions events one entity obtains control one businesses statement effective business combinations transactions entered fiscal years beginning december 15 2008 still evaluating impact sfas 141r however adoption statement expected material impact financial position results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” “sfas 160” sfas 160 establishes accounting reporting standards noncontrolling interest subsidiary retained interest gain loss subsidiary deconsolidated statement effective financial statements issued fiscal years beginning december 15 2008 still evaluating impact sfas 160 expect material impact financial position results operations december 2007 sec issued sab 110 “certain assumptions used valuation methods expected term” “sab 110” sab 110 allows companies continue use simplified method defined sab 107 “sharebased payment” estimate expected term stock options certain circumstances simplified method estimating expected term uses midpoint vesting term contractual term stock option analyzed circumstances use simplified method allowed opted use simplified method stock options granted 2008 management believes sufficient historical exercise data provide reasonable basis upon estimate expected term due limited period time shares common stock publicly traded march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” “sfas 161” requires additional disclosures objectives using derivative instruments method derivative instruments related hedged items accounted fasb statement 133 related interpretations effect derivative instruments related hedged items financial position financial performance cash flows sfas 161 also requires disclosure fair values derivative instruments gains losses tabular format sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 early adoption encouraged april 2008 fasb issued emerging issues task force “eitf 0705” “determining whether instrument embedded feature indexed entity’s stock” “eitf 0705” eitf 0705 provides guidance determining types instruments embedded features instrument held reporting entity considered indexed stock purpose evaluating first criteria scope exception paragraph 11 sfas 133 eitf 0705 effective financial statements issued fiscal years beginning december 15 2008 early application permitted adopting eitf 0705 material impact financial position results operations june 2008 fasb issued eitf 083 “accounting lessees maintenance deposits lease agreements” “eitf 083” eitf 083 mandates nonrefundable maintenance deposits accounted deposit underlying maintenance performed deposit expensed capitalized accordance lessee’s maintenance accounting policy eitf 083 effective fiscal years interim periods within fiscal years beginning december 15 2008 expect eitf 083 material impact financial position results operations cash flows june 2008 fasb issued eitf 0361 “determining whether instruments granted sharedbased payment transactions participating securities” “eitf 0361” eitf 0361 provides unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities shall included computation earnings per share pursuant twoclass method eitf 0361 effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years upon adoption company required retrospectively adjust earnings per share date including amounts related interim periods summaries earnings selected financial data conform provisions eitf 0361 currently evaluating impact adoption eitf 0361 financial position results operations item 7a item 7 managements discussion analysis financial condition results operations following discussion analysis relates financial condition results operations three years ended december 31 1999 information read conjunction item 6 selected consolidated financial data consolidated financial statements related notes thereto beginning page statement forwardlooking information certain statements section forwardlooking statements read information part special note regarding forwardlooking statements information presentation forwardlooking information general provide dedicated fiber optic infrastructure highbandwidth internet connectivity communications intensive customers facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure communications carriers corporate government customers united states europe acquisition abovenet also provide onehop connectivity enables missioncritical internet applications thrive well highbandwidth infrastructure including managed colocation services currently operations construction eleven tier cities throughout united states seven selected international markets intend expand presence include approximately 50 tier ii markets united states 17 major international markets existing intracity networks consist approximately 514000 fiber miles covering excess 1000 route miles first eleven tier cities currently working expand existing local intracity networks metropolitan areas construct additional intracity networks approximately 40 additional tier ii markets united states intercity network currently consists approximately 132000 fiber miles primarily covering 255 routemile network built new york city washington dc also built contracted acquire primarily fiber swaps nationwide dark fiber network linking intracity networks addition domestic networks intend expand international presence include approximately 17 major markets february 1999 entered agreement viatel inc carrier 1 holdings ltd jointly build dark fiber intercity network selected cities throughout germany completed german network consist approximately 320000 fiber miles covering excess 1450 route miles connecting 14 major cities also swapped strands fiber united states strands fiber circe network connects number european markets addition intercity networks constructing 16 intracity networks throughout europe separately also entered contract acquire rights dark fiber network facilities toronto canada september 8 1999 completed acquisition abovenet holders abovenet common stock received 235 shares class common stock share abovenet common stock abovenet leading provider facilitiesbased managed services customerowned web servers related equipment known colocation high performance internet connectivity solutions electronic commerce business critical internet operations paix abovenets wholly owned subsidiary serves packet switching center isps paix also offers secure faulttolerant colocation services isps acquisition recorded purchase method accounting abovenets results included results operations subsequent acquisition date october 7 1999 entered securities purchase agreement bell atlantic bell atlantic would agreed purchase approximately 512 million newly issued shares class common stock purchase price 1400 per share convertible subordinated note approximately 9753 million convertible shares class common stock conversion price 1700 per share transaction closed march 6 2000 assuming issuance 512 million shares class common stock conversion convertible subordinated note investment would represent 182 outstanding shares bell atlantic also agreed pay us 550 million next three years exchange delivery fiber optic facilities next five years proceeds two transactions used fund expansion network contracts provision dark fiber accounted operating leases recognize recurring monthly revenues certain contracts recognize revenue percentage completion method provision dark fiber effective june 30 1999 financial accounting standards board issued fasb interpretation 43real estate sales fin 43 requires sales leases integral equipment subsequent june 30 1999 accounted accordance real estate accounting rules believe staff securities exchange commission requires classification dark fiber cables ground integral equipment defined fin 43 accounting dark fiber leases defined fin 43 change economics contracts requires us however recognize revenue certain leases operating leases term contract opposed prior method recognizing revenue period deliver fiber result change accounting treatment reduces revenue income recognize earlier years contract spreads life contract regardless cash received delivery fiber took place way example entered agreement 25 year lease dark fiber customer pays 1000 million cash contract signed previously recorded average revenues 200 million 5 years delivered dark fiber contrast real estate accounting rules fin 43 would require us recognize revenue 40 million per year 25 year term contract even though would receive cash payment 1000 million contract signed implemented method accounting contracts entered june 30 1999 method required although change economics contracts timing cash received company impact change accounting resulted company recording substantially less revenue dates july 1 1999 december 31 1999 would recorded change imposed stock splits august 28 1998 december 22 1998 may 19 1999 completed twoforone stock splits class b common stock form 100 percent stock dividends stockholders record certain specified dates march 2 2000 company announced twoforone stock split companys class b common stock form 100 percent stock dividend shareholders record march 14 2000 stock split effective april 17 2000 share per share amounts presented herein give retroactive effect three stock splits effected 1998 1999 pending stock split december 31 1999 adjusted effect stock dividends 411116800 class common shares outstanding 67538544 class b common shares outstanding results operations year ended december 31 1999 compared year ended december 31 1998 revenues 1999 752 million 107 greater revenues 364 million period 1998 increase reflected higher revenues associated commencement service increased total number customers well revenue recognized related salestype leases portions network contracts entered june 30 1999 inclusion abovenets revenue period september 9 1999 acquisition date december 31 1999 revenue recognized 1999 using percentage completion method 403 million compared 328 million 1998 impact aforementioned accounting change effective june 30 1999 increase revenues would greater cost sales cost sales 490 million 1999 253 increase cost sales 139 million 1998 cost sales increased 1999 compared period 1998 due costs related inclusion abovenets operations since acquisition date costs associated greater number customers well higher fixed costs associated operation maintenance networks costs sales percentages revenue 1999 1998 65 38 respectively increasing result higher fixed costs related operation maintenance companys fiber optic network well higher fixed costs related internet connectivity services cost sales 1999 related percentage completion method 107 million compared 112 million 1998 cost sales also impacted direct result aforementioned accounting change effective june 30 1999 selling general administrative expenses selling general administrative expenses increased 510 million 1999 147 million 1998 increase 363 million 247 increase selling general administrative expenses resulted primarily increased overhead accommodate network expansion acquisition abovenet percentage revenue selling general administrative expenses increased 68 revenue 1999 40 comparable period 1998 selling general administrative expenses percentage revenue also impacted direct result aforementioned accounting change effective june 30 1999 settlement agreement recorded 19 million 34 million settlement agreements 1999 1998 respectively earnings interest taxes depreciation amortization ebitda year ended december 31 1999 recognized loss interest taxes depreciation amortization 271 million compared income interest taxes depreciation amortization year ended december 31 1998 41 million change ebitda primarily due acquisition abovenet aforementioned accounting change depreciation amortization recorded depreciation amortization 460 million 1999 versus 15 million 1998 increase 445 million increase depreciation amortization expense resulted primarily amortization goodwill relating acquisition abovenet increased investment completed fiber optic network additional property equipment acquired income loss operations year ended december 31 1999 loss operations 731 million 757 million change 26 million income comparable period 1998 loss greater result acquisition abovenet aforementioned accounting change effective june 30 1999 interest income interest income 321 million 1999 compared 88 million comparable 1998 period increase 233 million 265 interest income increased result investment certain proceeds issuance sale 10 senior notes due 2008 2009 interest expense net interest expense increased 1999 724 million compared 69 million period 1998 increase interest expense reflects issuance sale 10 senior notes due 2008 2009 issued november 1998 october 1999 respectively income loss joint ventures year ended december 31 1999 recorded 16 million loss joint ventures compared 146000 loss year ended december 31 1998 increase attributable losses incurred abovenets joint venture investees net loss net loss 1149 million 1999 versus net income 986000 comparable period 1998 year ended december 31 1999 basic net loss per share 028 versus basic net income per share 000 period 1998 net losses primarily attributable amortization goodwill related abovenet acquisition results operations abovenet since date acquisition increase net interest expense related issuance sale 10 senior notes due 2008 2009 issued november 1998 october 1999 respectively aforementioned accounting change year ended december 31 1998 compared year ended december 31 1997 revenues 1998 364 million 1356 greater revenues 25 million 1997 increase revenue 1998 versus 1997 reflected higher revenues associated commencement service increased total number customers well revenue recognized related grants indefeasible rights use portions network sales dark fiber classified sales type leases revenue recognized 1998 using percentage completion method 328 million revenue recognized 1997 using percentage completion method cost sales cost sales 139 million 1998 286 increase cost sales 36 million 1997 cost sales increased 1998 compared 1997 due costs associated commencement service customers higher fixed costs associated operation network service allocated costs network related revenue recognized grants indefeasible rights use portions network sales type leases portions dark fiber classified capital leases costs sales percentages revenue 1998 1997 38 142 respectively declining result significant increase number customers revenues cost sales 1998 related percentage completion method 112 million cost sales incurred 1997 relating percentage completion method selling general administrative expenses selling general administrative expenses 1998 147 million 133 greater selling general administrative expenses 63 million 1997 increase selling general administrative expenses 1998 compared 1997 resulted primarily increased overhead accommodate network expansion consulting employment incentives expense consulting employment incentives expense 1998 02 million compared 192 million 1997 consulting employment incentives expense incurred 1997 reflects value stock options issued key employees officers directors order attract retain services 1998 amount recorded reflects amortization unvested component options issued 1997 key employees settlement agreement recorded 34 million settlement agreement 1998 amount recorded first quarter 1998 expense associated issuance stock options payment cash related settlement agreement depreciation amortization expense depreciation amortization expense 1998 15 million 88 greater depreciation amortization expense 800000 1997 increases depreciation amortization expense resulted increased investment completed fiber optic network property equipment interest income expense interest income 1998 88 million 389 greater interest income 18 million 1997 interest income 1998 derived investment excess cash received proceeds initial public offering october 1997 additional cash received november 1998 proceeds 650 million note issuance interest expense increased 1998 69 million compared 07 million 1997 increase interest expense reflects interest accrued senior notes issued november 1998 income loss joint venture recorded 100000 loss 50 share ion joint ventures loss 1998 loss primarily represents startup costs operating activities joint venture income taxes recorded provision income taxes 1998 amount 34 million represents estimated effective tax rate federal state taxes 775 net income loss net income 10 million 1998 compared net loss 263 million 1997 1998 basic net income per share 000 compared basic net loss per share 014 1997 diluted basis net income per share 1998 000 improvements results 1998 primarily attributable growth revenues improvements gross margins noted well increase net interest income related investment made metromedia company funds raised initial public offering compared net interest expense liquidity capital resources initial public offering october 28 1997 145728000 shares class common stock generated net proceeds 1339 million deducting underwriters commission expenses relating initial public offering addition november 25 1998 issued sold 10 senior notes due 2008 generated net proceeds 6300 million also october 25 1999 issued sold 10 senior notes due 2009 generated net proceeds 9742 million october 7 1999 entered securities purchase agreement bell atlantic bell atlantic would purchase shares class common stock convertible subordinated note agreement closed march 6 2000 generated net proceeds approximately 17 billion addition bell atlantic agreed purchase minimum 550 million fiber optic facilities payable next three years year ended december 31 1999 operating activities generated 597 million cash compared 180 million comparable period 1998 increase cash provided operations primarily due increase advance payments received customers year ended december 31 1999 used 3448 million cash net investing activities compared 1260 million 1998 increase due primarily investments expansion networks related construction progress acquisition dark fiber infrastructure certain markets texas offsetting items cash acquired abovenet acquisition year ended december 31 1999 net proceeds 9869 million cash financing activities compared 5386 million 1998 amounts primarily due issuance noted 10 senior notes october 1999 november 1998 anticipate continue incur net operating losses expand complete existing networks construct additional networks market services expanding customer base anticipate spending approximately 34 billion year ending december 31 2001 buildout fiber optic networks internet service exchanges 50 major markets united states 17 major international markets believe net proceeds investment bell atlantic net proceeds senior notes cash hand certain vendor financing cash generated operations including advance customer payments enable us fully fund planned buildout networks working capital needs year ended december 31 2001 indentures governing debt obligations permit us incur additional indebtedness finance engineering construction installation acquisition lease development improvement telecommunications assets result may also consider time private public sales additional equity debt securities entering credit facilities financings depending upon market conditions order finance continued buildout network cannot assure able successfully consummate financing acceptable terms expect continue experience negative cash flows foreseeable future addition part acquisition abovenet recorded approximately 16 billion goodwill intangible assets amortizing periods twenty years accordingly expect report net operating losses foreseeable future year 2000 system modifications year 2000 impact processing datesensitive information network systems potential year 2000 problems result computer programs written using two digits rather four define year 2000 could result miscalculations system failures resulting recognition date using 00 year 1900 rather year 2000 year 2000 effort nominal cost impact costs expensed incurred except extent costs incurred purchase lease capital equipment item 7a item 7a quantitative qualitative disclosures market risk normal course business exposed market risk arising changes foreign currency exchange rates could impact cash flows earnings 2006 foreign activities accounted 81 consolidated revenues monitor foreign markets commitments markets manage currency risks date based upon level foreign operations entered hedging arrangement designed limit exposure foreign currencies increase level foreign activities current levels determine arrangements would appropriate consider arrangements minimize risk december 31 2006 debt capital lease obligation carried fixed rate interest result exposed interest rate risk february 29 2008 closed credit facility see item 7 “management’s discussion analysis financial condition results operations liquidity capital resources” item 8 “financial statements supplementary data” included elsewhere annual report form 10k terms credit facility borrowings bear interest based upon shortterm libor rates administrative agents base rate discretion plus applicable margins defined operative rate increases cost borrowing also increase thereby increasing costs investment strategy example libor increase 1 full year borrowing costs would increase 024 million 1 x 24 million based upon amount related debt outstanding march 31 2008 order manage exposure increases libor may consider interest rate hedging arrangement item 8 item 7a quantitative qualitative disclosures market risk normal course business exposed market risk arising changes foreign currency exchange rates could impact cash flows earnings 2010 foreign activities accounted 93 consolidated revenue translation rate british pound compared us dollar substantially flat year ended december 31 2010 monitor foreign markets commitments markets manage currency risks date based upon level foreign operations entered hedging arrangement designed limit exposure foreign currencies increase level foreign activities current levels determine arrangements would appropriate consider arrangements minimize risk terms secured credit facility place 2010 borrowing bore interest based upon shortterm libor rates administrative agent’s societe generale base rate discretion plus applicable margins defined operative rate increased cost borrowing increased thereby increasing costs investment strategy unless hedged chose 30 day libor interest rate august 4 2008 entered swap arrangement fixed borrowing costs respect 240 million borrowed term loan three years 365 per annum plus applicable margin 300 october 1 2008 borrowed additional 120 million expanded term loan november 14 2008 entered swap arrangement fixed borrowing costs respect 120 million three years 2635 per annum plus applicable margin 300 swaps effect increasing current interest expense respect term loans compared current libor rate reducing risk increases future interest expenses increasing libor rates terms swaps also december 2009 borrowed 2457 million available delayed draw term loan interest rate 30 day libor 023094 december 29 2009 plus applicable margin 300 interest rate december 31 2010 325750 30 day libor 025750 december 31 2010 plus applicable margin 300 enter swap arrangement fix borrowing costs delayed draw term loan accordingly subject interest fluctuations outstanding balance delayed draw term loan 213 million december 31 2010 december 31 2010 aggregate 497 million outstanding secured credit facility 284 million subject swap arrangements 213 million additionally 14 million capital lease obligation outstanding carried fixed rate interest 80 result exposed related interest rate risk capital lease interest income sensitive fluctuations general level us interest rates affect interest earn cash equivalents investment policy strategy focused preservation capital supporting liquidity requirements requires investments shortterm investment grade primarily rated aaa better objective minimizing potential risk principal loss investments fixed rate floating rate interest earning securities carry degree interest rate risk fixed rate securities may fair market value adversely impacted due rise interest rates floating rate securities may produce less income predicted interest rates fall may suffer losses principal forced sell securities declined market value due changes interest rates investments cash equivalents primarily floating rate investments item 8 item 7a quantitative qualitative disclosures market risk normal course business financial position company routinely subjected variety risks addition market risk associated interest movements companys outstanding debt company subject types risk collectibility accounts receivables companys principal long term obligation 650 million 10 senior notes fair value longterm debt december 31 1998 650 million 10 decrease 10 increase level interest rates would result increase fair value companys long term obligation 65 million decrease fair value companys long term obligation 65 million respectively company also purchased portfolio us government securities mature dates sufficient provide payment full interest companys 650 million 10 senior notes may 15 2000 pledged securities stated cost adjusted premium amortization accrued interest fair value pledged securities approximates carrying value company 569 million cash equivalents december 31 1998 extent companys cash equivalents 3 months exceed funding requirements company may invest excess cash equivalents longer term highquality financial instruments investments made subject changes interest rates item 8 item 7a quantitative qualitative disclosures market risk company required provide quantitative qualitative disclosures market risk annual report form 10k fiscal year ending december 31 1998 item 8 item 7a quantitative qualitative disclosures market risk normal course business exposed market risk arising changes foreign currency exchange rates could impact cash flows earnings year ended december 31 2011 foreign activities accounted 95 consolidated revenue due strengthening british pound compared us dollar translation rate year ended december 31 2011 increased 37 compared translation rate used year ended december 31 2010 monitor foreign markets commitments markets manage currency risks date based upon level foreign operations entered hedging arrangement designed limit exposure foreign currencies european expansion level foreign activities expected increase may determine hedging arrangements would appropriate consider arrangements minimize risk terms 250 million secured revolving credit facility entered january 28 2011 borrowings bear interest period one two three months agreed longer interest periods option either base rate defined 250 million secured revolving credit facility plus applicable margin ranging 125 200 alternatively adjusted libo rate defined 250 million secured revolving credit facility plus applicable margin ranging 225 300 closing company borrowed 550 million initial borrowings 250 million secured revolving credit facility carried interest rate 450 base rate 325 plus applicable margin 125 converted interest rate adjusted libo rate option february 4 2011 time interest rate changed 252 027 adjusted libo rate plus applicable margin 225 entered swap arrangement fix borrowing costs 250 million secured revolving credit facility thus operative rate increases cost borrowing also increase thereby increasing costs investment strategy example libor increase 1 full year borrowing costs would increase 055 million 1 x 550 million based upon amount related debt outstanding december 31 2011 december 31 2011 aggregate 550 million outstanding 250 million secured revolving credit facility none subject swap arrangements additionally 12 million capital lease obligation outstanding carried fixed rate interest 80 result exposed related interest rate risk capital lease interest income sensitive fluctuations general level us interest rates affect interest earn cash equivalents investment policy strategy focused preservation capital supporting liquidity requirements requires investments shortterm investment grade primarily rated aaa better objective minimizing potential risk principal loss investments fixed rate floating rate interest earning securities carry degree interest rate risk fixed rate securities may fair market value adversely impacted due rise interest rates floating rate securities may produce less income predicted interest rates fall may suffer losses principal forced sell securities declined market value due changes interest rates investments cash equivalents primarily floating rate investments item 8 item 7a quantitative qualitative disclosures market risk normal course business exposed market risk arising changes foreign currency exchange rates could impact cash flows earnings 2007 foreign activities accounted 103 consolidated revenue monitor foreign markets commitments markets manage currency risks date based upon level foreign operations entered hedging arrangement designed limit exposure foreign currencies increase level foreign activities current levels determine arrangements would appropriate consider arrangements minimize risk december 31 2007 debt capital lease obligation carried fixed rate interest result exposed interest rate risk february 29 2008 closed credit facility see item 7 “management’s discussion analysis financial condition results operations liquidity capital resources” item 8 “financial statements supplementary data” included elsewhere annual report form 10k terms credit facility borrowings bear interest based upon shortterm libor rates administrative agent’s base rate discretion plus applicable margins defined operative rate increases cost borrowing also increase thereby increasing costs investment strategy example libor increase 1 full year borrowing costs would increase 024 million 1 x 24 million based upon amount related debt outstanding august 31 2008 effective august 4 2008 company entered swap arrangement fixed borrowing costs respect 24 million outstanding three years 365 per annum plus applicable margin 325 swap effect increasing current interest expense compared current libor rate reducing risk increases future interest expenses increasing libor rates item 8 item 7a quantitative qualitative disclosures market risk normal course business exposed market risk arising changes foreign currency exchange rates could impact cash flows earnings 2009 foreign activities accounted 91 consolidated revenue monitor foreign markets commitments markets manage currency risks date based upon level foreign operations entered hedging arrangement designed limit exposure foreign currencies increase level foreign activities current levels determine arrangements would appropriate consider arrangements minimize risk terms secured credit facility borrowings bear interest based upon shortterm libor rates administrative agent’s societe generale base rate discretion plus applicable margins defined operative rate increases cost borrowing also increase thereby increasing costs investment strategy example libor increase 1 full year borrowing costs would increase 0573 million 1 x 573 million based upon amount related debt outstanding february 28 2010 chosen 30 day libor interest rate effective august 4 2008 entered swap arrangement fixed borrowing costs respect 24 million borrowed term loan february 29 2008 three years 365 per annum plus applicable margin 300 october 1 2008 borrowed additional 12 million expanded term loan november 14 2008 entered swap arrangement fixed borrowing costs respect 12 million three years 2635 per annum plus applicable margin 300 swaps effect increasing current interest expense respect term loans compared current libor rate reducing risk increases future interest expenses increasing libor rates expiration interest rates swap corresponding term loan bear interest 30 day libor plus applicable margin 300 december 31 2009 borrowed 2457 million available delayed draw term loan interest rate 30 day libor 023094 december 29 2009 plus applicable margin 300 entered swap arrangement fix borrowing costs delayed draw term loan december 31 2009 573 million outstanding secured credit facility additionally 17 million capital lease obligation outstanding carried fixed rate interest 80 result exposed related interest rate risk interest income sensitive fluctuations general level us interest rates affect interest earn cash equivalents investment policy strategy focused preservation capital supporting liquidity requirements requires investments investment grade primarily rated aaa better objective minimizing potential risk principal loss highly liquid investments initial maturities three months less date purchase classified cash equivalents investments fixed rate floating rate interest earning securities carry degree interest rate risk fixed rate securities may fair market value adversely impacted due rise interest rates floating rate securities may produce less income predicted interest rates fall may suffer losses principal forced sell securities declined market value due changes interest rates investments cash equivalents primarily floating rate investments item 8 item 7a quantitative qualitative disclosures market risk normal course business financial position routinely subjected variety risks addition market risk associated interest currency movements outstanding debt subject types risk collectibility accounts receivable principal long term obligations 650 million 10 senior notes due 2008 985 million 10 senior notes due 2009 convertible subordinated note approximately 9753 million issued verizon communications march 2000 fair value longterm debt december 31 2000 24 billion 10 decrease 10 increase level interest rates would result increase fair value long term obligations 1433 million decrease fair value long term obligation 1337 million respectively also subject market risk associated foreign currency exchange rates plan continue expansion foreign operations 2354 million 10 senior notes denominated euros utilized financial instruments minimize exposure foreign currency fluctuations continue analyze risk management strategies minimize foreign currency exchange risk future 10 decrease 10 increase currency rates related euro dollar based 10 senior notes due 2009 would result decrease fair value long term obligation 15 million increase fair value long term obligation 15 million respectively approximately 14 billion cash equivalents december 31 2000 extent cash equivalents exceed shortterm funding requirements may invest excess cash equivalents longerterm highquality financial instruments investments made subject changes interest rates item 8 item 7a quantitative qualitative disclosures market risk normal course business exposed market risk arising changes foreign currency exchange rates could impact cash flows earnings 2008 foreign activities accounted 99 consolidated revenue monitor foreign markets commitments markets manage currency risks date based upon level foreign operations entered hedging arrangement designed limit exposure foreign currencies increase level foreign activities current levels determine arrangements would appropriate consider arrangements minimize risk terms secured credit facility borrowings bear interest based upon shortterm libor rates administrative agent’s societe generale base rate discretion plus applicable margins defined operative rate increases cost borrowing also increase thereby increasing costs investment strategy example libor increase 1 full year borrowing costs would increase 036 million 1 x 36 million based upon amount related debt outstanding february 28 2009 effective august 4 2008 entered swap arrangement fixed borrowing costs respect 24 million borrowed term loan february 29 2008 three years 365 per annum plus applicable margin 325 decreased 300 september 30 2008 october 1 2008 borrowed additional 12 million expanded term loan november 14 2008 entered swap arrangement fixed borrowing costs respect 12 million three years 2635 per annum plus applicable margin 300 swaps effect increasing current interest expense compared current libor rate reducing risk increases future interest expenses increasing libor rates december 31 2008 36 million outstanding secured credit facility additionally capital lease obligation outstanding carried fixed rate interest result exposed related interest rate risk item 8 item 7a quantitative qualitative disclosures market risk normal course business financial position company routinely subjected variety risks addition market risk associated interest movements companys outstanding debt company subject types risk collectibility accounts receivables companys principal long term obligation 650 million 10 senior notes due 2008 1 billion 10 senior notes due 2009 convertible subordinated note approximately 9753 million issued bell atlantic march 2000 fair value longterm debt december 31 1999 165 billion 10 decrease 10 increase level interest rates would result increase fair value companys long term obligation 1126 million decrease fair value companys long term obligation 943 million respectively company also purchased portfolio us government securities mature dates sufficient provide payment full interest companys 650 million 10 senior notes due 2008 may 15 2000 pledged securities stated cost adjusted premium amortization accrued interest fair value pledged securities approximates carrying value company 12 billion cash equivalents december 31 1999 extent companys cash equivalents exceed shortterm funding requirements company may invest excess cash equivalents longerterm highquality financial instruments investments made subject changes interest rates item 8 item 8 financial statements supplementary data abovenet inc subsidiaries index consolidated financial statements report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audited accompanying consolidated balance sheets abovenet inc “company” december 31 2006 2005 related consolidated statements operations shareholders’ equity cash flows comprehensive income loss three years period ended december 31 2006 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position abovenet inc december 31 2006 2005 results operations cash flows three years ended period december 31 2006 conformity accounting principles generally accepted united states discussed note 2 consolidated financial statements company adopted provisions statement financial accounting standards 123r “share based payments” utilizing modified prospective transition method effective january 1 2006 also audited accordance standards public company accounting oversight board united states effectiveness abovenet inc’s internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued committee sponsoring organization treadway commission coso report dated february 28 2008 expressed adverse opinion thereon bdo seidman llp new york ny february 28 2008 except notes 2 15 16 may 9 abovenet inc subsidiaries consolidated balance sheets millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements operations millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements shareholders’ equity millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements comprehensive income loss millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 1 background organization bankruptcy filing reorganization may 20 2002 metromedia fiber network inc “mfn” substantially domestic subsidiaries “debtor” collectively “debtors” filed voluntary petitions reorganization chapter 11 united states bankruptcy code “bankruptcy code” united states bankruptcy court southern district new york “bankruptcy court” debtors remained possession assets properties continued operate businesses manage properties debtorsinpossession jurisdiction bankruptcy court july 1 2003 debtors filed amended plan reorganization “plan reorganization” amended disclosure statement “disclosure statement” july 2 2003 bankruptcy court approved disclosure statement related voting procedures august 21 2003 bankruptcy court confirmed plan reorganization plan reorganization governed treatment claims interest debtors plan reorganization creditors debtors received receive following distributions set forth greater detail therein debtors emerged proceedings chapter 11 bankruptcy code september 8 2003 “effective date” accordance plan reorganization mfn changed name abovenet inc together subsidiaries “company” august 29 2003 equity interests mfn received distribution plan reorganization equity securities mfn cancelled business company facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure colocation services communications carriers corporate government customers principally united states “us” united kingdom “uk” note 2 basis presentation significant accounting policies summary basis presentation significant accounting policies followed preparation consolidated financial statements follows basis presentation use estimates accompanying consolidated financial statements prepared accordance accounting principles generally accepted united states america “us gaap” pursuant rules regulations securities exchange commission “sec” consolidated financial statements include accounts company applicable opinion management accompanying consolidated financial statements reflect adjustments considered necessary fair presentation company’s results december 31 2006 2005 years ended december 31 2006 2005 2004 preparation consolidated financial statements conformity us gaap requires management make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements disclosure contingent assets liabilities consolidated financial statements accompanying notes reported amounts revenue expenses periods presented estimates used accounting certain items accounts receivable allowances property taxes transaction taxes deferred taxes estimates company makes based historical factors current circumstances experience judgment company’s management company evaluates assumptions estimates ongoing basis may employ outside experts assist company’s evaluations actual amounts results could differ estimates due subsequent events could material effect company’s prospective financial statements abovenet inc subsidiaries notes consolidated financial statements millions except share per share information misstatements connection audit financial statements year ended december 31 2006 company determined certain errors primarily related income taxes depreciation certain accruals included financial statements previously issued years ended december 31 2005 2004 period ended december 31 2003 including fresh start balance sheet september 8 2003 adjustments made applicable period effect adjustments would increase net loss 09 009 per basic diluted share year ended december 31 2005 increase net loss 01 001 per basic diluted share year ended december 31 2004 decrease net loss 02 002 per basic diluted share period ended december 31 2003 management believe based upon qualitative quantitative analysis errors material require restatement previously issued financial statements accordingly corrections reflected financial statements year ended december 31 2006 resulted reduction net income 03 003 per basic diluted share reclassification february 29 2008 company filed current report form 8k among things included consolidated statement operations year ended december 31 2006 consolidated statement operations year ended december 31 2006 contained herein reflects change classification certain expenses amounts recorded consolidated statement operations included current report form 8k dated february 29 2008 change resulted costs revenue decreasing 93 1312 1219 selling general administrative expenses increasing 93 618 711 year ended december 31 2006 reclassification affect operating loss net income earnings per share basic diluted assets liabilities shareholders’ equity year ended december 31 2006 fresh start accounting september 8 2003 company authorized 10000000 shares preferred stock 001 par value 30000000 shares common stock 001 par value holders common stock entitled one vote issued outstanding share entitled receive dividends subject rights holders preferred stock declared board directors preferred stock may issued time one classes series classes series shall distributive designation determined board directors 2006 company reserved issuance 10000000 shares authorized preferred stock described 500000 shares 001 par value junior preferred stock connection adoption shareholders’ rights plan event liquidation holders common stock entitled receive assets company available distribution payments creditors holders preferred stock pursuant plan reorganization upon company’s emergence bankruptcy company issued prepetition creditors 8750000 shares common stock rights purchase 1669210 shares common stock price 299543 rights offering rights purchase 1668992 shares exercised fiveyear stock purchase warrants purchase 709459 shares common stock exercisable price 2000 per share sevenyear stock purchase warrants purchases 834658 shares common stock exercisable price 2400 per share addition 1064956 shares common stock reserved issuance company’s equity incentive plan see note 9 “stockbased compensation” company’s emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 company accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires company allocate reorganization value assets liabilities based upon estimated fair values accordance statement position 907 “financial reporting entities reorganization bankruptcy code” “sop 907” company developed set financial projections utilized expert estimate fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries company 3 calculation enterprise value based upon future cash flows based upon company’s projections adopting fresh start accounting resulted material adjustments historical carrying values company’s assets liabilities reorganization value allocated company assets liabilities based upon fair values company engaged independent appraiser determine fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination comprehensive loss accumulated deficit accounts principles consolidation consolidated financial statements include accounts company applicable whollyowned subsidiaries consolidation generally required investments 50 outstanding voting stock investee except control held majority owner significant intercompany accounts transactions eliminated consolidation revenue recognition revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income related service period accordance sec staff accounting bulletin 101 “revenue recognition financial statements” amended sec staff accounting bulletin 104 “revenue recognition” company generally amortizes revenue related installation services straightline basis contracted customer relationship generally ranges two twenty years abovenet inc subsidiaries notes consolidated financial statements millions except share per share information termination revenue recognized customer discontinues service prior end contract period company previously received consideration revenue recognition deferred termination revenue also recognized customers made early termination payments company settle contractually committed purchase amounts customer longer expects meet company renegotiates contract customer result longer obligated provide services consideration previously received revenue recognition deferred 2006 2005 2004 company included receipts bankruptcy claim settlements former customers termination revenue termination revenue reported manner original service provided amounted 83 121 29 2006 2005 2004 respectively nonmonetary transactions company may exchange capacity service providers december 2004 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 153 “exchanges nonmonetary assets amendment apb opinion 29” “sfas 153” sfas 153 amends accounting principles board opinion 29 “accounting nonmonetary transactions” “apb 29” eliminate exception nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance sfas 153 applied prospectively nonmonetary exchanges occurring fiscal periods beginning june 15 2005 company’s adoption sfas 153 july 1 2005 material effect consolidated financial position results operations company prior company’s adoption sfas 153 nonmonetary transactions accounted accordance apb 29 exchange similar capacity recorded historical carryover basis dissimilar capacity accounted fair market value recognition gain loss gains losses nonmonetary transactions years ended december 31 2006 2005 2004 operating leases company leases office equipment space maintains equipment rentals rightofway contracts building access fees network capacity various noncancelable operating leases lease agreements expire various dates 2015 subject many cases renewal options provide payment taxes utilities maintenance certain lease agreements contain escalation clauses term lease related scheduled rent increases resulting pass increases operating costs property taxes effect costs changes consumer price indices accordance sfas 13 “accounting leases” company recognizes rent expense straightline basis records liability representing difference straightline rent expense amount payable increase decrease deferred liability leasehold improvements related operating leases amortized lesser economic lives remaining lease term rentfree periods incentives granted certain leases recorded reductions rent expense straightline basis related lease terms cash equivalents restricted cash equivalents purposes consolidated statements cash flows company considers cash banks shortterm highly liquid investments original maturity three months less cash equivalents cash equivalents restricted cash equivalents stated cost approximates fair value restricted cash equivalents comprised outstanding letters credit issued favor various third parties accounts receivable allowance doubtful accounts sales credits accounts receivable customer obligations services sold customers normal trade terms company’s customers primarily communications carriers corporate government customers located primarily us uk company performs periodic credit evaluations customers’ financial condition company provides allowances doubtful accounts sales credits provisions doubtful accounts recorded selling general administrative expenses allowances sales credits recorded reductions revenue adequacy reserves evaluated utilizing several factors including length time receivable past due changes customer’s credit worthiness customer’s payment history length customer’s relationship company current industry trends current economic climate property equipment property equipment stated preliminary estimated fair values effective date based company’s reorganization value purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress reclassified property equipment date project complete certain internal direct labor costs constructing installing property equipment capitalized direct labor amounted 51 47 38 years ended december 31 2006 2005 2004 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease estimated useful lives company’s property equipment follows property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income loss abovenet inc subsidiaries notes consolidated financial statements millions except share per share information time company required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances company fully depreciates remaining carrying value network infrastructure removed rendered unusable capitalizes new fiber associated construction costs relocation placed service reduced reimbursements received costs company capitalized relocation costs amounting 89 20 08 years ended december 31 2006 2005 2004 respectively company fully depreciated remaining carrying value network infrastructure rendered unusable amounting 16 04 01 original cost basis years ended december 31 2006 2005 2004 respectively accordance sfas 144 “accounting impairment disposal longlived assets” company periodically evaluates recoverability longlived assets evaluates assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value asset impairment losses recorded years ended december 31 2006 2005 2004 treasury stock treasury stock accounted cost method asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” company recognizes fair value liability asset retirement obligation period incurred reasonable estimate fair value made asset retirement obligations related decommissioning electronics leased facilities removal certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities asset retirement obligations generally recorded “other longterm liabilities” capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 56 54 december 31 2006 2005 respectively years 31 included “accrued expenses” 25 23 respectively included “other longterm liabilities” accretion expense included “interest expense” amounted 02 years ended december 31 2006 2005 2004 income taxes provision income taxes income taxes payable deferred income taxes provided accordance liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured applying enacted tax rates laws taxable years differences expected reverse valuation allowance provided company determines likely portion deferred tax asset balance realized company’s reorganization resulted significantly modified capital structure result applying freshstart accounting accordance sop 907 effective date fresh start accounting important consequences accounting realization valuation allowances related net deferred tax assets existed effective date arose preemergence periods specifically fresh start accounting requires reversal allowances recorded reduction intangible assets exhausted thereafter additional paid capital treatment result change liabilities taxing authorities cash flows undistributed earnings company’s foreign subsidiaries considered indefinitely reinvested therefore provision domestic taxes provided thereon upon repatriation earnings form dividends otherwise company would subject domestic income taxes offset part foreign tax credits related income withholding taxes payable various foreign countries determination amount unrecognized deferred domestic income tax liability practicable due complexities associated hypothetical calculations however unrecognized foreign tax credit carryforwards would available reduce portion domestic liability foreign currency translation transactions company’s functional currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive loss company’s foreign exchange transaction gains losses generally included “other income” consolidated statements operations stock options september 8 2003 company adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 9 “stockbased compensation” fair value provisions sfas 123 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards company historical basis determining volatility expected life assumptions model due company’s limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period company recognizes related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation company’s plan reorganization outstanding stock options respect mfn’s common stock cancelled abovenet inc subsidiaries notes consolidated financial statements millions except share per share information effective january 1 2006 company adopted sfas 123r “sharebased payment” “sfas 123r” using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 allowed companies estimate forfeitures recognize impact forfeitures occur company recognized impact forfeitures occur upon adoption sfas 123 adoption sfas 123r result different accounting treatment material impact company’s consolidated financial statements following assumptions used company calculate weighted average fair value stock options granted restricted stock units compensation cost restricted stock unit awards measured based upon quoted closing market price stock date grant compensation cost recognized straightline basis vesting period see note 9 “stockbased compensation” stock warrants connection plan reorganization described note 1 “background organization” note 2 “basis presentation significant accounting policies” company issued holders general unsecured claims part settlement claims five year warrants purchase 709459 shares common stock exercise price 2000 per share expiring september 8 2008 ii seven year stock warrants purchase 834658 shares common stock exercise price 2400 per share expiring september 8 2010 stock warrants treated equity upon exercise based upon terms warrant cash received stock warrants exercised totaled 6945 1229 5101 2006 2005 2004 respectively fair value financial instruments company’s consolidated balance sheets include following financial instruments shortterm cash investments trade accounts receivable trade accounts payable company believes carrying amounts financial statements approximates fair value financial instruments due relatively short period time origination instruments expected realization interest rates approximate current market rates concentration credit risk financial instruments potentially subject company concentration credit risk consist principally temporary cash investments accounts receivable company enter financial instruments trading speculative purposes company’s cash equivalents invested investmentgrade shortterm investment instruments high quality financial institutions company’s trade receivables unsecured geographically dispersed single customer accounts greater 10 consolidated revenue accounts receivable net company performs ongoing credit evaluations customers’ financial condition allowance noncollection accounts receivable based upon expected collectability accounts receivable company places cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits 401k postretirement benefits company profit sharing 401k plan “plan” employees us permits employees make contributions plan pretax salary reduction basis accordance provisions internal revenue code permits employer provide discretionary contributions fulltime employees eligible participate plan beginning month following three months service eligible employees may make contributions subject limitations defined internal revenue code company matches 50 us employee’s contributions amount set forth plan company’s subsidiaries uk similar plan matches 5 uk employee contributions matched amounts vest based upon employee’s length service company contributed 07 06 years ended december 31 2006 2005 2004 respectively net forfeitures obligations plans abovenet inc subsidiaries notes consolidated financial statements millions except share per share information recently issued accounting pronouncements june 2006 fasb issued interpretation 48 “accounting uncertainty income taxes interpretation sfas 109” “interpretation 48” interpretation clarifies accounting uncertainty income tax recognized enterprise’s financial statements accordance sfas 109 “accounting income taxes” interpretation prescribed recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken income tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition interpretation effective fiscal years beginning december 15 2006 company currently evaluating impact adopting interpretation 48 june 2006 emerging issues task force “eitf” ratified consensus eitf 063 “how taxes collected customers remitted governmental authorities” presented income statement “eitf 063” eitf 063 requires companies disclose accounting policies regarding gross net presentation certain taxes within scope eitf 063 taxes assessed governmental authority directly imposed revenueproducing transaction seller customer may include limited sales use value added excise taxes addition taxes significant presented gross basis amounts taxes disclosed eitf 063 effective quarterly reporting period ended march 31 2007 impact financial position results operations company’s policy record taxes within scope eitf 063 net basis september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” sfas no157 clarifies fair value amount would exchanged sell asset transfer liability orderly transaction market participants statement also requires fair value measurement technique include adjustment risks inherent particular valuation technique andor risks inherent inputs model market participants would also include adjustment provisions sfas 157 effective fiscal periods beginning november 15 2007 applied prospectively company currently evaluating impact adopting sfas 157 september 2006 staff sec issued staff accounting bulletin “sab” 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” sab 108 provides guidance consideration effects prior year misstatements quantifying current year misstatements purpose determining whether current year’s financial statements materially misstated sab 108 effective fiscal years ending november 15 2006 company adopted provisions sab 108 december 31 2006 required adoption sab 108 material impact company’s consolidated financial position results operations cash flows february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” “sfas 159” sfas 159 gives entities option carry financial assets liabilities fair value changes fair value recorded earnings statement effective first quarter fiscal 2009 expected material impact company’s consolidated financial position results operations cash flows february 2008 fasb issued fasb staff position fas 1572 “fsp fas 1572” fsp fas 1572 permits delay effective date sfas 157 fiscal years beginning november 15 2008 nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis least annually delay intended allow fasb constituents additional time consider effect various implementation issues arisen may arise application sfas 157 reclassifications certain reclassifications made 2005 consolidated financial statements conform classifications used 2006 consolidated financial statements note 3 prepaid expenses current assets prepaid expenses current assets continuing operations consist following abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 4 property equipment property equipment continuing operations consist following included network infrastructure assets certain assets equipment including transmission equipment held inventory future use original cost 466 553 accumulated depreciation 289 278 net carrying values 177 275 december 31 2006 2005 respectively depreciation amortization expense related property equipment continuing operations years ended december 31 2006 2005 2004 approximately 472 431 408 respectively fourth quarter 2006 company sold certain assets net certain liabilities related data center facilities located new york california virginia cash proceeds 431 sold stock abovenet uk limited uk company “auk” operated london data center price £135 british pounds sterling 26 usd £0675 british pounds sterling approximately 13 usd measured date receipt received closing £0675 british pounds sterling approximately 13 usd measured date receipt received january 2007 included accounts receivable net consolidated balance sheet december 31 2006 operations data center london uk accounted discontinued operation periods presented sale legal entity discreet financial information company recognized aggregate gain sale data centers amounting 521 280 60 represented reversal deferred fair value rent liability sfas 13 obligations respectively associated related properties gain summarized follows note 5 accrued expenses accrued expenses consists following abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 6 income taxes income taxes provided based upon tax laws rates countries operations conducted income earned provision income taxes years ended december 31 2006 2005 2004 follows deferred income taxes result temporary differences financial reporting basis tax basis assets liabilities amounts shown following table represent total differences company’s consolidated tax return basis assets liabilities corresponding basis assets liabilities financial reporting following summary significant items giving rise components company’s deferred tax assets liabilities company established valuation allowance related deferred tax assets based current years’ results operations anticipated profit levels future periods since likely deferred tax assets realized future connection company’s emergence bankruptcy company realized substantial cancellation debt income “codi” income taxable us income tax purposes codi resulted company’s reorganization bankruptcy code however us income tax reporting purposes company required reduce certain tax attributes including net operating loss carryforwards b capital losses c certain tax credit carryforwards tax basis assets total amount equal gain extinguishment debt reorganization company emergence date constituted ownership change section 382 internal revenue code use company’s nol’s capital losses tax credit carryforwards reduced pursuant provisions certain subsequently recognized “builtin” losses deductions existing prior ownership change subject overall annual limitation december 31 2006 company domestic nol carryforwards 5590 foreign nol carryforwards 1698 certain nol carryforwards begin expire 2024 company’s annual limitation ownership change rules us 81 accordingly company estimates 2020 domestic nol carryforwards may subject limitation united states internal revenue code section 382 additionally approximately 3700 future depreciation deductions subject limitation ownership change company subsidiaries’ income tax returns routinely examined various tax authorities management’s opinion adequate provision income taxes made open years accordance sfas 5 “accounting contingencies” abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 7 discontinued operations dispositions march 2004 company sold 100 issued outstanding stock abovenet communications’ gmbh operated austria unaffiliated third parties nominal amount company recognized loss 04 upon disposition june 2004 company sold 100 issued outstanding stock metromedia fiber network italia srl unaffiliated third party nominal amount company recognized gain 02 upon disposition march 2005 company liquidated mfn international cv operated netherlands company written interest mfn international cv estimated fair value fresh start date accordingly gain loss recognized upon disposition april 2005 company liquidated metromedia fiber network switzerland gmbh company written interest metromedia fiber network switzerland gmbh estimated fair value fresh start date accordingly gain loss recognized upon disposition june 2005 company liquidated metromedia fiber network belgium bvba gain loss recognized upon disposition august 2005 company liquidated metromedia fiber network services gmbh austria gain loss recognized upon disposition january 2006 company liquidated sitesmith netherlands bv gain loss recognized upon disposition february 2006 company liquidated metromedia fiber network sweden ab gain loss recognized upon disposition november 2006 company sold 100 issued outstanding stock auk aggregate purchase price £135 british pounds sterling 26 usd £0675 british pounds sterling approximately 13 usd measured date receipt received closing £0675 british pounds sterling approximately 13 usd measured date receipt received january 2007 included accounts receivable net consolidated balance sheet december 31 2006 company recorded gain 39 respect sale auk generated operating loss 09 2006 prior sale following summary results discontinued operations described note 8 income loss per common share basic income loss per common share computed net income net loss divided weightedaverage number common shares outstanding period result company’s net losses years ended december 31 2005 2004 diluted loss per common share basic loss per common share inclusion dilutive securities would antidilutive periods presented herein total weighted average shares utilized computing basic net income loss per common share 10669365 10596244 10550249 years ended december 31 2006 2005 2004 respectively total weighted average shares utilized computing dilutive net income loss per common share 11794279 10596244 10550249 years ended december 31 2006 2005 2004 respectively dilutive securities include stock options restricted stock units stock warrants due company’s net losses potentially dilutive securities totaling 565240 760053 years ended december 31 2005 2004 respectively excluded calculation income per share antidilutive year ended december 31 2006 potentially dilutive securities excluded calculation income per common share abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 9 stockbased compensation stockbased expenses period relate sharebased awards granted company’s 2003 incentive stock option stock grant plan “2003 stock incentive plan” reflect awards outstanding period including awards granted prior period 2003 stock incentive plan became effective september 8 2003 stock incentive plan company authorized issue aggregate sharebased awards 1064956 common shares employees directors consultants selected participate december 31 2006 company 158723 shares available future awards 2003 stock incentive plan stockbased compensation recorded costs revenue selling general administrative expenses based upon allocation payroll expense stock options year ended december 31 2006 company awarded options purchase 26800 shares common stock options purchase 7500 shares ten year life date grant vest ratably first second third anniversaries date grant per share exercise price 4850 options purchase 19300 shares vest one year period date grant ten year life per share exercise prices 4000 11700 shares 5375 7450 shares 5900 150 shares year ended december 31 2005 company awarded options purchase 111000 shares common stock options purchase 91330 shares ten year life vest ratably first second third anniversaries date grant exercise prices ranging 2500 per share 3300 per share options purchase 19670 shares vest vested pursuant certain previous grants ten year life exercise price 2500 per share year ended december 31 2004 company awarded options purchase 148485 shares ten year life vest ratably first second third anniversaries date grant original exercise prices ranging 3000 3650 per share company recognized noncash stockbased compensation expense amounting 15 22 33 years ended december 31 2006 2005 2004 respectively respect stock options granted effect decreasing net income 014 per basic common share 013 per diluted common share year ended december 31 2006 increasing net loss 021 031per basic diluted common share years ended december 31 2005 2004 respectively information regarding options purchase common stock granted outstanding years ended december 31 2006 2005 2004 summarized fair value vested options purchase common stock follows years ended december 31 aggregate fair value options purchase shares common stock vested years ended december 31 2006 2005 2004 19 118338 22 142038 16 112043 respectively abovenet inc subsidiaries notes consolidated financial statements millions except share per share information regarding fair value vested unvested options purchase common stock follows december 31 2006 company 09 unearned stockbased compensation expense associated options purchase shares common stock expected incurred 2007 2009 november 2005 fasb issued fasb staff position sfas 123r3 “transition election related accounting tax effects sharebased payment awards” alternative transition method includes simplified methods establish beginning balance additional paidin capital pool “apic pool” related tax effects employee sharebased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee sharebased compensation awards outstanding upon adoption sfas 123r company adopted method determined apic pool zero following table summarizes information concerning outstanding exercisable options purchase common stock december 31 2006 restricted stock units years ended december 31 2006 2005 2004 company awarded 32000 26000 91000 respectively restricted stock units employees company 2003 stock incentive plan restricted stock units generally vest ratably first second third fourth anniversaries respective grant restricted stock units require company deliver fixed number shares employees fixed date shares vested restricted stock units subject full partial vesting event employee’s employment terminated without cause vest fully event employee’s death issuance vested shares related restricted stock units subject certain restrictions provided 2003 stock incentive plan compliant section 409a internal revenue code pursuant restricted stock unit agreement company executives time delivery stock underlying restricted stock units may sold executive reason set forth agreements executive’s request company obligated purchase sufficient shares stock satisfy executive’s minimum tax withholding obligations 2005 company issued 41122 common shares vested restricted stock units 15277 shares purchased company records stockbased compensation expense fair value restricted stock units awarded grant date ratably vesting period company recognized noncash stockbased compensation expense amounting 24 18 16 years ended december 31 2006 2005 2004 respectively respect restricted stock units awarded effect decreasing net income 022 per basic common share 020 per diluted common share year ended december 31 2006 increasing net loss 017 015 per basic diluted common share years ended december 31 2005 2004 respectively following schedule summarizes activity company’s “restricted stock units” periods presented abovenet inc subsidiaries notes consolidated financial statements millions except share per share information december 31 2006 company 31 unearned stockbased compensation expense associated vesting restricted stock unit awards 24 consideration forfeitures expected incurred 2007 balance 2008 2010 stock warrants plan reorganization unsecured note holder claims general secured claims settled part distribution fiveyear stock warrants purchase 709459 shares common stock 2000 per share sevenyear stock warrants purchase 834658 shares common stock 2400 per share see note 1 following table summarizes activity company’s stock warrants periods presented note 10 longterm debt term loan october 2001 company entered 150 loan agreement “senior secured note” group lenders secured first lien company’s assets senior secured note remained outstanding bankruptcy period paid balance 941 immediately prior company’s emergence bankruptcy accordance company’s plan reorganization 1667 participant syndicate lenders forgave portion outstanding balance exchange shares reorganized company accordingly 157 balance senior secured note reclassified debt subject compromise additionally part plan reorganization company lenders entered new agreement september 8 2003 provided 784 term loan “term loan” bearing interest rate 11 per annum term loan originally scheduled mature september 8 2008 secured first lien assets company guaranteed company’s domestic certain foreign subsidiaries contained certain prepayment provisions december 2003 company completed 50 rights offering used proceeds 84 reduce term loan july 2004 company utilized proceeds sale certain german operations repay 05 term loan additionally part company’s settlement certain litigation additional 75 principal amount term loan forgiven recorded “other income” year ended december 31 2004 see note 11 august 10 2004 company paid entire outstanding balance term loan 620 plus accrued interest b obligation capital lease company obligated capital lease certain indefeasible right use included network infrastructure assets property equipment net december 31 2006 future minimum payments capital lease follows current portion obligation capital lease reported within “accrued expenses” longterm portion reported within “other longterm liabilities” abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 11 income consists following 1 represents reversal certain tax liabilities resulting either favorable ruling jurisdiction determining company subject certain transaction related taxes accrued prior years determination company respect certain jurisdictions taxes accrued prior years apply company’s operations 2 represents settlement contractual obligation accrued prior years note 12 commitments contingencies company commitments various noncancelable operating leases office equipment space equipment rentals rightofway contracts building access franchise fees network capacity contracts terms expiring 2026 company various sublet arrangements third parties estimated future payments net receipts respect contractual obligations follows expenses incurred described obligations years ended december 31 2006 2005 2004 continuing operations 333 363 respectively net sublease receipts 20 19 06 years ended december 31 2006 2005 2004 respectively rental expense reflected also net amortization deferred fair value rent liability represents difference present value contractual obligations leases place fresh start date fair market value obligations company recorded 42 51 54 years ended december 31 2006 2005 2004 respectively reductions rent expense continuing operations december 31 2006 2005 deferred fair value rent liability 55 337 respectively 17 42 respectively included accrued expenses 38 295 respectively included longterm liabilities related consolidated balance sheets december 31 2006 company committed construct approximately 180 related network infrastructure company maintains employment agreements key executives agreements include among things certain change control severance provisions company subject various legal proceedings claims arise normal course business company evaluates among things degree probability unfavorable outcome reasonably estimates amount potential loss plan reorganization became effective september 8 2003 “plan reorganization” “plan” essentially claims company’s us subsidiaries arose prior confirmation plan august 21 2003 discharged accordance plan reorganization summary treatment claims bankruptcy proceeding provided note 1 party fiber lease agreement sbc telecom inc “sbc” subsidiary att pursuant believe sbc obligated lease 40000 fiber miles fiber reducible 30000 certain circumstances term 20 years price set forth agreement sbc disagreed interpretation agreement issue litigated bankruptcy court southern district court new york “bankruptcy court” november 2003 bankruptcy court agreed interpretation agreement decision sbc appealed sbc also alleged breach obligations agreement unable assume agreement upon emergence bankruptcy disagreed sbc’s position december 2005 bankruptcy court agreed sbc appealed certain aspects decision district court southern district new york district court denied appeal filed notice appeal second circuit court appeals company records revenue based upon reduced fiber miles rate prescribed agreement paid sbc see note 15 “subsequent events litigation” discussion certain litigation settled unfavorably abovenet inc subsidiaries notes consolidated financial statements millions except share per share information sec investigation sec initiated formal investigation mfn prebankruptcy emergence predecessor company june 2002 december 15 2006 company received “wells” notice sec staff connection investigation indicating sec staff considering recommending sec bring civil injunctive action company alleging company violated various provisions federal securities laws response wells notice company provided sec written submission setting forth reasons company believed civil injunctive action authorized sec march 19 2007 company received notice sec staff stating investigation mfn terminated enforcement action recommended sec notice provided company guidelines final paragraph securities act release 5310 states among things “such notice must way construed indicating party exonerated action may ultimately result staff’s investigation particular matter communication means staff completed investigation time enforcement action recommended commission” note 13 related party transactions member company’s board directors also cochairman chief executive officer cofounder telecommunications company sold services andor material normal course business telecommunications company amount 01 2006 01 2005 respectively amounts outstanding december 31 2006 2005 related party activity year ended december 31 2004 activity parties conducted independent arms length transactions consistent similar terms circumstances customers vendors accounts two parties settled accordance invoice terms note 14 segment reporting sfas 131 “disclosures segments enterprise related information” defines operating segments components enterprise separate financial information available evaluated regularly company’s chief operating decision maker deciding assess performance allocate resources company operates business one operating segment geographic information revenue based location entity providing service longlived assets based physical location assets following table presents revenue longlived asset information geographic areas abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 15 subsequent events restricted stock units december 28 2007 company delivered 303369 vested restricted stock units represented vested restricted stock units date certain employees former employees company purchased aggregate 129816 shares employees 7500 per share closing market price company’s stock date order fund company’s estimate employees’ income tax obligation based upon highest federal state local marginal income tax rates aggregate value shares purchased company 97 charged treasury stock litigation abovenet communications uk limited company’s uk operating subsidiary “acuk” party duct purchase fiber lease agreement “duct purchase agreement” eu networks fiber uk ltd formerly global voice networks limited “gvn” dispute parties arose regarding extent network duct sold fiber leased gvn pursuant duct purchase agreement result dispute 2006 gvn filed claim acuk high court justice london seeking ownership disputed portion network duct right lease certain fiber associated damages december 2007 court ruled favor gvn respect disputed duct fiber early february 2008 acuk delivered disputed duct fiber gvn additional portions disputed duct fiber constructed delivered february 2008 company required construct balance disputed duct fiber deliver gvn 2008 pursuant schedule ordered court acuk certain repair maintenance obligations must perform respect duct gvn also seeking enforce option requiring acuk construct 180 200 chambers gvn along network dispute regarding scope obligation decided separately arbitration proceeding regardless outcome arbitration company believes costs perform construction option exceed option price payable gvn acuk also liable significant portion gvn’s legal expenses incurred result legal dispute 11 usd paid addition court scheduled trial june 2008 determine extent damages acuk liable company believes court ruled amount damages limited purchase price duct fiber 35 usd gvn cannot recover certain types damages excluded duct purchase agreement gvn alleged damages ₤49 british pounds sterling arguing liability limitation respect fiber lease including interest changes exchange rates although company cannot determine precise amount damages acuk required pay costs incur paying gvn’s legal fees performing required construction repair maintenance company believes amounts material expenses accrued december 31 2007 included company’s 2007 operating results bank financing february 29 2008 company excluding certain foreign subsidiaries obtained 60 senior secured credit facility consisting 18 revolving credit facility “revolver” 42 term loan facility “term loan” 24 drawn closing 18 could drawn within nine months closing company’s option collectively “credit facility” six months following close credit facility credit facility may increased 100 option company upon receipt additional commitments lenders new third party lenders credit facility used general corporate purposes capital investment revolver term loan term five years closing date credit facility company paid nonrefundable work fee 01 lenders credited upfront fee 15 total amount credit facility paid closing additionally company liable unused commitment fee 050 per annum 075 per annum depending utilization credit facility interest accrue libor 30 60 90 180 day rates announced base rate administrative agent company’s option plus applicable margins defined additionally company required maintain unrestricted cash balance times least 20 february 29 2008 company received proceeds 24 term loan required provisions term loan initial advance base rate interest plus margin 825 february 29 2008 converted libor plus 325 per annum 626 march 5 2008 abovenet inc subsidiaries notes consolidated financial statementscontinued millions except share per share information note 16 quarterly financial data unaudited following tables present unaudited quarterly results years ended december 31 2006 2005 operating results fourth quarter 2006 reflects gain sales domestic data centers unaffiliated third parties three sold october 2006 one sold november 2006 fourth quarter 2006 also includes gain sale auk november 15 2006 auk operated company’s data center london accounted discontinued operation periods presented revenue lower fourth quarter 2006 prior quarters 2006 due sale domestic data centers additionally quarterly revenue includes termination revenue follows selling general administrative expenses lower quarter ended september 30 2006 due primarily decrease commission expenses audit fees abovenet inc subsidiaries notes consolidated financial statementscontinued millions except share per share information fluctuations revenue reported period impacted termination revenue recognized quarter follows item 9 item 8 financial statements supplementary data abovenet inc subsidiaries index consolidated financial statements report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audited accompanying consolidated balance sheets abovenet inc “company” december 31 2010 2009 related consolidated statements operations shareholders’ equity cash flows comprehensive income three years period ended december 31 2010 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position abovenet inc december 31 2010 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness abovenet inc’s internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organization treadway commission coso report dated february 28 2011 expressed unqualified opinion thereon bdo usa llp new york ny february 28 2011 abovenet inc subsidiaries consolidated balance sheets millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements operations millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements shareholders’ equity millions except share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements comprehensive income millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 1 background organization bankruptcy filing reorganization may 20 2002 metromedia fiber network inc “mfn” substantially domestic subsidiaries “debtor” collectively “debtors” filed voluntary petitions reorganization chapter 11 united states bankruptcy code “bankruptcy code” united states bankruptcy court southern district new york “bankruptcy court” debtors remained possession assets properties continued operate businesses manage properties debtorsinpossession jurisdiction bankruptcy court july 1 2003 debtors filed amended plan reorganization “plan reorganization” amended disclosure statement “disclosure statement” july 2 2003 bankruptcy court approved disclosure statement related voting procedures august 21 2003 bankruptcy court confirmed plan reorganization debtors emerged proceedings chapter 11 bankruptcy code september 8 2003 “effective date” accordance plan reorganization mfn changed name abovenet inc together subsidiaries “company” august 29 2003 equity interests mfn received distribution plan reorganization equity securities mfn cancelled business company facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure colocation services communications carriers corporate government customers principally united states “us” europe note 2 basis presentation significant accounting policies summary basis presentation significant accounting policies followed preparation consolidated financial statements follows stock split august 3 2009 board directors company authorized twoforone common stock split effected form 100 stock dividend distributed september 3 2009 shareholder record august 20 2009 received one additional share common stock share common stock held date share per share information prior periods including warrants options purchase common shares restricted stock units warrant option exercise prices shares reserved company’s 2003 incentive stock option stock unit grant plan “2003 plan” company’s 2008 equity incentive plan “2008 plan” weighted average fair value options granted common stock additional paidin capital accounts consolidated balance sheets consolidated statement shareholders’ equity retroactively adjusted applicable reflect twoforone stock split abovenet inc subsidiaries notes consolidated financial statements millions except share per share information basis presentation use estimates accompanying consolidated financial statements prepared accordance accounting principles generally accepted united states america “us gaap” pursuant rules regulations securities exchange commission “sec” preparation consolidated financial statements conformity us gaap requires management make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements disclosure contingent assets liabilities consolidated financial statements accompanying notes reported amounts revenue expenses periods presented estimates used accounting certain items accounts receivable allowances property taxes transaction taxes deferred taxes estimates company makes based historical factors current circumstances experience judgment company’s management company evaluates assumptions estimates ongoing basis may employ outside experts assist company’s evaluations actual amounts results could differ estimates due subsequent events could material effect company’s financial statements covering future periods fresh start accounting september 8 2003 company authorized 10000000 shares preferred stock 001 par value 30000000 shares common stock 001 par value june 24 2010 shareholders approved amendment company’s certificate incorporation increasing number authorized shares common stock 30000000 200000000 see note 10 “shareholders’ equity amendment company’s amended restated certificate incorporation” holders common stock entitled one vote issued outstanding share entitled receive dividends subject rights holders preferred stock declared board directors preferred stock may issued time one classes series classes series shall distributive designation determined board directors 2006 company reserved issuance 10000000 shares authorized preferred stock described 500000 shares 001 par value junior preferred stock connection adoption amended restated rights agreement defined note 10 “shareholders’ equity” event liquidation holders common stock entitled receive assets company available distribution payments creditors holders preferred stock 2003 company issued 17500000 shares common stock 17498276 delivered 1724 shares determined undeliverable cancelled rights purchase 3338420 shares common stock price 1497715 per share rights offering rights purchase 3337930 shares common stock exercised five year stock purchase warrants purchase 1418918 shares common stock exercisable price 1000 per share seven year stock purchase warrants purchase 1669316 shares common stock exercisable price 1200 per share addition 2129912 shares common stock originally reserved issuance company’s 2003 plan see note 12 “stockbased compensation” abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company’s emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 company accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires company allocate reorganization value assets liabilities based upon estimated fair values accordance statement position 907 “financial reporting entities reorganization bankruptcy code” known financial accounting standards board accounting standards codification “fasb asc” 85210 company developed set financial projections utilized expert assist company estimating fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries company 3 calculation enterprise value based upon future cash flows company’s projections adopting fresh start accounting resulted material adjustments historical carrying values company’s assets liabilities reorganization value allocated company assets liabilities based upon fair values company engaged independent appraiser assist company determining fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination comprehensive loss accumulated deficit accounts principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries consolidation generally required investments 50 outstanding voting stock investee except control held majority owner significant intercompany accounts transactions eliminated consolidation revenue recognition company follows sec staff accounting bulletin sab 101 “revenue recognition financial statements” known fasb asc 60510 amended sec sab 104 “revenue recognition” also known fasb asc 60510 revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income fixed contract term prior october 1 2009 company generally amortized revenue related installation services straightline basis contracted customer relationship two twenty years fourth quarter 2009 company completed study historic customer relationship period result commencing october 1 2009 company began amortizing revenue related installation services straightline basis generally estimated customer relationship period generally ranging three twenty years abovenet inc subsidiaries notes consolidated financial statements millions except share per share information contract termination revenue recognized customer discontinues service prior end contract period company previously received consideration revenue recognition deferred contract termination revenue also recognized customers made early termination payments company settle contractually committed purchase amounts customer longer expects meet company renegotiates discontinues contract customer result longer obligated provide services consideration previously received revenue recognition deferred additionally company includes receipts bankruptcy claim settlements former customers contract termination revenue received contract termination revenue amounted 27 39 154 2010 2009 2008 respectively nonmonetary transactions company may exchange capacity service providers december 2004 fasb issued statement financial accounting standards “sfas” 153 “exchanges nonmonetary assets amendment apb opinion 29” “sfas 153” known fasb asc 84510 sfas 153 amends accounting principles board opinion 29 “accounting nonmonetary transactions” “apb 29” also known fasb asc 84510 eliminate exception nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance sfas 153 applied prospectively nonmonetary exchanges occurring fiscal periods beginning june 15 2005 company’s adoption sfas 153 july 1 2005 material effect consolidated financial position results operations company prior company’s adoption sfas 153 nonmonetary transactions accounted accordance apb 29 exchange similar capacity recorded historical carryover basis dissimilar capacity accounted fair market value recognition gain loss gains losses nonmonetary transactions years ended december 31 2010 2009 2008 operating leases company leases office equipment space maintains equipment rentals rightofway contracts building access fees network capacity various noncancelable operating leases lease agreements expire various dates 2030 subject many cases renewal options provide payment taxes utilities maintenance certain lease agreements contain escalation clauses term lease related scheduled rent increases resulting pass increases operating costs property taxes effect costs changes consumer price indices accordance sfas 13 “accounting leases” known fasb asc 840 company recognizes rent expense straightline basis records liability representing difference straightline rent expense amount payable increase decrease deferred liability leasehold improvements related operating leases amortized lesser economic lives remaining lease term rentfree periods incentives granted certain leases recorded reductions rent expense straightline basis related lease terms cash equivalents restricted cash equivalents purposes consolidated statements cash flows company considers cash banks shortterm highly liquid investments original maturity three months less cash equivalents cash equivalents restricted cash equivalents stated cost approximates fair value restricted cash equivalents comprised amounts secure outstanding letters credit issued favor various third parties abovenet inc subsidiaries notes consolidated financial statements millions except share per share information accounts receivable allowance doubtful accounts sales credits accounts receivable customer obligations services sold customers normal trade terms company’s customers primarily communications carriers corporate enterprise government customers located primarily us uk company performs periodic credit evaluations customers’ financial condition company provides allowances doubtful accounts sales credits provisions doubtful accounts recorded selling general administrative expenses allowances sales credits recorded reductions revenue adequacy reserves evaluated utilizing several factors including length time receivable past due changes customer’s creditworthiness customer’s payment history length customer’s relationship company current industry trends current economic climate property equipment property equipment owned effective date stated estimated fair values effective date based company’s reorganization value net accumulated depreciation amortization incurred since effective date purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress part network infrastructure assets described included property equipment respective balance sheets december 31 2010 december 31 2009 company 540 269 respectively construction progress certain internal direct labor costs constructing installing property equipment capitalized direct labor determined based upon core group project managers field engineers network infrastructure engineers equipment engineers capitalized direct labor based upon time spent capitalized projects consists salary plus related benefits individuals’ capitalized labor costs directly associated construction installation network infrastructure equipment customer installations salaries related benefits nonengineers supporting staff part operations engineering departments considered part pool subject capitalization capitalized direct labor amounted 100 114 107 years ended december 31 2010 2009 2008 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful life improvement term lease estimated useful lives company’s property equipment follows network infrastructure assets storage huts except risers 5 years 20 years hvac power equipment 12 20 years software computer equipment 3 4 years transmission ip equipment 5 7 years furniture fixtures equipment 3 10 years leasehold improvements lesser estimated useful life improvement term lease property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income abovenet inc subsidiaries notes consolidated financial statements millions except share per share information time company required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances company fully depreciates remaining carrying value network infrastructure removed rendered unusable capitalizes costs new fiber associated construction placed service certain circumstances local municipality agency responsible amounts company records share relocation costs property equipment records third party portion costs accounts receivable company capitalized relocation costs amounting 15 31 26 years ended december 31 2010 2009 2008 respectively company fully depreciated remaining carrying value network infrastructure rendered unusable original cost basis totaled 021 014 net book value basis year ended december 31 2010 original cost basis totaled 03 02 net book value basis years ended december 31 2009 2008 extent relocation requires movement existing network infrastructure another location related costs included company’s results operations accordance sfas 34 “capitalization interest cost” known fasb asc 83520 interest certain construction projects would capitalized amounts considered immaterial accordingly amounts capitalized years ended december 31 2010 2009 2008 accordance sfas 144 “accounting impairment disposal longlived assets” known fasb asc 3601035 company periodically evaluates recoverability longlived assets evaluates assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value assets company considers various factors determine impairment test necessary factors include consideration overall economic climate technological advances respect equipment company strategy capital planning certain operational issues since june 30 2006 event occurred business environment changed trigger impairment test assets revenue service operations company also considers removal assets network triggering event performing impairment test item removed service unless redeployed may little future cash flows related company performed annual physical counts assets revenue service operations eg inventory primarily spare parts around september 30 2010 2009 assistance valuation report assets inventory prepared independent third party basis consistent sfas 157 “fair value measurements” known fasb asc 82010 pursuant fasb asc 3601035 company determined fair value certain assets less carrying value accordingly recorded provisions impairment 05 year ended december 31 2010 04 years ended december 31 2009 2008 additionally december 31 2010 company recorded 15 provision impairment respect discreet group assets certain operational issues company also recorded provision impairment 08 year ended december 31 2009 record loss value certain equipment eventually sold unaffiliated third party see note 6 “change estimate” treasury stock treasury stock accounted cost method asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” known fasb asc 41020 company recognizes fair value liability asset retirement obligation period incurred reasonable estimate fair value made company asset retirement obligations related decommissioning removal equipment restoration leased facilities removal certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities abovenet inc subsidiaries notes consolidated financial statements millions except share per share information asset retirement obligations generally recorded “other longterm liabilities” capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 79 72 december 31 2010 2009 respectively 43 38 respectively included “accrued expenses” 36 34 respectively included “other longterm liabilities” dates accretion expense included “interest expense” amounted 028 year ended december 31 2010 027 years ended december 31 2009 2008 income taxes company accounts income taxes accordance sfas 109 “accounting income taxes” known fasb asc 740 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis net operating losses tax credit carryforwards tax contingencies deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled evaluation realizability company’s deferred tax assets company reduced valuation allowance 73 1830 2010 2009 respectively see note 8 “income taxes” discussion company’s provision income taxes company subject audits various taxing authorities audits may result proposed assessments ultimate resolution results company owing additional taxes company required establish reserves fasb interpretation 48 “accounting uncertainty income taxes” known fasb asc 74010 company believes uncertainty respect certain positions company may succeed realizing tax benefit company believes tax return positions appropriate supportable relevant tax law company evaluated tax positions items uncertainty accordance fasb asc 74010 determined tax positions highly certain within meaning fasb asc 74010 company believes estimates assumptions used support evaluation tax benefit realization reasonable accordingly adjustments made consolidated financial statements years ended december 31 2010 2009 company’s reorganization resulted significantly modified capital structure result applying freshstart accounting accordance fasb asc 85210 effective date fresh start accounting important consequences accounting realization valuation allowances related net deferred tax assets existed effective date arose preemergence periods prior 2009 fresh start accounting required reversal allowances recorded reduction intangible assets exhausted thereafter additional paid capital beginning 2009 accordance sfas141r “business combinations revised” known fasb asc 805 future utilization benefit reduce income tax expense treatment result change liabilities taxing authorities cash flows undistributed earnings company’s foreign subsidiaries considered indefinitely reinvested therefore provision domestic taxes provided thereon upon repatriation earnings form dividends otherwise company would subject domestic income taxes offset part foreign tax credits related income withholding taxes payable various foreign countries determination amount unrecognized deferred domestic income tax liability practicable due complexities associated hypothetical calculation however unrecognized foreign tax credit carryforwards would available reduce portion domestic liability company’s policy recognize interest penalties accrued component operating expense date adoption fasb asc 74010 company accrued interest penalties associated unrecognized income tax benefits interest expense recognized years ended december 31 2010 2009 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information foreign currency translation transactions company’s functional currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive income company’s foreign exchange transaction gains losses generally included “other income expense net” consolidated statements operations stock options september 8 2003 company adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” known fasb asc 71810 sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” also known fasb asc 71810 provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 12 “stockbased compensation” fair value provisions sfas 123 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards company historical basis determining volatility expected life assumptions model due company’s limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period company recognizes related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation company’s plan reorganization outstanding stock options cancelled effective january 1 2006 company adopted sfas 123r “sharebased payment” “sfas 123r” known fasb asc 718 using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 allowed companies estimate forfeitures recognize impact forfeitures occur company recognized impact forfeitures occurred sfas 123 adoption sfas 123r result different accounting treatment material impact company’s consolidated financial statements following assumptions used company calculate weighted average fair value stock options granted options purchase shares common stock granted years ended december 31 2010 2009 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information restricted stock units compensation cost restricted stock unit awards performancebased measured based upon quoted closing market price company’s stock date grant related compensation cost recognized straightline basis vesting period compensation expense performancebased restricted stock unit awards measured based upon quoted market price company’s stock date performance targets established communicated grantee related compensation cost recognized based upon review performance targets determination performance targets achieved straightline basis vesting period see note 12 “stockbased compensation” stock warrants connection plan reorganization described note 1 “background organization” company issued holders general unsecured claims part settlement claims five year warrants purchase 1418918 shares common stock exercise price 1000 per share expired september 8 2008 “five year warrants” ii seven year warrants purchase 1669316 shares common stock exercise price 1200 per share expired september 8 2010 “seven year warrants” stock warrants treated equity upon exercise based upon terms warrant cash received stock warrants purchase shares common stock exercised totaled 858530 725326 1379850 2010 2009 2008 respectively terms five year seven year warrant agreements collectively “warrant agreements” market price company’s common stock defined warrant agreements 60 days prior expiration date respective warrants greater warrant exercise price company required give warrant holder notice warrant expiration date warrants would deemed exercised pursuant net exercise provisions respective warrant agreements “net exercise” unless warrant holder elected written notice exercise warrants net exercise shares issued warrant holders would reduced number shares necessary cover aggregate exercise price shares valuing shares current market price defined warrant agreements fractional shares otherwise issuable would paid cash september 8 2008 expiration date five year warrants required conditions met net exercise total five year warrants purchase 318526 shares common stock deemed exercised net exercise basis including warrants purchase 778 shares common stock exercised net exercise basis prior expiration 213432 shares issued warrant holders 105094 shares returned treasury 0004 paid recipients fractional shares addition five year warrants purchase 50 shares common stock cancelled accordance instructions warrant holders september 8 2010 expiration date seven year warrants required conditions met net exercise accordingly seven year warrants purchase 13626 shares common stock exercised expiration 10409 shares issued warrant holders 3217 shares returned treasury 0004 paid recipients fractional shares total seven year warrants purchase 443504 shares common stock deemed exercised net exercise basis 441688 2010 353598 shares issued warrant holders 89906 shares returned treasury 0004 paid recipients fractional shares addition seven year warrants purchase 26 shares common stock determined undeliverable cancelled abovenet inc subsidiaries notes consolidated financial statements millions except share per share information derivative financial instruments company utilized may time future utilize derivative financial instruments known interest rate swaps “derivatives” mitigate exposure interest rate risk company purchased first interest rate swap august 4 2008 hedge interest rate initial 240 original principal term loan secured credit facility company purchased second interest rate swap november 14 2008 hedge interest rate additional 120 original principal term loan provided suntrust bank see note 9 “longterm debt” company accounted derivatives sfas 133 “accounting derivative instruments hedging activities” known fasb asc 815 fasb asc 815 requires derivatives recognized financial statements measured fair value regardless purpose intent holding policy company historically entered derivatives trading purposes speculation based criteria defined fasb asc 815 interest rate swaps considered cash flow hedges 100 effective accordingly changes fair value derivatives recorded period accumulated comprehensive loss changes fair value derivatives reported accumulated comprehensive loss reclassified earnings period earnings impacted variability cash flows hedged item ineffective portion hedges recognized current period earnings unrealized net loss recorded accumulated comprehensive loss december 31 2010 2009 06 12 respectively interest rate swaps marktomarket value cash flow hedges recorded current assets current liabilities noncurrent assets longterm liabilities applicable offsetting gains losses accumulated comprehensive loss january 1 2009 company adopted sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” known fasb asc 81510 fasb asc 81510 changes disclosure requirements derivatives hedging activities entities required provide enhanced disclosures entity uses derivatives ii derivatives related hedged items accounted fasb asc 815 iii derivatives related hedged items affect entity’s financial position cash flows company minimizes credit risk relating counterparties derivatives transacting multiple high quality counterparties thereby limiting exposure individual counterparties monitoring financial condition counterparties derivatives recorded company’s consolidated balance sheets fair value accounting gains losses resulting changes fair value derivatives depends use derivative whether qualifies hedge accounting accordance fasb asc 815 december 31 2010 net interest rate swap derivative liabilities 06 included “accrued expenses” company’s consolidated balance sheet december 31 2009 net interest rate swap derivative liabilities 12 included “other longterm liabilities” company’s consolidated balance sheet derivatives recorded fair value company’s consolidated balance sheets december 31 2010 december 31 2009 consisted following derivative liabilities two interest rate swap agreements original three year terms included “accrued expenses” company’s consolidated balance sheet december 31 2010 “other longterm liabilities” company’s consolidated balance sheet december 31 2009 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information interest rate swap agreements notional amounts provide indication extent involvement agreements represent exposure market risk following table shows notional amount outstanding maturity date weighted average receive pay rates interest rate swap agreements december 31 2010 interest expense agreements respective debt instruments hedge recorded net effective interest rate hedged transaction notional amounts swap arrangements since reduced amounts corresponding reductions outstanding principal balances swap agreements settled january 2011 connection repayment term loans secured credit facility closing 250 million secured revolving credit facility cost 05 settle swap agreements included “other expenses” company’s consolidated statement operations three months ended march 31 2011 fair value financial instruments company adopted sfas 157 “fair value measurements” known fasb asc 82010 company’s financial assets liabilities effective january 1 2008 pronouncement defines fair value establishes framework measuring fair value requires expanded disclosures fair value measurements fasb asc 82010 emphasizes fair value marketbased measurement entityspecific measurement defines fair value price would received sell asset transfer liability orderly transaction market participants measurement date fasb asc 82010 discusses valuation techniques market approach comparable market prices income approach present value future income cash flow cost approach cost replace service capacity asset replacement cost based upon observable unobservable inputs observable inputs reflect market data obtained independent sources unobservable inputs reflect company’s market assumptions fasb asc 82010 utilizes fair value hierarchy prioritizes inputs fair value measurement techniques three broad levels level 1 observable inputs quoted prices identical assets liabilities active markets level 2 observable inputs quoted prices directly indirectly observable asset liability including quoted prices similar assets liabilities active markets quoted prices similar identical assets liabilities markets active modelderived valuations whose inputs observable whose significant value drivers observable level 3 unobservable inputs reflect reporting entity’s assumptions company’s investment overnight money market institutional funds amounted 482 1541 december 31 2010 december 31 2009 respectively included cash equivalents accompanying balance sheets classified level 1 asset abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company party two interest rate swaps utilized modify company’s interest rate risk company recorded marktomarket value interest rate swap contracts 06 included “accrued expenses” company’s consolidated balance sheet december 31 2010 12 included “other longterm liabilities” company’s consolidated balance sheet december 31 2009 company used third parties value interest rate swap agreements december 31 2010 december 31 2009 well market analysis determine fair value fair value interest rate swap contracts classified level 2 liabilities company’s consolidated balance sheets include following financial instruments shortterm cash investments trade accounts receivable trade accounts payable note payable company believes carrying amounts financial statements approximate fair value financial instruments due relatively short period time origination instruments expected realization interest rates approximate current market rates swap agreements settled january 2011 connection repayment term loans secured credit facility closing 250 million secured revolving credit facility cost 05 settle swap agreements included “other expenses” company’s consolidated statement operations three months ended march 31 2011 concentration credit risk financial instruments potentially subject company concentration credit risk consist principally shortterm cash investments accounts receivable company enter financial instruments trading speculative purposes company’s cash equivalents invested investmentgrade shortterm investment instruments high quality financial institutions company’s trade receivables unsecured geographically dispersed single customer accounts greater 10 consolidated revenue accounts receivable net company performs ongoing credit evaluations customers’ financial condition allowance noncollection accounts receivable based upon expected collectability accounts receivable company places cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits 401k postretirement benefits company profit sharing 401k plan “plan” employees us permits employees make contributions plan pretax salary reduction basis accordance provisions internal revenue code permits employer provide discretionary contributions fulltime us employees eligible participate plan beginning month following three months service eligible employees may make contributions subject limitations defined internal revenue code company matches 50 us employee’s contributions amount set forth plan matched amounts vest based upon employee’s length service company’s subsidiaries uk different plan contributions made maximum 8 uk employee contributions reach 5 salary uk plan contributions made two levels uk employee contributes 3 less 5 salary plan company’s contribution fixed 5 salary uk employee contributes 5 salary plan company’s contribution fixed 8 salary regardless percentage contribution excess 5 company contributed 15 years ended december 31 2010 2009 2008 net forfeitures obligations plans abovenet inc subsidiaries notes consolidated financial statements millions except share per share information taxes collected customers june 2006 emerging issues task force “eitf” ratified consensus eitf 063 “how taxes collected customers remitted governmental authorities presented income statement gross versus net presentation” “eitf 063” known fasb asc 60545 fasb asc 60545 requires companies disclose accounting policies regarding gross net presentation certain taxes within scope fasb asc 60545 taxes assessed governmental authority directly imposed revenueproducing transaction seller customer may include limited sales use value added excise taxes addition taxes significant presented gross basis amounts taxes disclosed company adopted eitf 063 effective january 1 2007 company records universal service fund “usf” contributions relating certain services provides net basis accordance guidelines eitf 9919 “reporting revenue gross principal versus net agent” also known fasb asc 60545 company’s policy record fees contributions taxes within scope fasb asc 60545 net basis reclassifications certain reclassifications made consolidated financial statements year ended december 31 2008 2009 conform classifications used year ended december 31 2010 recently issued accounting pronouncements august 2009 fasb issued asu 20095 fair value measurements disclosures topic 820 measuring liabilities fair value asu 20095 provides clarification circumstances quoted price active market identical liability available reporting entity required measure fair value using valuation technique uses quoted price identical liability traded asset quoted prices similar liabilities similar liabilities traded assets another valuation technique consistent principles asc topic 820 asu 20095 effective first reporting period including interim periods beginning issuance adoption asu 20095 material impact company’s financial position results operations cash flows october 2009 fasb issued asu 200913 revenue recognition topic 605 multiple deliverable revenue arrangements asu 200913 eliminates residual method allocation requires arrangement consideration allocated inception arrangement deliverables using relative selling price method expands disclosures related multipledeliverable revenue arrangements asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 earlier adoption permitted adoption asu 200913 material impact company’s financial position results operations cash flows january 2010 fasb issued asu 201002 consolidation topic 810 accounting reporting decreases ownership subsidiary scope clarification asu 201002 clarifies scope decrease ownership provisions topic 810 applies subsidiary group assets business subsidiary business transferred equity method investee joint venture exchange group assets constitutes business noncontrolling interest entity apply sales substance real estate asu 201002 effective beginning period entity adopts sfas 160 sfas 160 previously adopted first interim annual period ending december 15 2009 applied retrospectively first period entity adopted sfas 160 adoption asu 201002 material impact company’s financial position results operations cash flows abovenet inc subsidiaries notes consolidated financial statements millions except share per share information january 2010 fasb issued asu 201006 fair value measurements disclosures topic 820 improving disclosures fair value measurements asu 201006 requires new disclosures regarding transfers level 1 2 activity within level 3 fair value measurements clarifies existing disclosures inputs valuation techniques level 2 3 fair value measurements asu 201006 also includes conforming amendments employers disclosures postretirement benefit plan assets new disclosures clarifications existing disclosures effective interim annual reporting periods beginning december 15 2009 except disclosure activity within level 3 fair value measurements effective fiscal years beginning december 15 2010 interim periods within years adoption asu 201006 material impact company’s financial position results operations cash flows february 2010 fasb issued asu 201009 subsequent events topic 855 amendments certain recognition disclosure requirements asu 201009 requires entity sec filer evaluate subsequent events date financial statements issued removes requirement sec filer disclose date subsequent events evaluated asu 201009 effective upon issuance adoption asu 201009 effect company’s financial position results operations cash flows april 2010 fasb issued asu 201013 compensation stock compensation topic 718 effect denominating exercise price sharebased payment award currency market underlying equity security trades asu 201013 provides amendments topic 718 clarify employee sharebased payment award exercise price denominated currency market substantial portion entitys equity securities trades considered contain condition market performance service condition therefore entity would classify award liability otherwise qualifies equity amendments asu 201013 effective fiscal years interim periods within fiscal years beginning december 15 2010 adoption asu 201013 material impact company’s financial position results operations cash flows note 3 prepaid costs current assets prepaid costs current assets consist following abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 4 property equipment property equipment consist following included network infrastructure assets certain transmission ip equipment held inventory future use original cost 324 393 accumulated depreciation 150 257 net carrying values 174 136 december 31 2010 2009 respectively addition december 31 2010 2009 company assets held sale disposition net book values totaling 06 02 respectively net allowances equipment impairment 05 03 december 31 2010 2009 respectively included network infrastructure assets including transmission ip equipment depreciation amortization expense related property equipment years ended december 31 2010 2009 2008 approximately 633 520 483 respectively included costs revenue years ended december 31 2010 2009 2008 provisions impairment 20 12 04 respectively respect certain assets removed network either sold disposed made available sale disposition asset abandonment 2006 company acquired software enterprise resource planning system “erp system” expected company’s information technology platform capitalized costs totaling 23 september 2008 management decided abandon implementation erp system investigate alternatives including enhancements upgrades current systems accordingly company recorded impairment charge 23 respect abandonment reflected selling general administrative expenses year ended december 31 2008 additionally company accrued maintenance fees 03 year ended december 31 2008 settled year ended december 31 2010 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 5 subordinated investment january 2008 company became strategic member defined mediaxstream llc newly formed limited liability company created provide transport managed network services production broadcast industries “mediax” mediax formed preferred members contributed cash strategic members management members contribute services company’s interest provide voting rights mediax’s board managers company agreed contribute certain monthly services pursuant 51 month contract commenced april 2008 interest mediax distributions company subordinated distributions preferred members original investment plus preferred return based upon amounts contributed company’s nominal ownership interest approximately 154 equity mediax startup company operating history distributions company’s investment subordinated distributions preferred members company’s interest provide level control factors indicated fair value company’s investment mediax significant accordingly company reflected services contributed revenue corresponding investment mediax financial statements cost providing services included costs revenue relevant period company contributed services mediax 17 13 years ended december 31 2010 2009 2008 respectively represents estimated fair value services actual costs providing services significant december 2009 ownership interests mediax including ownership interest held us purchased hibernia group ehf “hibernia” pursuant purchase agreement company entitled earnout payment event mediax achieves certain financial performance results company continue contribute services accordance original contract company record distributions investment mediax income received additionally company provides services mediax basis provides customers company billed mediax services reimbursements 07 06 05 years ended december 31 2010 2009 2008 respectively note 6 change estimate effective january 1 2008 company changed estimated useful lives spare parts classified inventory five years respective asset class lives parts range seven twenty years effect change material effective october 1 2009 company changed estimated useful lives certain hvac power equipment 20 years 12 15 years certain components infrastructure risers 20 years 5 years effective january 1 2010 company changed estimated useful lives ip equipment 7 years 5 years additionally company changed estimated useful lives certain capitalized labor 20 years 7 years effect changes company’s future operating results material abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 7 accrued expenses accrued expenses consist following note 8 income taxes income taxes provided based upon tax laws rates countries operations conducted income earned provision benefit income taxes years ended december 31 2010 2009 2008 follows abovenet inc subsidiaries notes consolidated financial statements millions except share per share information deferred income taxes result temporary differences financial reporting basis tax basis assets liabilities following summary significant items giving rise components company’s deferred tax assets liabilities respect 2009 table reflects reduction deferred tax assets totaling 4290 significant portion domestic nols limited section 382 united states internal revenue code realizable value year ended december 31 2010 company recorded current net tax expense capitalbased state income taxes 13 company provided income taxes statutory rate 2010 2009 fourth quarter 2010 2009 company recognized 73 1830 noncash tax benefits december 31 2010 2009 respectively result reducing certain valuation allowances previously established respect deferred tax assets us uk believe likely utilize assets reduce eliminate tax payments future periods company’s evaluation encompassed review recent history profitability us uk past three years ii review internal financial forecasts demonstrating expected capacity utilize deferred tax assets iii reassessment tax benefits recognition fasb asc 740 federal income tax provision 2008 substantially comprised us alternative minimum tax abovenet inc subsidiaries notes consolidated financial statements millions except share per share information connection company’s emergence bankruptcy company realized substantial cancellation debt income “codi” income taxable us income tax purposes codi resulted company’s reorganization bankruptcy code however us income tax reporting purposes company required reduce certain tax attributes including net operating loss carryforwards b capital losses c certain tax credit carryforwards tax basis assets total amount equal gain extinguishment debt reorganization company effective date constituted ownership change section 382 internal revenue code use company’s nol’s capital losses tax credit carryforwards remaining applying provisions certain subsequently recognized “builtin” losses deductions existing prior ownership change subject overall annual limitation december 31 2008 december 31 2010 company domestic nol carryforwards 2174 foreign nol carryforwards 213 certain nol carryforwards begin expire 2024 company’s use 1539 domestic nol carryforward limited 81 per annum 635 unlimited nol carryforwards may subject future limitation section 382 united states internal revenue code company subsidiaries’ income tax returns routinely examined various tax authorities statute limitations open respect tax years 2001 2009 statute limitations years begin expire 2011 note 9 longterm debt secured february 29 2008 company excluding certain foreign subsidiaries entered credit guaranty agreement amended “credit agreement” providing 600 senior secured credit facility “secured credit facility” consisting 180 revolving credit facility “revolver” 420 term loan facility “term loan” comprised 240 advanced closing 180 originally could drawn within nine months closing company’s option “delayed draw term loan” secured credit facility secured substantially company’s domestic assets september 2008 delayed draw term loan option originally scheduled expire november 25 2008 extended june 30 2009 subsequently extended december 31 2009 revolver term loan term five years closing date secured credit facility company paid nonrefundable work fee 01 lenders credited upfront fee 15 09 total amount secured credit facility paid closing paid 03 unaffiliated third party financial advisors assisted company also liable unused commitment fee 075 per annum interest accrued libor 30 60 90 180 day rates announced base rate administrative agent company’s option plus applicable margins defined company chose 30 day libor interest rate 30 day libor 025750 december 31 2010 plus applicable margin 3 additionally company originally required maintain unrestricted cash balance times least 200 february 29 2008 company received proceeds 240 deduction debt acquisition costs term loan required provisions term loan initial advance base rate interest plus margin 825 february 29 2008 converted libor plus 325 per annum 626 march 5 2008 company’s ability draw upon available commitments revolver subject compliance covenants contained credit agreement company’s continued ability make certain representations warranties among things covenants imposed limits annual capital expenditures 2010 provided company’s net total funded debt ratio could time exceed specified amount required company maintained minimum consolidated fixed charges coverage ratio addition credit agreement prohibited company paying dividends shares equity securities making certain payments including payments acquire company’s equity securities specified circumstances include repurchase company’s equity securities employees directors aggregate amount exceed 150 company obtained waiver lenders effectuate dividend paid december 2010 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information september 26 2008 company executed joinder agreement secured credit facility added additional lender increased amount secured credit facility 900 effective october 1 2008 revolver increased 270 term loan increased 360 available delayed draw term loan increased 270 connection joinder agreement company paid 045 fee closing aggregate 025 advisory fees additional amount term loan 120 advanced october 1 2008 effective august 4 2008 company entered swap arrangement fixed borrowing costs respect 240 original principal term loan outstanding three years 365 plus applicable margin 325 reduced 300 september 30 2008 november 14 2008 company entered swap arrangement fixed borrowing costs respect additional 120 original principal term loan borrowed october 1 2008 three years 2635 per annum plus applicable margin 300 june 29 2009 company lenders entered amendment credit agreement extended availability delayed draw term loan commitments june 30 2009 december 31 2009 provided reduction commitments 081 june 30 2009 september 30 2009 december 31 2009 addition company’s obligation maintain minimum balance 200 cash deposits times eliminated december 31 2009 company borrowed 2457 delayed draw term loan carried interest 30 day libor 025750 december 31 2010 plus applicable margin 300 delayed draw term loan provided payment terms similar term loan term loan provided monthly payments interest quarterly installments principal 108 commenced june 30 2009 quarterly installment principal increased 189 beginning march 31 2010 take consideration delayed draw term loan repayment schedule aggregate quarterly principal repayment scheduled increase 252 june 30 2012 balance 3276 plus accrued unpaid interest due february 28 2013 outstanding amounts 497 term loan secured credit facility december 31 2010 scheduled repaid follows additionally company executed 10 standby letter credit favor new york city secure company’s franchise agreement collateralized 10 availability revolver standby letter credit originally scheduled expire may 1 2010 renewed extended may 1 2011 december 31 2010 company 260 available revolver term loan delayed draw term loan repaid plus accrued interest january 28 2011 upon closing 250 secured revolving credit facility see note 19 subsequent events “250 million secured revolving credit facility” abovenet inc subsidiaries notes consolidated financial statements millions except share per share information obligation capital lease company obligated capital lease certain indefeasible rightsofuse included network infrastructure assets property equipment net december 31 2010 future minimum payments capital lease follows longterm portion reported within “other longterm liabilities” note 10 shareholders’ equity dividends november 2010 obtained waivers lenders societe generale suntrust bank cit lending services corporation permit 500 per share dividend november 23 2010 announced board directors declared special onetime cash dividend 500 per share common stock “special cash dividend” special cash dividend paid december 27 2010 stockholders record close business december 6 2010 aggregate amount payment made connection special cash dividend approximately 1290 december 20 2010 company’s board directors granted restricted stock units “rsu dividend” holders unvested restricted stock units record date special cash dividend order provide holders amount approximated value special cash dividend total company granted 40508 restricted stock units pursuant rsu dividend 1246 restricted stock units vested february 2011 based upon achievement certain performance targets established fiscal year 2010 28656 restricted stock units scheduled vest november 15 2011 9360 scheduled vest november 16 2011 1246 restricted stock units scheduled vest march 15 2012 based upon achievement certain performance targets established fiscal year 2011 additionally december 20 2010 company’s board directors granted shares common stock “option dividend” holders vested unexercised options purchase shares common stock order provide holders amount approximated value special cash dividend december 27 2010 company delivered 9281 shares common stock pursuant option dividend additionally company paid cash one former employee estate one deceased employee totaling 0007 fourth quarter 2010 company recorded stockbased compensation expense 05 connection option dividend abovenet inc subsidiaries notes consolidated financial statements millions except share per share information stock split august 3 2009 board directors company authorized twoforone common stock split effected form 100 stock dividend distributed september 3 2009 shareholder record august 20 2009 received one additional share common stock share common stock held date share per share information prior periods including warrants options purchase common shares restricted stock units warrant option exercise prices shares reserved 2003 plan 2008 plan weighted average fair value options granted common stock additional paidin capital accounts consolidated balance sheets consolidated statement shareholders’ equity retroactively adjusted applicable reflect twoforone stock split amendment company’s amended restated certificate incorporation june 24 2010 company’s stockholders approved amendment company’s amended restated certificate incorporation “amendment” increase number authorized shares common stock par value 001 per share 30 million 200 million number authorized shares preferred stock remained 10 million increase number authorized shares common stock could antitakeover effect discouraging hindering efforts acquire control company would able use additional shares oppose hostile takeover attempt delay prevent changes control management company intent board directors adopting amendment adopted response known threat acquire control company increase authorized shares common stock became effective upon filing amendment secretary state delaware june 24 2010 rights agreement august 3 2006 company entered rights agreement “rights agreement” american stock transfer trust company rights agent amended restated august 3 2009 subsequently amended january 26 2010 amended “amended restated rights agreement” amended restated rights agreement ratified company’s stockholders annual meeting june 24 2010 result rights defined amended restated rights agreement remain effect august 7 2012 unless sooner terminated company’s board directors following description amended restated rights agreement purport complete qualified entirety reference amended restated rights agreement included exhibit 41 company’s current report form 8k filed sec august 3 2009 amendment amended restated rights agreement dated january 26 2010 abovenet inc american stock transfer trust company llc included exhibit 41 company’s current report form 8k filed sec january 28 2010 connection initial rights agreement company’s board directors declared dividend distribution one preferred share purchase right “right” outstanding share company’s common stock par value 001 per share “common shares” dividend paid august 7 2006 stockholders record date earlier occur date 10 days following date public announcement person entity group affiliated associated persons acquired beneficial ownership 15 outstanding common shares “acquiring person” ii 10 business days later date may determined action company’s board directors prior time person entity becomes acquiring person following commencement announcement intention commence tender offer exchange offer consummation would result person entity becoming acquiring person earlier dates called “distribution date” rights evidenced common share certificates bookentry shares abovenet inc subsidiaries notes consolidated financial statements millions except share per share information rights exercisable distribution date right upon becoming exercisable entitle holder purchase company specified fraction share company’s series junior participating preferred stock “preferred shares” effective purchase price rights expire august 7 2012 unless earlier redeemed exchanged number outstanding rights number preferred shares issuable upon exercise rights also subject adjustment event stock split common shares stock dividend common shares payable common shares subdivisions consolidation combinations common shares occurring case prior distribution date purchase price payable number preferred shares securities property issuable upon exercise rights subject adjustment time prevent dilution described amended restated rights agreement result company’s stock split discussed appropriate adjustments amended restated rights agreement made event person group affiliated associated persons becomes acquiring person proper provision made holder right rights beneficially owned acquiring person associates affiliates thereafter void right receive upon exercise lieu preferred shares number common shares market value two times effective exercise price right number shares cannot authorized company may issue preferred shares cash debt stock combination thereof exchange rights event company acquired merger business combination transaction 50 consolidated assets earning power sold acquiring person associates affiliates certain persons proper provision made holder right rights beneficially owned acquiring person associates affiliates thereafter void thereafter right receive upon exercise thereof current exercise price right lieu preferred shares number shares common stock acquiring company time transaction market value two times effective exercise price per right time person becomes acquiring person prior acquisition acquiring person 50 outstanding common shares company may exchange rights owned acquiring person group become void whole part exchange ratio one share common stock per right election company may issue cash debt stock combination thereof exchange rights subject adjustment time prior earlier time person become acquiring person ii final expiration date company may redeem less outstanding rights price 0005 per right “redemption price” rights may also redeemed certain times described amended restated rights agreement immediately upon redemption rights right exercise rights terminate right holders rights receive redemption price terms rights may amended company’s board directors without consent holders rights except time rights distributed amendment may adversely affect interest holders rights interests acquiring person affiliates associates right exercised holder thereof rights stockholder company including without limitation right vote receive dividends abovenet inc subsidiaries notes consolidated financial statements millions except share per share information 2010 employee stock purchase plan june 24 2010 company’s stockholders approved abovenet inc 2010 employee stock purchase plan adopted board directors april 28 2010 amended “stock purchase plan” stock purchase plan administered compensation committee board directors aggregate number shares common stock may issued pursuant stock purchase plan 300000 subject increase decrease reason stock splits reclassifications stock dividends similar corporate events determined compensation committee eligibility participation employees company designated subsidiaries completed least ninety 90 days employment first day applicable offering period eligible participate stock purchase plan subject certain limitations imposed internal revenue code certain limitations set forth stock purchase plan employee may participate stock purchase plan immediately joined would stock andor hold rights purchase stock possessing 5 total combined voting power value classes stock company subsidiary company officers company subject reporting requirements section 16a securities exchange act 1934 “section 16 officers” also eligible participate stock purchase plan also limits employee’s rights purchase stock employee stock purchase plans subject section 423 internal revenue code company subsidiaries rights may accrue rate exceeds 0025 fair market value stock determined first day offering period calendar year right purchase stock outstanding time addition employee may purchase 200 shares common stock purchase plan offering period 100 shares common stock offering period 2010 employees may withdraw stock purchase plan time prior end current offering period december 31 2010 total approximately 680 employees would eligible participate stock purchase plan offering periods purchase price stock purchase plan operates series offering periods approximately 10 months duration commencing january 16 ending november 15 except 2010 offering period september 1 2010 november 15 2010 purchases made participants end offering period applying payroll deductions accumulated course offering period towards purchases payroll deductions accumulated course offering period included “accrued expenses” company’s consolidated balance sheet price purchases made equal 85 lesser fair market value common stock first day offering period fair market value last day offering period 2010 offering period 86 employees participated september 1 2010 november 15 2010 offering pursuant 02 withheld 2010 offering period company follows fasb technical bulletin 971 “accounting statement 123 certain employee stock purchase plans lookback option” known fasb asc 718 sfas 123r also known fasb asc 718 account stock purchase plan stock purchase plan provides discount greater 5 compensatory plan qualifies fair value accounting accordingly fair market value grant calculated grant date accordance sfas 123r additionally fair value lookback option calculated similar basis company also estimates future forfeitures withdrawals stock purchase plan provided fasb asc 718 stockbased compensation expense recognized respect stock purchase plan year ended december 31 2010 002 company issued 4414 common shares respect 2010 offering period abovenet inc subsidiaries notes consolidated financial statements millions except share per share information stock warrants plan reorganization unsecured note holder claims general secured claims settled part distribution five year warrants seven year warrants see note 1 “background organization” following table summarizes activity company’s warrants periods presented 1 includes 105094 shares returned treasury settle aggregate exercise price connection net exercises 2 includes 476 shares returned treasury settle aggregate exercise price connection net exercises 3 includes 89430 shares returned treasury settle aggregate exercise price connection net exercises terms warrant agreements described note 2 “basis presentation significant accounting policies stock warrants” market price company’s common stock defined warrant agreements 60 days prior expiration date respective warrants greater warrant exercise price company required give warrant holder notice warrant expiration date warrants would deemed exercised pursuant net exercise provisions respective warrant agreements “net exercise” unless warrant holder elected written notice exercise warrants net exercise shares issued warrant holders would reduced number shares necessary cover aggregate exercise price shares valuing shares current market price defined warrant agreements fractional shares otherwise issuable would paid cash prior expiration date five year warrants five year warrants purchase 778 shares common stock exercised net exercise basis resulting issuance 520 common shares issued 258 common shares returned treasury september 8 2008 expiration date five year warrants required conditions met net exercise five year warrants purchase 50 shares common stock cancelled accordance instructions warrant holders additionally five year warrants purchase 317748 shares common stock deemed exercised net exercise basis 212912 shares issued warrant holders additional 104836 shares returned treasury 0004 paid recipients fractional shares abovenet inc subsidiaries notes consolidated financial statements millions except share per share information september 8 2010 expiration date seven year warrants required conditions met net exercise accordingly seven year warrants purchase 13626 shares common stock exercised expiration 10409 shares issued warrant holders 3217 shares returned treasury 0004 paid recipients fractional shares total seven year warrants purchase 443504 shares common stock deemed exercised net exercise basis 353598 shares issued warrant holders 89906 shares returned treasury 0004 paid recipients fractional shares addition seven year warrants purchase 26 shares common stock determined undeliverable cancelled stock purchase agreements october 2008 company purchased employees previously received distributions common stock pursuant vested restricted stock units 37220 shares common stock price 25035 per share aggregate purchase price 09 price determined based average trading price set board directors filing company’s annual report form 10k year ended december 31 2007 purchases pursuant stock purchase agreement also included provision restricts employee selling otherwise transferring shares common stock securities company earlier six months date company becomes current respect securities exchange act filing obligations b time company’s common stock becomes listed national securities exchange note 11 income per common share basic net income per common share computed net income divided weighted average number common shares outstanding period total weighted average shares utilized computing basic net income per common share 25293188 23504077 21985284 years ended december 31 2010 2009 2008 respectively total weighted average shares utilized computing diluted net income per common share 26242696 25468405 24454150 years ended december 31 2010 2009 2008 respectively dilutive securities include options purchase shares common stock restricted stock units stock warrants years ended december 31 2010 2009 potentially dilutive securities excluded calculation diluted income per common share year ended december 31 2008 potentially dilutive securities acquire 23800 shares common stock excluded calculation diluted income per common share antidilutive note 12 stockbased compensation adoption 2008 equity incentive plan august 29 2008 board directors company approved company’s 2008 plan 2008 plan administered company’s compensation committee employee officer director consultant company subsidiary company selected compensation committee eligible receive awards 2008 plan stock options restricted stock restricted unrestricted stock units stock appreciation rights may awarded eligible participants stand alone combination tandem basis 1500000 shares company’s common stock initially reserved issuance pursuant awards granted 2008 plan number shares available grant terms outstanding grants subject adjustment stock splits stock dividends capital adjustments stockbased compensation expense period relates sharebased awards granted company’s 2008 plan described company’s 2003 plan reflect awards outstanding period including awards granted prior period 2003 plan became effective september 8 2003 plan company authorized issue aggregate sharebased awards 2129912 common shares employees directors consultants selected participate 2003 plan december 31 2010 1169432 common shares issued pursuant vested restricted stock units including shares repurchased company 826166 shares issued pursuant options exercised purchase common shares 100186 common shares reserved pursuant outstanding vested options purchase shares common stock 34178 common shares cancelled shares available future grants 2003 plan abovenet inc subsidiaries notes consolidated financial statements millions except share per share information 2008 plan company authorized issue sharebased awards 1500000 common shares accordance terms december 31 2010 486010 common shares issued pursuant delivery vested restricted stock units including shares repurchased company 3288 common shares issued pursuant exercise options purchase shares common stock 9281 common shares issued pursuant option dividend december 20 2010 750596 reserved pursuant outstanding restricted stock units 6712 common shares reserved pursuant outstanding options purchase shares common stock 244113 common shares reserved future grants stock options pursuant 2008 plan year ended december 31 2008 company awarded options purchase 10000 shares common stock ten year life date grant vested first anniversary date grant per share exercise prices 3000 options purchase shares common stock granted years ended december 31 2010 2009 company recognized noncash stockbased compensation expense amounting 02 12 years ended december 31 2009 2008 respectively respect stock options granted effect decreasing net income 001 per basic common share 001 per diluted common share year ended december 31 2009 006 per basic common share 005 per diluted common share year ended december 31 2008 noncash stockbased compensation expense recognized respect options purchase shares common stock year ended december 31 2010 options subject forfeiture specified respective award agreement information regarding options purchase common stock granted exercised outstanding years ended december 31 2010 2009 2008 summarized abovenet inc subsidiaries notes consolidated financial statements millions except share per share information grant date fair value vested options purchase common stock follows december 31 aggregate grant date fair value options purchase shares common stock vested years ended december 31 2009 2008 02 10000 shares 10 72008 shares respectively options purchases shares common stock vested year ended december 31 2010 december 31 2010 options purchase shares common stock vested accordingly company unearned stockbased compensation expense associated options purchase shares common stock november 2005 fasb issued fasb staff position sfas 123r3 “transition election related accounting tax effects sharebased payment awards” alternative transition method includes simplified methods establish beginning balance additional paidin capital pool “apic pool” related tax effects employee sharebased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee sharebased compensation awards outstanding upon adoption sfas 123r company adopted method determined apic pool 28 company reduced apic pool 01 2008 reflect tax effect delivery common shares underlying restricted stock units 2008 86778 742626 options exercised purchase common shares years ended december 31 2010 2009 options purchase common shares exercised year ended december 31 2008 following table summarizes information concerning outstanding exercisable options purchase common stock december 31 2010 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information restricted stock units december 20 2010 pursuant 2008 plan company awarded 254700 restricted stock units certain employees nonemployee members board directors fair value grants 5682 per share closing price company’s common stock day 10800 restricted stock units granted employees scheduled vest november 16 2011 balance 243900 restricted stock units including 3000 restricted stock units five nonemployee members board directors 161267 scheduled vest november 16 2012 82633 scheduled vest november 16 2013 additionally december 20 2010 pursuant 2008 plan board directors company granted 40508 restricted stock units pursuant rsu dividend 28656 restricted stock units scheduled vest november 15 2011 9360 restricted stock units scheduled vest november 16 2011 1246 vested along 14000 previously granted restricted stock units february 2011 based upon attainment certain performancebased metrics respect fiscal year 2010 1246 may vest along 14000 previously granted restricted stock units march 15 2012 based upon attainment certain performancebased metrics respect fiscal year 2011 december 2 2010 pursuant 2008 plan company awarded 5900 restricted stock units ie agreement provide common shares future certain employees fair value grant 5657 per share closing company’s stock day restricted stock units scheduled vest november 16 2011 december 3 2009 pursuant 2008 plan company awarded 182700 restricted stock units originally scheduled vest november 16 2010 certain employees independent members board directors fair value grant 5390 per share closing price company’s common stock day 1600 restricted stock units accelerated vested delivered october 25 2010 74220 vested delivered november 16 2010 99480 scheduled vest november 16 2011 7400 restricted stock units forfeited september 8 2008 pursuant 2008 plan company granted certain employees aggregate 648200 restricted stock units 380000 vested 30 first anniversary date grant 10 vested second anniversary date grant 60 scheduled vest third anniversary date grant 172000 vested scheduled vest ratably first second third anniversaries date grant 96200 vested 2666 restricted stock units forfeited first anniversary date grant fair value grants 3000 per share closing price company’s stock day grant additionally william g laperch president chief executive officer company granted additional 42000 restricted stock units vested scheduled vest ratably 2010 2011 2012 based upon achievement certain performance targets fiscal years 2009 2010 2011 established december 31 2010 respect 2011 grants company also granted 70000 restricted stock units fourth quarter 2008 vested 30 november 16 2009 10 november 15 2010 60 scheduled vest november 15 2011 fair value grant 1950 per share closing price company’s stock day grant additionally fourth quarter 2008 company granted 8000 restricted stock units vested november 16 2009 may 2 2008 company awarded 18000 restricted stock units employees 2003 plan underlying shares fair value 3500 per share closing price stock date grant stock units vested first anniversary date grant additionally 2008 connection delivery 81750 shares pursuant vested restricted stock units 175250 shares described company repurchased 34154 shares fund estimated income tax obligations exceeded company’s minimum tax withholding obligations accordingly company recorded compensation charge 09 year ended december 31 2008 accordance provisions sfas 123r amounts recorded years ended december 31 2010 2009 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company records stockbased compensation expense fair value restricted stock units awarded grant date ratably vesting period company recognized noncash stockbased compensation expense amounting 119 95 113 years ended december 31 2010 2009 2008 respectively respect restricted stock units awarded effect decreasing net income 028 per basic common share 027 per diluted common share year ended december 31 2010 040 per basic common share 037 per diluted common share year ended december 31 2009 051 per basic common share 046 per diluted common share year ended december 31 2008 following schedule summarizes activity company’s “restricted stock units” periods presented 1 includes 14000 restricted stock units previously granted 1246 granted pursuant rsu dividend earned based achievement certain performance targets fiscal 2010 scheduled delivered march 2011 also includes another 1246 restricted stock units granted pursuant rsu dividend may vest 2012 based upon achievement certain performance targets established february 2011 fiscal 2011 2 excludes 14000 restricted stock units previously granted may vest 2012 based achievement certain performance targets established february 2011 fiscal 2011 december 31 2010 company 192 58 14 unearned stockbased compensation expense associated vesting restricted stock unit awards outstanding december 31 2010 expected recognized 2011 2012 2013 respectively excluding 15246 restricted stock units granted mr laperch described abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 13 employment contract termination march 4 2008 employment contract michael doris company’s former senior vice president chief financial officer modified terminated pursuant modification company paid mr doris upon termination 03 ii salary bonuses earned yet paid iii accrued unused paid time days iv health welfare benefits eighteen 18 months executed delivered consulting agreement mr doris consulting agreement provided exchange mr doris’ provision consulting services company period nine months mr doris paid annual salary 03 pro rated per week nine months ii bonus 005 “2006 filing bonus” upon filing sec form 10k respect company’s fiscal year ended december 31 2006 b bonus 005 “2007 filing bonus” upon filing sec form 10k respect company’s fiscal year ended december 31 2007 addition mr doris’ stock unit agreement dated august 7 2007 amended provide shares underlying 10000 restricted stock units became vested upon termination without cause delivered mr doris january 5 2009 ii company repurchase market price number shares required meet company’s estimate mr doris’ federal state income taxes due respect delivery restricted stock units aggregate value benefits delivered mr doris including value restricted stock units vested accordance terms 16 12 recognized selling general administrative expenses 2008 additionally company recorded additional noncash stockbased compensation expense 07 relating modification options purchase common shares connection modification termination mr doris’ employment agreement note 14 income expense net income expense net consists following represents reversal certain transaction tax liabilities resulting primarily expiration statute limitations abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 15 commitments contingencies company commitments various noncancelable operating leases office equipment space equipment rentals rightofway contracts building access franchise fees network capacity contracts terms expiring 2030 company various sublet arrangements third parties estimated future payments net receipts respect contractual obligations follows expenses incurred described obligations years ended december 31 2010 2009 2008 operations 350 332 303 respectively net sublease receipts 12 22 24 years ended december 31 2010 2009 2008 respectively rental expense reflected also net amortization deferred fair value rent liability represents difference present value contractual obligations leases place fresh start date fair market value obligations company recorded 08 12 15 years ended december 31 2010 2009 2008 respectively reductions rent expense continuing operations december 31 2010 2009 deferred fair value rent liability 15 21 respectively 06 08 respectively included accrued expenses 09 13 respectively included longterm liabilities related consolidated balance sheets december 31 2010 company commitments customer buildouts infrastructure totaling 170 employment contracts company maintains employment agreements key executives agreements include among things certain change control severance provisions september 2008 company entered new employment agreements certain senior officers “executive officers” employment agreements term ends november 16 2011 automatic extensions additional oneyear period unless cancelled executive company writing least 120 days prior end applicable term contracts provides base rate compensation may increase cannot decrease term contract additionally contract provides incentive cash bonus targets executive officers generally entitled benefits offered company’s executives employment contracts provides payment severance provision certain benefits connection certain termination events employment contracts also include confidentiality noncompete assignment intellectual property covenants executive officers october 2008 company entered employment agreement mr joseph p ciavarella mr ciavarella agreed become company’s senior vice president chief financial officer employment agreement substantially general terms september 2008 employment agreements described abovenet inc subsidiaries notes consolidated financial statements millions except share per share information internal revenue service september 2008 company notified internal revenue service “irs” reclassifying certain individuals classified company independent contractors employees accordingly assessing certain payroll taxes penalties totaling 03 company disputed position citing relief provided irc section 530 irc section 3509 january 13 2009 irs made settlement offer company executed march 10 2009 irs countersigned may 11 2009 terms settlement agreement company agreed pay 0015 irs fully discharge federal employment tax liability may owed 2005 irs agreed dispute classification “such workers” federal employment tax purposes period january 1 2005 march 31 2009 beginning april 1 2009 company agreed treat “consultants” described settlement agreement perform equivalent duties employees company employees finally company agreed extend statute limitations respect federal employment tax payments period covered settlement agreement january 1 2005 march 31 2009 april 1 2012 new york city franchise agreement result certain ongoing litigation third party department information technology telecommunications city new york “doitt” informed company temporarily suspended discussions regarding renewals telecommunications franchises city new york result company’s understanding doitt renewed recently expired franchise agreement including company’s franchise agreement expired december 20 2008 prior expiration company’s franchise agreement company sought received written confirmation doitt company’s franchise agreement provides basis company continue operate city new york pending conclusion renewal discussions company intends continue operate expired franchise agreement pending renewal company believes number operators city new york operating similar basis based company’s discussions doitt written confirmation company received company believe doitt intends take adverse actions respect operation telecommunications providers result expired franchise agreements company believes attempted would face number legal obstacles nevertheless attempt doitt limit company’s operations result expired franchise agreement could material adverse effect company’s business financial condition results operations capital investments network expansion company time commits capital among things customer capital connect customers network ii expansion improvement infrastructure iii equipment company also commits capital investments selected markets 2010 company incurred expenses open denver market expand paris amsterdam frankfurt europe additionally company connected miami long haul network received favorable ruling canadian authorities regarding ability lease light fiber operations toronto based company’s success markets company may increase presence markets company may develop markets us internationally company believes liquidity capacity execute plans abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 16 litigation company subject various legal proceedings claims arise normal course business company evaluates among things degree probability unfavorable outcome reasonably estimates amount potential loss global voice networks limited “gvn” abovenet communications uk limited company’s uk operating subsidiary “acuk” party duct purchase fiber lease agreement “duct purchase agreement” eu networks fiber uk ltd formerly gvn dispute parties arose regarding extent network duct sold fiber leased gvn pursuant duct purchase agreement result dispute 2006 gvn filed claim acuk high court justice london seeking ownership disputed portion network duct right lease certain fiber associated damages december 2007 court ruled favor gvn respect disputed duct fiber early february 2008 acuk delivered disputed duct fiber gvn additionally original ruling company also required construct balance disputed duct fiber deliver gvn pursuant schedule ordered court additional portions disputed duct fiber constructed subsequently delivered portions scheduled delivery company also certain repair maintenance obligations must perform respect duct gvn also seeking enforce option requiring acuk construct 180 200 chambers gvn along network june 2008 company paid 30 damages pursuant liability trial additionally company reimbursed gvn 18 legal fees additionally company’s legal fees aggregated 24 company incurred obligated costs totaling 27 build additional network early august 2008 company reached settlement agreement company paid gvn 06 agreed provide additional construction duct estimated cost 12 provide gvn limited additional access acuk’s network gvn acuk provided mutual releases claims including acuk’s repair obligation chamber construction obligations discussed company recorded loss litigation 117 december 31 2007 december 31 2010 company paid 109 connection litigation 2010 company provided additional provision 09 record additional expenses repairs covered settlement obligations denominated british pounds accordingly amounts adjusted changes currency translation rates years company remaining accrual balance 07 relating transaction included company’s consolidated balance sheet december 31 2010 sbc telecom inc “sbc” company party fiber lease agreement sbc subsidiary att entered may 2000 company believed sbc obligated agreement lease 40000 fiber miles reducible 30000 certain circumstances term 20 years price set forth agreement subject adjustment based upon number fiber miles leased higher volume fiber miles leased lower price per fiber mile sbc disagreed interpretation agreement 2003 issue litigated bankruptcy court november 2003 bankruptcy court agreed company’s interpretation agreement decision sbc appeal subsequently sbc also alleged company breach obligations agreement therefore company unable assume agreement upon emergence bankruptcy company disagreed sbc’s position however december 2005 bankruptcy court agreed sbc 2006 company appealed certain aspects decision district court southern district new york district court denied company’s appeal march 2007 company filed notice appeal second circuit court appeals seeking relief respect bankruptcy court’s determination company default agreement sbc term agreement sbc paid company higher rate per fiber mile reflect reduced volume services sbc believes obligated take accordance understanding fiber lease agreement however financial statement purposes company billed recorded revenue based lower amount per fiber mile fiber miles accepted sbc 23 20 years ended december 31 2008 2007 respectively abovenet inc subsidiaries notes consolidated financial statements millions except share per share information july 2008 company sbc entered “stipulation release agreement” new service agreement executed period july 10 2008 december 31 2010 new service agreement sbc agreed continue purchase existing services current rate services sbc fixed minimum payment commitment declines contract term sbc may cancel service time subject notice provisions subject payment commitment payment commitment may satisfied existing services sbc may order new services additionally may 2000 fiber lease agreement sbc terminated company sbc released claims related agreement difference amount paid sbc amount recognized company revenue aggregated 35 july 10 2008 32 december 31 2007 recorded contract termination revenue year ended december 31 2008 telekenex may 2008 telekenex inc “telekenex” customer filed complaint company san francisco county superior court alleging company failed deliver telekenex fiber optic capacity certain ten year contract telekenex company telekenex asserted complaint entitled fiber optic capacity unspecified damages september 29 2008 company signed settlement telekenex pursuant company agreed pay 035 provide telekenex additional fiber access order resolve dispute amount paid october 2008 pursuant settlement agreement parties released claims related dispute telekenex dismissed complaint december 2008 company recovered entire amount insurance policy liquidity solutions inc “lsi” october 2010 lsi filed motion chapter 11 cases captioned 360networks usa inc et al sdny bankr 0113721 alg “360 cases” requesting court compel court appointed representative 360networks estates commence legal action members official committee unsecured creditors committee 360 cases breach fiduciary duty negligence gross negligence fraud based facts circumstances giving rise theft approximately 40 held behalf committee counsel dreier llp funds stolen dreier llp’s managing partner marc dreier alternatively lsi requested court grant authority lsi file claims members committee behalf 360networks estates company served one members committee 360 cases court appointed representative indicated court believe viable causes action members committee date legal proceeding filed company event proceeding filed company believes would substantial defenses note 17 related party transactions member company’s board directors richard postma also cochairman chief executive officer cofounder telecommunications company sold services andor material normal course business telecommunications company amount 039 035 030 years ended december 31 2010 2009 2008 respectively amounts outstanding december 31 2010 december 31 2009 mr postma also serves chief executive officer holds minority ownership interest construction company purchased certain installation construction services totaling 0002 2010 003 2009 013 2008 construction firm activities company entities conducted independent arms length transactions consistent similar terms circumstances customers vendors accounts two parties settled accordance invoice terms abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 18 segment reporting sfas 131 “disclosures segments enterprise related information” known fasb asc 28010 defines operating segments components enterprise separate financial information available evaluated regularly company’s chief operating decision maker deciding assess performance allocate resources company operates business one operating segment geographic information company’s revenue based location entity providing service longlived assets based physical location assets following table presents revenue longlived asset information geographic areas note 19 subsequent events 250 million secured revolving credit facility january 28 2011 company closed five year 250 secured revolving credit facility “250 million secured revolving credit facility” lender parties thereto “lenders” suntrust bank administrative agent “administrative agent” lenders received first priority interest lien substantially company’s domestic assets 65 abovenet inc’s principal directly owned foreign subsidiaries loans 250 million secured revolving credit facility bear interest period one two three months agreed longer interest periods company’s option either base rate defined 250 million secured revolving credit facility plus applicable margin ranging 125 200 alternately adjusted libo rate defined 250 million secured revolving credit facility plus applicable margin ranging 225 300 company also required pay unused commitment fee ranging 0375 050 per annum based daily average undrawn portion 250 million secured revolving credit facility applicable margin unused commitment fee determined based company’s leverage ratio based consolidated total debt consolidated ebitda defined 250 million secured revolving credit facility abovenet inc subsidiaries notes consolidated financial statements millions except share per share information 250 million secured revolving credit facility includes uncommitted accordion feature permits company increase aggregate principal amount 1250 one term loans additional revolving credit subject agreement one lenders provide additional principal amount company borrowed 550 closing 50 used pay bank fees legal expenses 499 used repay secured credit facility 01 used general corporate purposes borrowing carried interest rate 450 base rate 325 plus applicable margin 125 company converted interest rate adjusted libo rate option february 4 2011 time interest rate changed 252 027 libor rate plus applicable margin 225 company right prepay outstanding loan prior maturity without premium penalty company required comply number affirmative negative financial covenants among things covenants require company provide notices material events information regarding collateral restrict company’s ability subject certain exceptions baskets incur additional indebtedness grant liens assets undergo fundamental changes make investments sell assets make restricted payments including ability pay dividends engage affiliate transactions require company maintain leverage ratio greater 25 10 interest coverage ratio defined 250 million secured revolving credit facility less 30 10 closing based upon company’s leverage ratio defined cash balance availability facility 1960 retained earnings unrestricted dividend purposes balance restricted 250 million secured revolving credit facility contains customary events default subject customary grace periods cure rights materiality thresholds including among others failure pay principal interest fees violation covenants material inaccuracy representations warranties crossdefault crossacceleration material indebtedness certain bankruptcy insolvency events certain judgments certain erisa events change control following event default 250 million secured revolving credit facility administrative agent lenders would entitled take various actions including acceleration amounts due 250 million secured revolving credit facility seek remedies may taken secured creditors outstanding principal amount revolving credit loans together accrued unpaid interest thereon due payable january 28 2016 connection closing company also settled two interest rate swaps total cost 05 included “other expenses” company’s consolidated statement operations three months ended march 31 2011 company also wroteoff 11 unamortized debt acquisition costs associated secured credit facility also included “other expenses” company’s consolidated statement operations three months ended march 31 2011 appointment chief operating officer january 25 2011 board directors company appointed rajiv datta senior vice president chief technology officer company’s chief operating officer connection appointment company’s board directors approved increase mr datta’s annual base salary 03 04 made special grant mr datta 15000 restricted stock units vest delivered november 16 2011 amendment employment agreements william g laperch chief executive officer president mr datta joseph p ciavarella senior vice president chief financial officer john jacquay senior vice president sales marketing douglas jendras senior vice president operations robert sokota senior vice president general counsel collectively “named executive officers” party employment agreement company amended effective january 25 2011 amendments extend term named executive officer’s employment agreement november 16 2011 december 31 2011 b clarify named executive officer employed company december 31 calendar year bonus earned named executive officer would entitled receive bonus payable year mr datta’s employment agreement also amended reflect new title base salary employment agreements messrs ciavarella jacquay jendras sokota also amended clarify determined discretion company’s chief executive officer would report company’s chief operating officer restricted stock unit grants january 25 2011 company granted aggregate 213100 restricted stock units 211000 granted company’s named executive officers follows including 15000 restricted stock units granted mr datta connection appointment chief operating officer fair value restricted stock unit granted 5925 based closing price company’s common stock new york stock exchange january 25 2011 213000 restricted stock units scheduled vest follows 15000 november 16 2011 132066 november 16 2012 66034 november 16 2013 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 20 quarterly financial data unaudited following table presents unaudited quarterly results year ended december 31 2010 fluctuations revenue reported period impacted contract termination revenue recognized quarter follows 1 includes provision equipment impairment 02 2 includes provision equipment impairment 02 3 includes provision impairment 16 4 fourth quarter 2010 based upon company’s review profitability uk internal financial forecasts demonstrating expected capacity utilize deferred tax assets company reduced valuation allowance 77 respect deferred tax assets associated uk operations comprised 73 tax benefit recognized 10 attributable reduction uk tax rates partially offset 06 due foreign currency translation abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 20 quarterly financial data unaudited cont’d following table presents unaudited quarterly results year ended december 31 2009 fluctuations revenue reported period impacted contract termination revenue recognized quarter follows 1 includes provision equipment impairment 05 2 includes provision equipment impairment 04 3 includes provision equipment impairment 03 4 includes recognition 1830 noncash tax benefits resulting reduction certain valuation allowances previously established respect deferred tax assets us uk item 9 item 8 financial statements supplementary data response item incorporated reference pages s1 herein item 9 item 8 financial statements supplementary data metromedia fiber network inc subsidiaries index consolidated financial statements report independent auditors board directors shareholders metromedia fiber network inc audited accompanying consolidated balance sheets metromedia fiber network inc subsidiaries company december 31 1997 1996 related consolidated statements operations stockholders deficiency cash flows years ended audits also included financial statement schedule listed index item 14a consolidated financial statements schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall consolidated financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position metromedia fiber network inc subsidiaries december 31 1997 1996 consolidated results operations cash flows years ended conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respects information set forth therein ernst young llp new york new york march 16 1998 report independent auditors board directors shareholders metromedia fiber network inc audited accompanying consolidated statements operations stockholders deficiency cash flows year ended december 31 1995 metromedia fiber network inc subsidiaries company consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audit conducted audit accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall consolidated financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated results operations cash flows year ended december 31 1995 metromedia fiber network inc subsidiary conformity generally accepted accounting principles accompanying consolidated financial statements prepared assuming company continue going concern discussed note 1 consolidated financial statements companys significant recurring losses operating history significant working capital deficiency including significant amounts past due payables raise substantial doubt companys ability continue going concern managements plans regard matters also discussed note 1 consolidated financial statements include adjustments relating recoverability classification recorded asset amounts classification liabilities might result outcome uncertainty mr weiser co llp new york new york june 26 1996 metromedia fiber network inc subsidiaries consolidated balance sheets see accompanying notes metromedia fiber network inc subsidiaries consolidated statements operations see accompanying notes metromedia fiber network inc subsidiaries consolidated statements cash flows see accompanying notes metromedia fiber network inc subsidiaries consolidated statements changes stockholders deficiency equity metromedia fiber network inc subsidiaries consolidated statements changes stockholders deficiency equity continued see accompanying notes metromedia fiber network inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies business operations line business metromedia fiber network inc formerly national fiber network inc subsidiaries company granted nonexclusive right city new york effective december 20 1993 provide telecommunication services construct fiber optic network purpose providing services october 1995 basic backbone fiber optic cable network city new york completed company began servicing customers company entered joint venture agreement racal telecommunications inc racal november 26 1997 joint venture enable company racal provide broadband transatlantic communication services new york london respective customers racal part racal electronics group headquartered united kingdom accompanying consolidated financial statements prepared going concern basis contemplates realization assets satisfaction liabilities normal course business april 301997 company sold 8403325 shares series b preferred shares exchange 32500000 cash prior thereto company working capital deficiencies stockholders deficiencies substantially trade payables certain current liabilities past due factors prior april 1997 sale preferred stock raised substantial doubt companys ability continue going concern basis presentation consolidated financial statements include accounts company subsidiaries intercompany balances transactions eliminated consolidation investment racal joint venture company owns 50 accounted equity method certain balances restated conform current period presentation estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates cash equivalents purposes consolidated financial statements company considers highly liquid investments original maturity three months less purchased cash equivalents fiber optic transmission network related equipment fiber optic transmission network related equipment stated cost costs connection installation expansion network capitalized depreciation computed using straightline method life either franchise agreement right way related network metromedia fiber network inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies continued property equipment property equipment stated cost depreciation computed using straightline method estimated useful lives assets franchise costs amortization franchise costs new york city network began upon commencement service customers computed straightline method december 20 2008 159 months expiration date franchise agreement organization costs incurred connection organization company capitalized amortized five years straightline basis longlived assets company reviews impairment longlived assets certain identifiable intangibles whenever events changes circumstances indicate carrying amount asset may recoverable impairment indicators identified company income taxes company recognizes deferred tax liabilities assets expected future tax consequences events included financial statements tax returns method deferred tax liabilities assets determined based difference financial statement tax bases assets liabilities using enacted tax rates effect year differences expected reverse valuation allowances provided expected realization tax assets meet likely criterion recapitalizations february 17 1995 company effected 4000forone stock split outstanding shares common stock april 1997 company increased authorized common stock 01 par value 60000000 shares addition authorized preferred stock par value 01 increased 2000000 shares april 29 1997 company effected 3forone stock split outstanding shares common stock september 1997 company effected 507for1 reverse stock split common stock october 28 1997 total authorized number shares common stock company increased 200 million shares par value 001 per share 180 million shares designated class common stock 20 million shares designated class b common stock accompanying financial statements give retroactive effect recapitalizations recognition revenue company recognizes revenue telecommunications services ratably term applicable agreements customers company also provides installation services customers services typically completed within year company records revenues related costs services completed contract method metromedia fiber network inc subsidiaries notes consolidated financial statements 1 summary significant accounting policies continued stockbased compensation company adopted disclosureonly provisions sfas 123 accounting stockbased compensation company applies apb opinion 25 accounting stock issued employees related interpretations accounting stock options consulting employment incentives amounts represent value common stock warrants options issued consultants officers employees directors company incentive provide services company 1997 amounts represent value options purchase 3095235 shares companys common stock issued 1997 officers employees directors company options valued accordance apb opinion 25 difference exercise price options fair market value companys common stock earnings per share company required adopted sfas 128 earnings per share year end 1997 prior period earnings per share data restated net loss per share computations based upon net loss attributable common shareholders divided weighted average number shares common stock outstanding respective periods effect stock options warrants using treasury stock method computing diluted earnings per share antidilutive prepaid expenses noncurrent prepaid expense mainly represents prepayment 1997 rail transportation company granted company longterm nonexclusive rightofway place fiber optic network portion property restricted cash 1997 company entered agreements regarding issuance longterm standby letters credit financial institution whereby financial institution required company maintain collateral form interestbearing cash balance financial institution full amount standby letters credit issued restricted cash invested shortterm time deposits issuing financial institution interest earned time deposits free restriction released company periodically deferred revenues deferred revenue represents prepayments received customers future use companys fiber optic network well prepayment installation services yet provided company derives revenues leasing dark fiber optic cable lease payments structured either prepayments monthly recurring charges prepayments accounted deferred revenues recognized term respective customer lease agreement december 31 1997 company received prepaid lease payments totaling 115 million metromedia fiber network inc subsidiaries notes consolidated financial statements 2 fiber optic transmission network related equipment fiber optic transmission network related equipment consist following 3 property equipment property equipment consist following 4 investment inadvances joint venture november 26 1997 company entered joint venture agreement racal provide broadbased transatlantic communication services new york london company racal required contribute capital 3400000 october 1 1998 respective 50 interests december 31 1997 neither party yet made capital contribution balance investment december 31 1997 represents advances made joint venture company 5 related party transactions prior 1996 company engaged services electrical contractor controlled person companys majority shareholder 1995 company incurred charges labor materials 692887 december 31 1995 692887 owed related company may 1996 company assignee related party entered agreement whereby full amount indebtedness satisfied issuance 456300 shares companys common stock value stock based upon invoices rendered services performed based upon negotiations company electrical contractor metromedia fiber network inc subsidiaries notes consolidated financial statements 5 related party transactions continued person companys majority shareholder made loans company december 31 1994 totaled 1967109 april 1995 shareholder company agreed contribute companys capital 17 million amounts due agreement company shareholder may 1996 transaction rescinded 1995 company made repayments net additional advances 1070130 december 31 1995 company owed shareholder 896979 pursuant agreement dated may 21 1996 company issued 152100 shares common stock shareholder consideration cancellation 600000 outstanding balance 1997 remaining balance note repaid full march june 1997 company entered two oneyear leases office space affiliate subsequent june 1997 affiliate sold property year ended december 31 1997 office rent expenses leases amounted approximately 110000 6 notes payable notes payable consisted following april 16 1996 company entered agreement us one communications us one exclusive usage rights fibers companys fiber optic transmission network initial term agreement period beginning april 1996 expiring december 2008 agreement renewable option us one extended term 13 years expiring december 2021 connection agreement company borrowed 4900000 us one 3227867 immediately used repay notes payable tomen america april 30 1997 company amended agreement allows us one exclusive right use 888 fiber miles network additionally pursuant amended agreement us one received option acquire company 1620 additional fiber miles upon payment predetermined amount accordance amended agreement following occurred interest accrued inception loan closing date agreement waived us one ii 4900000 principal balance loan offset 3530000 scheduled payment due us one company amended lease agreement iii company paid us one difference 1370000 connection execution aforementioned lease financing agreements company granted us one warrant purchase common stock company warrant exercisable number shares class common stock determined companys discretion subject minimum number 76050 shares maximum number 456300 shares per share exercise price metromedia fiber network inc subsidiaries notes consolidated financial statements 6 notes payable continued determined pursuant formula event shall aggregate purchase price exceed 1250000 b october 1995 company initiated private offering 858000 convertible subordinated notes december 31 1995 783000 notes sold pursuant offering additional 75000 notes sold january february 1996 notes scheduled mature period october 1996 february 1997 bore interest annual rate 15 payable maturity notes convertible companys option shares common stock concurrent issuance notes warrants issued company noteholders purchase 130502 shares common stock 800 per share november 2000 1997 company repaid outstanding balance notes plus accrued interest december 1996 company offered noteholders warrants purchase 107078 shares common stock exercisable 800 per share november 2000 exchange extension due dates notes noteholders accepted offer accordingly company recorded non cash charge 111306 december 31 1997 3803 warrants exercised march 1997 consideration extension due dates notes company issued warrants noteholders purchase aggregate 57682 shares common stock exercisable 800 per share november 2000 company recorded noncash charge 220036 issuance december 31 1997 3803 warrants exercised c september 24 1996 company entered loan agreement sterling capital sterling 550000 loan bore interest 10 per annum matured march 1 1997 loan secured companys assets incentive loan company issued sterling warrants purchase 94302 shares common stock exercise price 592 warrants exercisable september 1999 may 1 1997 company repaid loan full accrued interest december 31 1997 4286 warrants exercised august 1995 company initiated 600000 private offering subordinated notes scheduled mature march 1996 bore interest annual rate 15 payable quarterly arrears concurrent issuance notes warrants issued company noteholders exercisable common shares company amount equal 07 outstanding shares common stock immediately following initial public offering companys common stock exercise price equal 60 initial public offering price warrants exercisable threeyear period beginning effective date initial public offering april 1996 company offered warrantholders shares common stock equal 07 common stock issued outstanding exchange surrender cancellation outstanding warrants consideration extension maturity date notes june 30 1996 warrantholders accepted offer accordingly company issued total 59359 shares companys common stock company recorded noncash charge 107322 connection issuance 1996 company repaid 50000 debt 1997 company repaid outstanding balance notes plus accrued interest e april 18 1995 company entered loan agreement subsequently amended att wireless 500000 bearing interest 11 per annum july 1997 note repaid full 1995 company issued att wireless warrant entitling holder purchase total 669167 shares companys common stock metromedia fiber network inc subsidiaries notes consolidated financial statements 6 notes payable continued warrant canceled replaced new warrant issued february 13 1997 purchase 456300 shares companys common stock 485 per share new warrant expires february 13 2000 f february 13 1996 company entered investment agreement individual investor pursuant company borrowed 1000000 consideration issuance 12 senior subordinated promissory notes maturing november 1 1996 notes guaranteed personally companys president notes convertible price 262 per unit 1000 principal outstanding unit consisted following one share common stock ii one warrant purchase one share common stock 527 per share inducement entering investment agreement company issued investor following 381087 shares common stock ii warrant purchase 381087 shares common stock 527 per share exercisable august 15 2002 company recorded noncash charges 689013 issuances march 19 1996 supplemental investment agreement executed investor providing additional advance 500000 maturity date interest rate conversion rights guaranty features initial 1000000 investment advance subsequently repaid along interest april 16 1996 connection supplemental agreement company issued warrant purchase 190543 shares common stock 527 per share exercisable august 15 2002 company also issued warrant purchase additional 190543 shares class common stock 0006 per share exercisable august 15 2002 company recorded noncash charge 250550 issuance april 11 1996 memorandum understanding entered parties pursuant warrants issued february 13 1996 purchase 381087 shares 527 per share warrants issued march 19 1996 purchase 190543 shares 527 per share surrendered investor company consideration issuance 228150 shares companys common stock april july 1996 investor purchased 152100 38443 shares common stock respectively 0006 per share connection exercise warrants held investor accordance investment agreement additional 38025 shares common stock issued investor compliance antidilutive requirements agreement 7 settlement agreements february 1996 company entered settlement agreement former officer regarding termination employment agreement provided company make payments officer totaling 1003000 including interest former officers services effectively terminated prior december 31 1995 accordingly december 31 1995 company recorded 876146 liability accordance terms settlement agreement metromedia fiber network inc subsidiaries notes consolidated financial statements settlement agreement also reaffirmed option previously issued former officer may 1 1995 entitles holder purchase 207883 shares companys common stock 0006 per share february 1 1999 1997 company repurchased retired warrant november 14 1996 company amended referenced settlement agreement former officer whereby consultant company agreed purchase common stock company former officer certain affiliates exchange 640000 complete satisfaction aforementioned liability february 11 1997 company entered agreement consultantdirector pursuant agreement company agreed pay consultantdirector fee 250000 full complete payment services provided company consultantdirector fees compensation due consultantdirector resulting prior agreements company consultantdirector agreed release company claims company 8 equity transactions stock issued legal counsel january 12 1996 company entered agreement legal counsel calls issuance company common stock additional consideration legal services provided pursuant agreement amended company issued total 491105 shares common stock management estimated value 491105 shares issued 907301 recorded noncash charge connection issuance preferred stock april 30 1997 company sold aggregate 8403325 shares series b convertible preferred stock par value 001 per share series b preferred stock metromedia company affiliates metromedia aggregate purchase price 325 million metromedia investment share series b preferred stock convertible 507 shares companys common stock october 28 1997 series b convertible preferred shares converted 4260486 shares class b common stock october 28 1997 total 39327 shares class b common stock outstanding converted equivalent number shares class common stock portion proceeds metromedia investment used repay metromedia loan discussed accrued interest thereon 4058127 repay shortterm indebtedness 3485000 redeem 2115000 outstanding shares companys preferred stock series preferred stock related warrants april 30 1997 metromedia loaned company aggregate 4000000 metromedia loan portion proceeds metromedia loan used purchase 588470 shares companys common stock warrants purchase 207883 shares common stock december 31 1997 shares companys series preferred stock series b preferred stock remained outstanding december 31 1997 series b preferred stock company eliminated pursuant actions board directors metromedia fiber network inc subsidiaries notes consolidated financial statements 8 equity transactions continued common stock november 3 1997 company completed initial public offering ipo 9108000 shares class common stock offering price 16 per share net proceeds company ipo deducting expenses ipo approximately 1339 million addition october 28 1997 total 9564940 shares common stock company owned stockholders prior ipo exchanged equal number shares class common stock company also reserved issuance 4260486 shares class common stock conversion class b common stock october 28 1996 shareholder granted companys chairman board option purchase 399889 shares common stock company aggregate exercise price 500000 letter dated december 3 1996 option amended reduce number option shares 323839 shares option thereafter assigned chairman company february 11 1997 company exercised option payment 500000 april 15 1996 company entered stock purchase agreement vento company new york llc vcny pursuant agreement company issued 1521000 shares common stock vcny consideration services provided vcny company estimated value stock issued approximated 2760000 concurrent execution aforementioned stock purchase agreement parties entered consulting agreement term agreement april 15 1996 april 15 2001 terms agreement vcny provide guidance advice respect management daytoday operations companys fiber optic transmission network consideration services company reimbursed vcny reasonable personnel travel costs incurred vcny respect performance services october 9 1996 company entered settlement agreement companys former chief executive officer vcny regarding termination officers employment services provided vcny agreement provided vcny deliver total 1521000 shares common stock exchange payments made company payments made sale shares companys obligation buy shares deemed null void september 1996 company sold 10934 shares common stock three individuals total proceeds 23500 august 1996 company issued 182520 shares common stock consulting services company recorded noncash charge 334800 issuance july 1996 company issued 12168 shares common stock consideration consulting services company recorded noncash charge 21200 issuance addition company issued 150579 shares three employees services rendered transaction later rescinded shares returned company june 1996 company sold total 38025 shares common stock two individuals total proceeds 100000 concurrent issuance shares warrants issued company shareholders entitling holders purchase total 38025 shares 262 per share threeyear period metromedia fiber network inc subsidiaries notes consolidated financial statements 8 equity transactions continued stock warrants 1997 1996 1995 connection issuance notes extension due dates company issued warrants noteholders purchase 164760 shares common stock 800 per share november 2000 see note 6 december 31 1997 company reserved approximately 1176198 shares common stock exercise warrants contingent warrants december 31 1996 company issued sold penny lane partners lp penny lane aggregate cash consideration 2025000 150000 shares 10 cumulative convertible preferred stock series preferred stock bearing dividends rate 135 per share per annum ii warrants purchase 114075 shares common stock exercise price 493 per share common stock number determined based certain future events exercise price 002 per share contingent warrants march 1997 penny lane agreed permit series preferred stock contingent warrants redeemed aggregate redemption price 2115000 includes accrued unpaid dividends series preferred stock connection therewith number penny lane warrants increased 114075 228150 september 1996 company granted 94302 common stock purchase warrants sterling exercise price lesser 592 per share price company shall issue securities future less 592 one half price common stock company offered initial public offering exercisable later date september 24 1999 twelve months 90 days date warrant shares covered registration statement company recorded noncash charge 13640 issuance june 1996 company granted 152100 common stock purchase warrants companys legal counsel exercisable 07 per share period four years additional consideration legal services provided company recorded noncash charge 200000 issuance stock options 1997 company granted certain officers employees directors options purchase 3095235 shares common stock options exercise prices 197 763 per share expire 2007 company recorded noncash charge 19218591 issuance october 28 1997 stockholders company approved metromedia fiber network inc 1997 incentive stock plan option plan option plan authorized award 1000000 options acquire class common stock corporation directors officers employees company others deemed provide substantial important services company options purchase 612500 shares companys common stock granted exercise price 1600 per share market price date grant compensation committee board directors responsible determining type award awards granted number shares terms awards exercise price options exercisable period exceed ten years date grant vesting periods range immediate vesting four years metromedia fiber network inc subsidiaries notes consolidated financial statements 8 equity transactions continued following table summarizes stock option transactions year ended december 31 1997 pro forma information regarding net income earnings per share required statement financial standards 123 accounting stockbased compensation saf 123 determined company accounted employees stock options fair value method provided statement fair value options estimated date grant using blackscholes option pricing model following assumptions vested nonvested options blackscholes options valuation model developed use estimating fair value traded options vesting restrictions fully transferable addition option valuation models require input highly subjective assumptions including expected stock price volatility companys employee stock characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements option existing models necessarily provide reliable single measure fair value employee stock options purpose pro forma disclosures estimated fair value options amortized expense vesting period options companys pro forma information follows weighted average fair value options granted year ended december 31 1997 393 weighted average remaining contractual life options outstanding december 31 1997 94 years 9 income taxes provision federal state income taxes years ended december 31 1997 1996 1995 december 31 1997 company expects available approximately 16000000 net operating loss carryforwards expiring years 2009 2012 company recorded full valuation allowance deferred tax asset realization uncertain metromedia fiber network inc subsidiaries notes consolidated financial statements 10 reconciliation earnings per share 11 commitments contingencies company entered franchise agreement city new york december 20 1993 whereby company granted nonexclusive franchise install operate repair maintain replace cable wire fiber transmission medium related equipment facilities property city new york exchange company obligated pay franchise fees commencing completion date initial backbone fiber optic cable network december 20 2008 connection agreement among requirements company maintains performance bond amount approximately 1750000 provided city 500000 letter credit security fund franchise fees based percentage companys gross sales 10 first second years 6 third year 5 fourth year thereafter however year term franchise fee shall less 200000 franchise fees charged operations connection agreement amounted 200000 years ended december 31 1997 1996 1995 b company entered license agreement jersey city new jersey july 10 1995 whereby company granted license construct fiberoptic system within jersey city term agreement continues written notice termination given either party c company entered conduit occupancy agreement bell atlantic formerly known new york telephone company 1993 whereby company granted right place maintain cable facilities conduit system bell atlantic term agreement one year date agreement thereafter three months written notice termination given either party company also right place maintain cable facilities conduit system empire city subway company ltd virtue franchise agreement city new york occupancy fees charged operations connection agreement approximately 120000 152000 years ending december 31 1997 1996 respectively company leases several office facilities operating leases expire various times march 31 2010 metromedia fiber network inc subsidiaries notes consolidated financial statements 11 commitments contingencies continued rent expense charged operations approximately 268000 158000 148000 years ended december 31 1997 1996 1995 respectively e june 1 1995 company entered two lease agreements port authority new york new jersey whereby company granted nonexclusive right lease two ducts north south tubes holland tunnel install maintain operate provide telecommunications equipment customers term agreements ten years june 1 2005 lease expense charged operations connection leases approximately 112000 107000 63000 years ending december 31 1997 1996 1995 respectively f august 11 1995 company entered service agreement unrelated party maintenance companys telecommunications equipment located jersey city term agreement one year option renew agreement annually five consecutive one year renewal terms service fees charge operations connections agreement approximately 24000 1997 g november 17 1997 company entered agreement telecommunication company seller purchase conduit associated improvements conduit system within multiple conduit system constructed seller counties philadelphia montgomery pennsylvania purchase price conduit system 546940 payable installments upon acceptance multiple conduit system company seller grant bargain sell assign transfer convey set right title interest conduit system h december 1 1997 company entered agreement provides company rightofway construct install operate maintain two innerducts containing fiber optic cable tunnel connects new york city secaucus new jersey initial term agreement five years option renew extend agreement five consecutive renewal terms five years annual rental fee 151199 first contract year anniversary effective date annual rental fee shall adjusted reflect increases cpi previous year december 5 1997 company entered agreement utility company purchase conduit existing future installation fiber optic cable used exclusively provide telecommunication services city chicago purchase price existing conduit 13 million 130000 paid december 1997 remainder payable first quarter 1998 metromedia fiber network inc subsidiaries notes consolidated financial statements 11 commitments contingencies continued j approximate minimum annual franchise license lease service fees conduit payments aforementioned agreement follows k february 1997 former investment advisor company asserted claim company amount 305731 pursuant agreement made june 27 1995 payment certain fees expenses september 1997 company paid former investment advisor 250000 full settlement claim plus related expenses l april 18 1997 howard katz realprop capital corporation evelyn katz commenced action among others company stephen garofalo peter sahagen peter silverman united states district court southern district court new york captioned katz et al v national fiber network inc et al 97 civ 2764 jgk katz litigation may 28 1997 plaintiffs filed amended complaint september 15 1997 plaintiffs filed second amended complaint amended alleges causes action among things common law fraud violations section 10b securities exchange act 1934 rule 10b5 promulgated thereunder breach fiduciary duty negligent misrepresentation alleged misrepresentations omissions made connection repurchase right purchase aggregate 264631 shares class common stock company class shares authorized october 1997 option purchase warrants purchase 207888 shares class common stock amended complaint also contains allegations corporate waste company stephen garofalo plaintiffs seek among things compensatory damages less 12 million punitive damages amount 100 million alternative rescission purchase common stock warrants company october 31 1997 defendants moved dismiss amended complaint motions fully briefed december 12 1997 company intends vigorously defend allegations based belief company acted appropriately connection matters issue litigation assurance made though company determine advantages entering settlement outweigh risk expense protracted litigation ultimately company successful defense allegations company unsuccessful defense allegations award magnitude sought plaintiffs katz litigation would material adverse effect companys financial condition results operations october 20 1997 vento company new york llc vcny commenced action company stephen garofalo peter silverman law firm silverman collura chernis balzano pc peter sahagen consulting group florida collectively sahagen defendants robert kramer birdie capital corp lawrence black sterling capital llc penrush metromedia fiber network inc subsidiaries notes consolidated financial statements 11 commitments contingencies continued limited needham capital group arthur asch michael asch ronald kuzon kramer defendants united states district court southern district new york 97 civ 7751 vcny litigation complaint alleges causes action among things violation section 10b securities exchange act 1934 rule 10b5 promulgated thereunder fraud fraudulent concealment breach fiduciary duty negligent misrepresentation omission made connection sale vcny 1368900 shares class common stock peter sahagen kramer defendants january 13 1997 vcny sale complaint also alleges cause action declaratory judgment asserting certain piggyback registration rights applicable shares companys class common stock vcny owns may rescinded vcny pursuant requested remedies complaint requests declaratory judgement stockholders agreement company stephen garofalo vcny declared operative agreement indirectly required vcny designated directors approve significant transactions accordingly metromedia loan metromedia investment rescinded mr vento reappointed chief executive officer company believes among things stockholders agreement mr vento party terminated result mr vento rights approve metromedia investment metromedia loan remain chief executive officer company plaintiff seeks among things rescission vcny sale alternatively damages amount presently ascertainable believed excess 36 million together interest thereon ii punitive damages amount 50 million iii declaratory judgements discussed company intends vigorously defend allegations based belief acted appropriately connection matters issue litigation however assurance made company determine advantages entering settlement outweigh risk expense protracted litigation ultimately company successful defense allegations company unsuccessful defense allegations award magnitude sought plaintiffs vcny litigation would material adverse effect companys financial condition results operations metromedia fiber network inc subsidiaries schedule ii valuation qualifying accounts item 9 item 8 financial statements supplementary data abovenet inc subsidiaries index consolidated financial statements report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audited accompanying consolidated balance sheets abovenet inc “company” december 31 2011 2010 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2011 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position abovenet inc december 31 2011 2010 results operations cash flows three years period ended december 31 2011 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness abovenet inc’s internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organization treadway commission coso report dated february 29 2012 expressed unqualified opinion thereon bdo usa llp new york ny february 29 2012 abovenet inc subsidiaries consolidated balance sheets millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements operations millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements comprehensive income millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements shareholders’ equity millions except share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 1 background organization bankruptcy filing reorganization may 20 2002 metromedia fiber network inc “mfn” substantially domestic subsidiaries “debtor” collectively “debtors” filed voluntary petitions reorganization chapter 11 united states bankruptcy code “bankruptcy code” united states bankruptcy court southern district new york “bankruptcy court” debtors remained possession assets properties continued operate businesses manage properties debtorsinpossession jurisdiction bankruptcy court july 1 2003 debtors filed amended plan reorganization “plan reorganization” amended disclosure statement “disclosure statement” july 2 2003 bankruptcy court approved disclosure statement related voting procedures august 21 2003 bankruptcy court confirmed plan reorganization debtors emerged proceedings chapter 11 bankruptcy code september 8 2003 “effective date” accordance plan reorganization mfn changed name abovenet inc together subsidiaries “company” august 29 2003 equity interests mfn received distribution plan reorganization equity securities mfn cancelled business company facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure colocation services communications carriers corporate government customers principally united states “us” europe note 2 basis presentation significant accounting policies summary basis presentation significant accounting policies followed preparation consolidated financial statements follows stock split august 3 2009 board directors company authorized twoforone common stock split effected form 100 stock dividend distributed september 3 2009 shareholder record august 20 2009 received one additional share common stock share common stock held date share per share information prior periods including warrants options purchase common shares restricted stock units warrant option exercise prices shares reserved company’s 2003 incentive stock option stock unit grant plan “2003 plan” company’s 2008 equity incentive plan “2008 plan” weighted average fair value options granted common stock additional paidin capital accounts consolidated balance sheets consolidated statement shareholders’ equity retroactively adjusted applicable reflect twoforone stock split abovenet inc subsidiaries notes consolidated financial statements millions except share per share information basis presentation use estimates accompanying consolidated financial statements prepared accordance accounting principles generally accepted united states america “us gaap” pursuant rules regulations securities exchange commission “sec” preparation consolidated financial statements conformity us gaap requires management make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements disclosure contingent assets liabilities consolidated financial statements accompanying notes reported amounts revenue expenses periods presented estimates used accounting certain items accounts receivable allowances property taxes transaction taxes deferred taxes estimates company makes based historical factors current circumstances experience judgment company’s management company evaluates assumptions estimates ongoing basis may employ outside experts assist company’s evaluations actual amounts results could differ estimates due subsequent events could material effect company’s financial statements covering future periods fresh start accounting september 8 2003 company authorized 10000000 shares preferred stock 001 par value 30000000 shares common stock 001 par value june 24 2010 shareholders approved amendment company’s certificate incorporation increasing number authorized shares common stock 30000000 200000000 see note 10 “shareholders’ equity amendment company’s amended restated certificate incorporation” holders common stock entitled one vote issued outstanding share entitled receive dividends subject rights holders preferred stock declared board directors preferred stock may issued time one classes series classes series shall distributive designation determined board directors 2006 company reserved issuance 10000000 shares authorized preferred stock described 500000 shares 001 par value junior preferred stock connection adoption amended restated rights agreement defined note 10 “shareholders’ equity” event liquidation holders common stock entitled receive assets company available distribution payments creditors holders preferred stock 2003 company issued 17500000 shares common stock 17498276 delivered 1724 shares determined undeliverable cancelled rights purchase 3338420 shares common stock price 1497715 per share rights offering rights purchase 3337930 shares common stock exercised five year stock purchase warrants purchase 1418918 shares common stock exercisable price 1000 per share seven year stock purchase warrants purchase 1669316 shares common stock exercisable price 1200 per share addition 2129912 shares common stock originally reserved issuance company’s 2003 plan see note 12 “stockbased compensation” abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company’s emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 company accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires company allocate reorganization value assets liabilities based upon estimated fair values accordance statement position 907 “financial reporting entities reorganization bankruptcy code” known financial accounting standards board accounting standards codification “fasb asc” 85210 company developed set financial projections utilized expert assist company estimating fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries company 3 calculation enterprise value based upon future cash flows company’s projections adopting fresh start accounting resulted material adjustments historical carrying values company’s assets liabilities reorganization value allocated company assets liabilities based upon fair values company engaged independent appraiser assist company determining fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination accumulated comprehensive loss accumulated deficit accounts principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries consolidation generally required investments 50 outstanding voting stock investee except control held majority owner significant intercompany accounts transactions eliminated consolidation revenue recognition company follows sec staff accounting bulletin sab 101 “revenue recognition financial statements” known fasb asc 60510 amended sec sab 104 “revenue recognition” also known fasb asc 60510 revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income fixed contract term prior october 1 2009 company generally amortized revenue related installation services straightline basis contracted customer relationship two twenty years fourth quarter 2009 company completed study historic customer relationship period result commencing october 1 2009 company began amortizing revenue related installation services straightline basis generally estimated customer relationship period generally ranging three twenty years abovenet inc subsidiaries notes consolidated financial statements millions except share per share information contract termination revenue recognized customer discontinues service prior end contract period company previously received consideration revenue recognition deferred contract termination revenue also recognized customers made early termination payments company settle contractually committed purchase amounts customer longer expects meet company renegotiates discontinues contract customer result longer obligated provide services consideration previously received revenue recognition deferred additionally company includes receipts bankruptcy claim settlements former customers contract termination revenue received contract termination revenue amounted 44 27 39 2011 2010 2009 respectively nonmonetary transactions company may exchange capacity service providers december 2004 fasb issued statement financial accounting standards “sfas” 153 “exchanges nonmonetary assets amendment apb opinion 29” “sfas 153” known fasb asc 84510 sfas 153 amends accounting principles board opinion 29 “accounting nonmonetary transactions” “apb 29” also known fasb asc 84510 eliminate exception nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance sfas 153 applied prospectively nonmonetary exchanges occurring fiscal periods beginning june 15 2005 company’s adoption sfas 153 july 1 2005 material effect consolidated financial position results operations company prior company’s adoption sfas 153 nonmonetary transactions accounted accordance apb 29 exchange similar capacity recorded historical carryover basis dissimilar capacity accounted fair market value recognition gain loss gains losses nonmonetary transactions years ended december 31 2011 2010 2009 operating leases company leases office equipment space maintains equipment rentals rightofway contracts building access fees network capacity various noncancelable operating leases lease agreements expire various dates 2030 subject many cases renewal options provide payment taxes utilities maintenance certain lease agreements contain escalation clauses term lease related scheduled rent increases resulting pass increases operating costs property taxes effect costs changes consumer price indices accordance sfas 13 “accounting leases” known fasb asc 840 company recognizes rent expense straightline basis records liability representing difference straightline rent expense amount payable increase decrease deferred liability leasehold improvements related operating leases amortized lesser economic lives remaining lease term rentfree periods incentives granted certain leases recorded reductions rent expense straightline basis related lease terms cash equivalents restricted cash equivalents purposes consolidated statements cash flows company considers cash banks shortterm highly liquid investments original maturity three months less cash equivalents cash equivalents restricted cash equivalents stated cost approximates fair value restricted cash equivalents comprised amounts secure outstanding letters credit issued favor various third parties abovenet inc subsidiaries notes consolidated financial statements millions except share per share information accounts receivable allowance doubtful accounts sales credits accounts receivable customer obligations services sold customers normal trade terms company’s customers primarily communications carriers corporate enterprise government customers located primarily us united kingdom “uk” company performs periodic credit evaluations customers’ financial condition company provides allowances doubtful accounts sales credits provisions doubtful accounts recorded selling general administrative expenses allowances sales credits recorded reductions revenue adequacy reserves evaluated utilizing several factors including length time receivable past due changes customer’s creditworthiness customer’s payment history length customer’s relationship company current industry trends current economic climate property equipment property equipment owned effective date stated estimated fair values effective date based company’s reorganization value net accumulated depreciation amortization incurred since effective date purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress part network infrastructure assets described included property equipment respective balance sheets december 31 2011 december 31 2010 company 578 540 respectively construction progress certain internal direct labor costs constructing installing property equipment capitalized direct labor determined based upon core group project managers field engineers network infrastructure engineers equipment engineers capitalized direct labor based upon time spent capitalized projects consists salary plus certain related benefits individuals’ capitalized labor costs directly associated construction installation network infrastructure equipment customer installations salaries related benefits nonengineers supporting staff part operations engineering departments considered part pool subject capitalization capitalized direct labor amounted 102 100 114 years ended december 31 2011 2010 2009 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful life improvement term lease estimated useful lives company’s property equipment follows property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income abovenet inc subsidiaries notes consolidated financial statements millions except share per share information time company required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances company fully depreciates remaining carrying value network infrastructure removed rendered unusable capitalizes costs new infrastructure placed service certain circumstances local municipality agency responsible amounts company records share relocation costs property equipment records third party portion costs accounts receivable company capitalized relocation costs amounting 18 15 31 years ended december 31 2011 2010 2009 respectively company fully depreciated remaining carrying value network infrastructure rendered unusable original cost basis totaled 031 015 net book value basis year ended december 31 2011 original cost basis totaled 021 014 net book value basis year ended december 31 2010 original cost basis totaled 03 02 net book value basis year ended december 31 2009 extent relocation temporary nature requires movement existing network infrastructure another location construction insignificant portion entire segment related costs included company’s results operations accordance sfas 34 “capitalization interest cost” known fasb asc 83520 interest certain construction projects would capitalized amounts considered immaterial accordingly amounts capitalized years ended december 31 2011 2010 2009 accordance sfas 144 “accounting impairment disposal longlived assets” known fasb asc 3601035 company periodically evaluates recoverability longlived assets evaluates assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value assets company considers various factors determine impairment test necessary factors include consideration overall economic climate technological advances respect equipment company strategy capital planning certain operational issues since june 30 2006 event occurred business environment changed trigger impairment test assets revenue service operations company also considers removal assets network triggering event performing impairment test item removed service unless redeployed may little future cash flows related company performed annual physical counts assets revenue service operations around september 30 year assistance valuation report assets revenue service prepared independent third party basis consistent sfas 157 “fair value measurements” known fasb asc 82010 pursuant fasb asc 3601035 company determined fair value certain assets less carrying value accordingly recorded provisions impairment totaling 12 year ended december 31 2011 05 year ended december 31 2010 04 year ended december 31 2009 additionally december 31 2010 company recorded 15 provision impairment respect discreet group assets certain operational issues company also recorded provision equipment impairment 08 year ended december 31 2009 record loss value certain equipment eventually sold unaffiliated third party see note 6 “changes estimate” treasury stock treasury stock accounted cost method asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” known fasb asc 41020 company recognizes fair value liability asset retirement obligation period incurred reasonable estimate fair value made company asset retirement obligations related decommissioning removal equipment restoration leased facilities removal certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities abovenet inc subsidiaries notes consolidated financial statements millions except share per share information asset retirement obligations generally recorded “other longterm liabilities” capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 81 79 december 31 2011 2010 respectively 45 43 respectively included “accrued expenses” dates 36 included “other longterm liabilities” dates accretion expense included “interest expense” amounted 027 years ended december 31 2011 2009 028 year ended december 31 2010 income taxes company accounts income taxes accordance sfas 109 “accounting income taxes” known fasb asc 740 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis net operating losses tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled evaluation realizability company’s deferred tax assets company reduced valuation allowance 91 73 1830 2011 2010 2009 respectively see note 8 “income taxes” discussion company’s provision income taxes company subject audits various taxing authorities audits may result proposed assessments ultimate resolution results company owing additional taxes company required establish reserves fasb interpretation 48 “accounting uncertainty income taxes” known fasb asc 74010 company believes uncertainty respect certain positions company may succeed realizing tax benefit company believes tax return positions appropriate supportable relevant tax law company believes estimates assumptions used support evaluation tax benefit realization reasonable accordingly adjustments made consolidated financial statements years ended december 31 2011 2010 2009 company’s reorganization resulted significantly modified capital structure result applying freshstart accounting accordance fasb asc 85210 effective date fresh start accounting important consequences accounting realization valuation allowances related net deferred tax assets existed effective date arose preemergence periods prior 2009 fresh start accounting required reversal allowances recorded reduction intangible assets exhausted thereafter additional paid capital beginning 2009 accordance sfas141r “business combinations revised” known fasb asc 805 future utilization benefit reduce income tax expense treatment result change liabilities taxing authorities cash flows undistributed earnings company’s foreign subsidiaries considered indefinitely reinvested therefore provision domestic taxes provided thereon upon repatriation earnings form dividends otherwise company would subject domestic income taxes offset whole part foreign tax credits related income withholding taxes payable various foreign countries determination amount unrecognized deferred domestic income tax liability practicable due complexities associated hypothetical calculation however foreign tax credit carryforwards would available reduce portion domestic liability company’s policy recognize interest penalties accrued component operating expense date adoption fasb asc 74010 company accrued interest penalties associated unrecognized income tax benefits interest expense recognized years ended december 31 2011 2010 2009 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information foreign currency translation transactions company’s reporting currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive income company’s foreign exchange transaction gains losses generally included “other income expense net” consolidated statements operations stock options september 8 2003 company adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” known fasb asc 71810 sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” also known fasb asc 71810 provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 12 “stockbased compensation” fair value provisions fasb asc 71810 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards company historical basis determining volatility expected life assumptions model due company’s limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period company recognizes related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation company’s plan reorganization outstanding stock options cancelled effective january 1 2006 company adopted sfas 123r “sharebased payment” “sfas 123r” known fasb asc 718 using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 allowed companies estimate forfeitures recognize impact forfeitures occur company recognized impact forfeitures occurred sfas 123 adoption sfas 123r result different accounting treatment material impact company’s consolidated financial statements options purchase shares common stock granted years ended december 31 2011 2010 2009 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information restricted stock units compensation cost restricted stock unit awards performancebased measured based upon quoted closing market price company’s stock date grant related compensation cost recognized straightline basis vesting period compensation expense performancebased restricted stock unit awards measured based upon quoted market price company’s stock date performance targets established communicated grantee related compensation cost recognized based upon review performance targets determination performance targets achieved straightline basis vesting period see note 12 “stockbased compensation” stock warrants connection plan reorganization described note 1 “background organization” company issued holders general unsecured claims part settlement claims five year warrants purchase 1418918 shares common stock exercise price 1000 per share expired september 8 2008 “five year warrants” ii seven year warrants purchase 1669316 shares common stock exercise price 1200 per share expired september 8 2010 “seven year warrants” stock warrants treated equity upon exercise based upon terms warrant cash received stock warrants purchase shares common stock exercised totaled 858530 725326 2010 2009 respectively terms five year seven year warrant agreements collectively “warrant agreements” market price company’s common stock defined warrant agreements 60 days prior expiration date respective warrants greater warrant exercise price company required give warrant holder notice warrant expiration date warrants would deemed exercised pursuant net exercise provisions respective warrant agreements “net exercise” unless warrant holder elected written notice exercise warrants net exercise shares issued warrant holders would reduced number shares necessary cover aggregate exercise price shares valuing shares current market price defined warrant agreements fractional shares otherwise issuable would paid cash september 8 2008 expiration date five year warrants required conditions met net exercise total five year warrants purchase 318526 shares common stock deemed exercised net exercise basis including warrants purchase 778 shares common stock exercised net exercise basis prior expiration 213432 shares issued warrant holders 105094 shares returned treasury 0004 paid recipients fractional shares addition five year warrants purchase 50 shares common stock cancelled accordance instructions warrant holders exercises five year warrants holders generated cash 110 september 8 2010 expiration date seven year warrants required conditions met net exercise accordingly seven year warrants purchase 13626 shares common stock exercised expiration 10409 shares issued warrant holders 3217 shares returned treasury 0004 paid recipients fractional shares total seven year warrants purchase 443504 shares common stock deemed exercised net exercise basis 441688 2010 353598 shares issued warrant holders 89906 shares returned treasury 0004 paid recipients fractional shares addition seven year warrants purchase 26 shares common stock determined undeliverable cancelled exercises seven year warrants holders generated cash 147 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information derivative financial instruments company utilized may time future utilize derivative financial instruments known interest rate swaps “derivatives” mitigate exposure interest rate risk company purchased first interest rate swap august 4 2008 hedge interest rate initial 240 original principal term loan secured credit facility term defined note 9 “longterm debt secured credit facility” company purchased second interest rate swap november 14 2008 hedge interest rate additional 120 original principal term loan provided suntrust bank see note 9 “longterm debt secured credit facility” company accounted derivatives sfas 133 “accounting derivative instruments hedging activities” known fasb asc 815 fasb asc 815 requires derivatives recognized financial statements measured fair value regardless purpose intent holding policy company historically entered derivatives trading purposes speculation based criteria defined fasb asc 815 interest rate swaps considered cash flow hedges 100 effective accordingly changes fair value derivatives recorded period comprehensive loss changes fair value derivatives reported accumulated comprehensive loss reclassified earnings period earnings impacted variability cash flows hedged item ineffective portion hedges would recognized current period earnings unrealized net loss recorded accumulated comprehensive loss december 31 2010 06 interest rate swaps marktomarket value cash flow hedges recorded current assets current liabilities noncurrent assets longterm liabilities applicable offsetting gains losses comprehensive loss interest rate swaps settled january 2011 january 1 2009 company adopted sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” known fasb asc 81510 fasb asc 81510 changes disclosure requirements derivatives hedging activities entities required provide enhanced disclosures entity uses derivatives ii derivatives related hedged items accounted fasb asc 81510 iii derivatives related hedged items affect entity’s financial position cash flows company applicable minimized credit risk relating counterparties derivatives transacting multiple high quality counterparties thereby limiting exposure individual counterparties monitoring financial condition counterparties derivatives recorded company’s consolidated balance sheets fair value accounting gains losses resulting changes fair value derivatives depends use derivative whether qualifies hedge accounting accordance fasb asc 81510 december 31 2010 net interest rate swap derivative liabilities 06 included “accrued expenses” company’s consolidated balance sheet swap agreements settled january 2011 described derivatives recorded fair value company’s consolidated balance sheets december 31 2011 2010 consisted following derivative liabilities two interest rate swap agreements original three year terms included “accrued expenses” company’s consolidated balance sheet december 31 2010 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information interest rate swap agreements notional amounts provide indication extent company’s involvement agreements represent exposure market risk following table shows notional amount outstanding maturity date weighted average receive pay rates interest rate swap agreements december 31 2011 2010 interest expense agreements respective debt instruments hedge recorded net effective interest rate hedged transaction swap agreements settled january 2011 connection repayment term loans secured credit facility closing 250 million secured revolving credit facility terms defined note 9 “longterm debt 250 million secured revolving credit facility” cost 05 settle swap agreements included “other expense income net” company’s consolidated statement operations year ended december 31 2011 fair value financial instruments company adopted sfas 157 “fair value measurements” known fasb asc 82010 company’s financial assets liabilities effective january 1 2008 pronouncement defines fair value establishes framework measuring fair value requires expanded disclosures fair value measurements fasb asc 82010 emphasizes fair value marketbased measurement entityspecific measurement defines fair value price would received sell asset transfer liability orderly transaction market participants measurement date fasb asc 82010 discusses valuation techniques market approach comparable market prices income approach present value future income cash flow cost approach cost replace service capacity asset replacement cost based upon observable unobservable inputs observable inputs reflect market data obtained independent sources unobservable inputs reflect company’s market assumptions fasb asc 82010 utilizes fair value hierarchy prioritizes inputs fair value measurement techniques three broad levels level 1 observable inputs quoted prices identical assets liabilities active markets level 2 observable inputs quoted prices directly indirectly observable asset liability including quoted prices similar assets liabilities active markets quoted prices similar identical assets liabilities markets active modelderived valuations whose inputs observable whose significant value drivers observable level 3 unobservable inputs reflect reporting entity’s assumptions company’s investment overnight money market institutional funds amounted 1100 482 december 31 2011 december 31 2010 respectively included cash equivalents accompanying balance sheets classified level 1 asset abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company party two interest rate swaps utilized modify company’s interest rate risk company recorded marktomarket value interest rate swap contracts 06 included “accrued expenses” company’s consolidated balance sheet december 31 2010 december 31 2010 company used third parties well market analysis determine fair value interest rate swap agreements fair value interest rate swap contracts classified level 2 liabilities swap agreements settled january 2011 connection repayment term loans secured credit facility closing 250 million secured revolving credit facility cost 05 settle swap agreements included “other expense income net” company’s consolidated statement operations year ended december 31 2011 company’s consolidated balance sheets include following financial instruments shortterm cash investments trade accounts receivable trade accounts payable note payable company believes carrying amounts financial statements approximate fair value financial instruments due relatively short period time origination instruments expected realization interest rates approximate current market rates concentration credit risk financial instruments potentially subject company concentration credit risk consist principally shortterm cash investments accounts receivable company enter financial instruments trading speculative purposes company’s cash equivalents invested investmentgrade shortterm investment instruments high quality financial institutions company’s trade receivables unsecured geographically dispersed single customer accounts greater 10 consolidated revenue accounts receivable net company performs ongoing credit evaluations customers’ financial condition allowance noncollection accounts receivable based upon expected collectability accounts receivable company places cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits 401k postretirement benefits company profit sharing 401k plan “plan” employees us permits employees make contributions plan pretax salary reduction basis accordance provisions internal revenue code permits employer provide discretionary contributions fulltime us employees eligible participate plan beginning month following three months service eligible employees may make contributions subject limitations defined internal revenue code company matches 50 us employee’s contributions amount set forth plan matched amounts vest based upon employee’s length service company’s subsidiaries uk different plan contributions made maximum 8 uk employee contributions reach 5 salary uk plan contributions made two levels uk employee contributes 3 less 5 salary plan company’s contribution fixed 5 salary uk employee contributes 5 salary plan company’s contribution fixed 8 salary regardless percentage contribution excess 5 company contributed 16 year ended december 31 2011 15 years ended december 31 2010 2009 net forfeitures obligations plans abovenet inc subsidiaries notes consolidated financial statements millions except share per share information taxes collected customers june 2006 emerging issues task force “eitf” ratified consensus eitf 063 “how taxes collected customers remitted governmental authorities presented income statement gross versus net presentation” “eitf 063” known fasb asc 60545 fasb asc 60545 requires companies disclose accounting policies regarding gross net presentation certain taxes within scope fasb asc 60545 taxes assessed governmental authority directly imposed revenueproducing transaction seller customer may include limited sales use value added excise taxes addition taxes significant presented gross basis amounts taxes disclosed company adopted eitf 063 effective january 1 2007 company records universal service fund “usf” contributions relating certain services provides net basis accordance guidelines eitf 9919 “reporting revenue gross principal versus net agent” also known fasb asc 60545 company’s policy record fees contributions taxes within scope fasb asc 60545 net basis reclassifications certain reclassifications made consolidated financial statements year ended december 31 2011 conform classifications used year ended december 31 2010 recently issued accounting pronouncements august 2009 fasb issued asu 20095 fair value measurements disclosures topic 820 measuring liabilities fair value asu 20095 provides clarification circumstances quoted price active market identical liability available reporting entity required measure fair value using valuation technique uses quoted price identical liability traded asset quoted prices similar liabilities similar liabilities traded assets another valuation technique consistent principles asc topic 820 asu 20095 effective first reporting period including interim periods beginning issuance adoption asu 20095 material impact company’s financial position results operations cash flows october 2009 fasb issued asu 200913 revenue recognition topic 605 multiple deliverable revenue arrangements asu 200913 eliminates residual method allocation requires arrangement consideration allocated inception arrangement deliverables using relative selling price method expands disclosures related multipledeliverable revenue arrangements asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 earlier adoption permitted adoption asu 200913 material impact company’s financial position results operations cash flows january 2010 fasb issued asu 201002 consolidation topic 810 accounting reporting decreases ownership subsidiary scope clarification asu 201002 clarifies scope decrease ownership provisions topic 810 applies subsidiary group assets business subsidiary business transferred equity method investee joint venture exchange group assets constitutes business noncontrolling interest entity apply sales substance real estate asu 201002 effective beginning period entity adopts sfas 160 sfas 160 previously adopted first interim annual period ending december 15 2009 applied retrospectively first period entity adopted sfas 160 adoption asu 201002 material impact company’s financial position results operations cash flows abovenet inc subsidiaries notes consolidated financial statements millions except share per share information january 2010 fasb issued asu 201006 fair value measurements disclosures topic 820 improving disclosures fair value measurements asu 201006 requires new disclosures regarding transfers level 1 2 activity within level 3 fair value measurements clarifies existing disclosures inputs valuation techniques level 2 3 fair value measurements asu 201006 also includes conforming amendments employers disclosures postretirement benefit plan assets new disclosures clarifications existing disclosures effective interim annual reporting periods beginning december 15 2009 except disclosure activity within level 3 fair value measurements effective fiscal years beginning december 15 2010 interim periods within years adoption asu 201006 material impact company’s financial position results operations cash flows february 2010 fasb issued asu 201009 subsequent events topic 855 amendments certain recognition disclosure requirements asu 201009 requires entity sec filer evaluate subsequent events date financial statements issued removes requirement sec filer disclose date subsequent events evaluated asu 201009 effective upon issuance adoption asu 201009 effect company’s financial position results operations cash flows april 2010 fasb issued asu 201013 compensation stock compensation topic 718 effect denominating exercise price sharebased payment award currency market underlying equity security trades asu 201013 provides amendments topic 718 clarify employee sharebased payment award exercise price denominated currency market substantial portion entitys equity securities trades considered contain condition market performance service condition therefore entity would classify award liability otherwise qualifies equity amendments asu 201013 effective fiscal years interim periods within fiscal years beginning december 15 2010 adoption asu 201013 material impact company’s financial position results operations cash flows note 3 prepaid costs current assets prepaid costs current assets december 31 2011 2010 consist following abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 4 property equipment property equipment december 31 2011 2010 consist following included network infrastructure assets certain transmission ip equipment held inventory future use original cost 405 324 accumulated depreciation 201 150 net carrying values 204 174 december 31 2011 2010 respectively addition december 31 2011 2010 company assets held sale disposition net book values totaling 01 06 respectively net allowances equipment impairment 03 05 december 31 2011 2010 respectively included network infrastructure assets including transmission ip equipment depreciation amortization expense related property equipment years ended december 31 2011 2010 2009 approximately 753 633 520 respectively included costs revenue years ended december 31 2011 2010 2009 provisions impairment 12 20 12 respectively respect certain assets removed network either sold disposed made available sale disposition abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 5 subordinated investment january 2008 company became strategic member defined mediaxstream llc newly formed limited liability company created provide transport managed network services production broadcast industries “mediax” mediax formed preferred members contributed cash strategic members management members contribute services company’s interest provide voting rights mediax’s board managers company agreed contribute certain monthly services pursuant 51 month contract commenced april 2008 interest mediax distributions company subordinated distributions preferred members original investment plus preferred return based upon amounts contributed company’s nominal ownership interest approximately 154 equity mediax startup company operating history distributions company’s investment subordinated distributions preferred members company’s interest provide level control factors indicated fair value company’s investment mediax significant accordingly company reflected services contributed revenue corresponding investment mediax financial statements cost providing services included costs revenue relevant period company contributed services mediax 17 years ended december 31 2011 2010 2009 represents estimated fair value services actual costs providing services significant december 2009 ownership interests mediax including ownership interest held us purchased hibernia group ehf pursuant purchase agreement company entitled earnout payment event mediax achieves certain financial performance results company continue contribute services accordance original contract company record distributions investment mediax income received additionally company provides services mediax basis provides customers company billed mediax services reimbursements 07 years ended december 31 2011 2010 06 year ended december 31 2009 note 6 changes estimate effective january 1 2010 company changed estimated useful lives ip equipment seven years five years additionally company changed estimated useful lives certain capitalized labor 20 years seven years effective october 1 2011 company changed estimated useful lives certain capitalized labor seven five years began depreciating assets company’s sparing program accordance respective asset class lives effect changes company’s operating results material abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 7 accrued expenses accrued expenses december 31 2011 2010 consist following note 8 income taxes income taxes provided based upon tax laws rates countries operations conducted income earned provision benefit income taxes years ended december 31 2011 2010 2009 follows abovenet inc subsidiaries notes consolidated financial statements millions except share per share information deferred income taxes result temporary differences financial reporting basis tax basis assets liabilities following summary significant items giving rise components company’s deferred tax assets liabilities years ended december 31 2011 2010 company recorded current net tax expense capitalbased state taxes 13 company provided income taxes statutory rate 2011 2010 2009 2011 2010 2009 company recognized 92 73 1830 noncash tax benefits result reducing certain valuation allowances previously established respect deferred tax assets us uk believe likely utilize assets reduce eliminate tax payments future periods company’s evaluation encompassed review recent history profitability us uk past three years ii review internal financial forecasts demonstrating expected capacity utilize deferred tax assets iii reassessment tax benefits recognition fasb asc 740 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information connection company’s emergence bankruptcy company realized substantial cancellation debt income “codi” income taxable us income tax purposes codi resulted company’s reorganization bankruptcy code however us income tax reporting purposes company required reduce certain tax attributes including net operating loss carryforwards b capital losses c certain tax credit carryforwards tax basis assets total amount equal gain extinguishment debt reorganization company effective date constituted ownership change section 382 internal revenue code use company’s nol’s capital losses tax credit carryforwards remaining applying provisions certain subsequently recognized “builtin” losses deductions existing prior ownership change subject overall annual limitation december 31 2008 december 31 2011 company domestic nol carryforwards 2835 foreign nol carryforwards 411 certain nol carryforwards begin expire 2024 company’s use 1377 domestic nol carryforward limited 81 per annum 1458 unlimited nol carryforwards may subject future limitation section 382 united states internal revenue code company subsidiaries’ income tax returns routinely examined various tax authorities statute limitations open respect tax years 2007 2010 statute limitations returns filed respect years begin expire 2012 note 9 longterm debt 250 million secured revolving credit facility january 28 2011 company closed five year 250 secured revolving credit facility “250 million secured revolving credit facility” lender parties thereto “lenders” suntrust bank administrative agent “administrative agent” lenders received first priority security interest lien substantially company’s domestic assets 65 ownership interest company’s principal foreign subsidiaries loans 250 million secured revolving credit facility bear interest period one two three months agreed longer interest periods company’s option either base rate defined 250 million secured revolving credit facility plus applicable margin ranging 125 200 alternately adjusted libo rate defined 250 million secured revolving credit facility plus applicable margin ranging 225 300 company also required pay unused commitment fee ranging 0375 050 per annum based daily average undrawn portion 250 million secured revolving credit facility applicable margin unused commitment fee determined based company’s leverage ratio based consolidated total debt consolidated ebitda defined 250 million secured revolving credit facility 250 million secured revolving credit facility includes uncommitted accordion feature permits company increase aggregate principal amount 1250 one term loans additional revolving credit subject agreement one lenders provide additional principal amount company borrowed 550 closing 50 used pay bank fees legal expenses 499 used repay secured credit facility defined 01 used general corporate purposes initial borrowings 250 million secured revolving credit facility carried interest rate 450 base rate 325 plus applicable margin 125 company converted interest rate adjusted libo rate option february 4 2011 time interest rate changed 252 027 adjusted libo rate plus applicable margin 225 december 31 2011 250 million secured revolving credit facility carried interest rate 253 028 adjusted libo rate plus applicable margin 225 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company right prepay outstanding loan 250 million secured revolving credit facility prior maturity without premium penalty company required comply number affirmative negative financial covenants among things covenants require company provide notices material events information regarding collateral restrict company’s ability subject certain exceptions baskets incur additional indebtedness grant liens assets undergo fundamental changes make investments sell assets make restricted payments including ability pay dividends engage affiliate transactions require company maintain leverage ratio greater 25 10 interest coverage ratio terms defined 250 million secured revolving credit facility less 30 10 december 31 2011 based upon company’s leverage ratio cash balance availability 250 million secured revolving credit facility 2575 retained earnings unrestricted dividend purposes balance restricted 250 million secured revolving credit facility contains customary events default subject customary grace periods cure rights materiality thresholds including among others failure pay principal interest fees violation covenants material inaccuracy representations warranties crossdefault crossacceleration material indebtedness certain bankruptcy insolvency events certain judgments certain erisa events change control following event default 250 million secured revolving credit facility administrative agent lenders would entitled take various actions including acceleration amounts due 250 million secured revolving credit facility seek customary remedies may taken secured creditors outstanding principal amount revolving credit loans together accrued unpaid interest thereon due payable january 28 2016 connection january 2011 closing 250 million secured revolving credit facility company also settled two interest rate swaps total cost 05 included “other income expense net” company’s consolidated statement operations year ended december 31 2011 company also wroteoff 11 unamortized debt issuance costs associated secured credit facility also included “other income expense net” company’s consolidated statement operations year ended december 31 2011 december 31 2011 1950 available borrowings 250 million secured revolving credit facility company compliance debt covenants december 31 2011 secured credit facility february 29 2008 company excluding certain foreign subsidiaries entered credit guaranty agreement amended “credit agreement” providing 600 senior secured credit facility “secured credit facility” consisting 180 revolving credit facility “revolver” 420 term loan facility “term loan” comprised 240 advanced closing 180 originally could drawn within nine months closing company’s option “delayed draw term loan” secured credit facility secured substantially company’s domestic assets september 2008 delayed draw term loan option originally scheduled expire november 25 2008 extended june 30 2009 subsequently extended december 31 2009 revolver term loan term five years february 29 2008 company paid upfront fee 15 09 total amount secured credit facility paid 03 unaffiliated third party financial advisors assisted company also liable unused commitment fee 075 per annum interest accrued libor 30 60 90 180 day rates announced base rate administrative agent company’s option plus applicable margins defined company chose 30 day libor interest rate plus applicable margin 3 effective september 30 2008 additionally company originally required maintain unrestricted cash balance times least 200 february 29 2008 company received proceeds pursuant term loan 240 less debt issuance costs provisions term loan initial advance base rate interest plus margin 825 february 29 2008 converted libor plus 325 per annum 626 march 5 2008 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company’s ability draw upon available commitments revolver subject compliance covenants contained credit agreement company’s continued ability make certain representations warranties among things covenants imposed limits annual capital expenditures 2010 provided company’s net total funded debt ratio could time exceed specified amount required company maintained minimum consolidated fixed charges coverage ratio addition credit agreement prohibited company paying dividends shares equity securities making certain payments including payments acquire company’s equity securities specified circumstances include repurchase company’s equity securities employees directors aggregate amount exceed 150 company obtained waiver lenders effectuate dividend paid december 2010 september 26 2008 company executed joinder agreement secured credit facility added additional lender increased amount secured credit facility 900 effective october 1 2008 revolver increased 270 term loan increased 360 available delayed draw term loan increased 270 connection joinder agreement company paid 045 fee closing aggregate 025 advisory fees additional amount term loan 120 advanced october 1 2008 effective august 4 2008 company entered swap arrangement fixed borrowing costs respect 240 original principal term loan outstanding three years 365 plus applicable margin 325 reduced 300 september 30 2008 november 14 2008 company entered swap arrangement fixed borrowing costs respect additional 120 original principal term loan borrowed october 1 2008 three years 2635 per annum plus applicable margin 300 june 29 2009 company lenders entered amendment credit agreement extended availability delayed draw term loan commitments june 30 2009 december 31 2009 provided reduction commitments 081 june 30 2009 september 30 2009 december 31 2009 addition company’s obligation maintain minimum balance 200 cash deposits times eliminated december 31 2009 company borrowed 2457 delayed draw term loan carried interest 30 day libor 025750 december 31 2010 plus applicable margin 300 delayed draw term loan provided payment terms similar term loan term loan provided monthly payments interest quarterly installments principal 108 commenced june 30 2009 quarterly installment principal increased 189 beginning march 31 2010 take consideration delayed draw term loan repayment schedule aggregate quarterly principal repayment scheduled increase 252 june 30 2012 balance 3276 plus accrued unpaid interest due february 28 2013 additionally company executed 10 standby letter credit favor city new york secure company’s franchise agreement collateralized 10 availability revolver standby letter credit originally scheduled expire may 1 2010 renewed extended term loan delayed draw term loan plus accrued interest totaling 499 repaid january 28 2011 upon closing 250 million secured revolving credit facility standby letter credit favor city new york terminated connection repayment replaced 10 standby letter credit secured 10 restricted cash balance term scheduled expire january 2013 subject annual renewals company’s option january 2016 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information obligation capital lease company obligated capital lease certain indefeasible rightsofuse included network infrastructure asset property equipment net december 31 2011 future minimum payments capital lease follows longterm portion reported within “other longterm liabilities” note 10 shareholders’ equity dividends november 2010 obtained waivers lenders societe generale suntrust bank cit lending services corporation permit 500 per share dividend november 23 2010 announced board directors declared special onetime cash dividend 500 per share common stock “special cash dividend” special cash dividend paid december 27 2010 stockholders record close business december 6 2010 aggregate amount payment made connection special cash dividend approximately 1290 december 20 2010 company’s board directors granted restricted stock units “rsu dividend” holders unvested restricted stock units record date special cash dividend order provide holders amount approximated value special cash dividend total company granted 40508 restricted stock units pursuant rsu dividend 1246 restricted stock units vested february 2011 based upon achievement certain performance targets established fiscal year 2010 28656 restricted stock units vested november 15 2011 9360 vested november 16 2011 1246 restricted stock units vested february 10 2012 based upon determination compensation committee board directors certain performance targets established fiscal year 2011 met additionally december 20 2010 company’s board directors granted shares common stock “option dividend” holders vested unexercised options purchase shares common stock order provide holders amount approximated value special cash dividend december 27 2010 company delivered 9281 shares common stock pursuant option dividend additionally company paid cash one former employee estate one deceased employee totaling 0007 fourth quarter 2010 company recorded stockbased compensation expense 05 connection option dividend abovenet inc subsidiaries notes consolidated financial statements millions except share per share information stock split august 3 2009 board directors company authorized twoforone common stock split effected form 100 stock dividend distributed september 3 2009 shareholder record august 20 2009 received one additional share common stock share common stock held date share per share information prior periods including warrants options purchase common shares restricted stock units warrant option exercise prices shares reserved 2003 plan 2008 plan weighted average fair value options granted common stock additional paidin capital accounts consolidated balance sheets consolidated statement shareholders’ equity retroactively adjusted applicable reflect twoforone stock split amendment company’s amended restated certificate incorporation june 24 2010 company’s stockholders approved amendment company’s amended restated certificate incorporation “amendment” increase number authorized shares common stock par value 001 per share 30 million 200 million number authorized shares preferred stock remained 10 million increase number authorized shares common stock could antitakeover effect discouraging hindering efforts acquire control company would able use additional shares oppose hostile takeover attempt delay prevent changes control management company intent board directors adopting amendment adopted response known threat acquire control company increase authorized shares common stock became effective upon filing amendment secretary state delaware june 24 2010 rights agreement august 3 2006 company entered rights agreement “rights agreement” american stock transfer trust company rights agent amended restated august 3 2009 subsequently amended january 26 2010 amended “amended restated rights agreement” amended restated rights agreement ratified company’s stockholders annual meeting june 24 2010 result rights defined amended restated rights agreement remain effect august 7 2012 unless sooner terminated company’s board directors following description amended restated rights agreement purport complete qualified entirety reference amended restated rights agreement included exhibit 41 company’s current report form 8k filed sec august 3 2009 amendment amended restated rights agreement dated january 26 2010 abovenet inc american stock transfer trust company llc included exhibit 41 company’s current report form 8k filed sec january 28 2010 connection initial rights agreement company’s board directors declared dividend distribution one preferred share purchase right “right” outstanding share company’s common stock par value 001 per share “common shares” dividend paid august 7 2006 stockholders record date earlier occur date 10 days following date public announcement person entity group affiliated associated persons acquired beneficial ownership 15 outstanding common shares “acquiring person” ii 10 business days later date may determined action company’s board directors prior time person entity becomes acquiring person following commencement announcement intention commence tender offer exchange offer consummation would result person entity becoming acquiring person earlier dates called “distribution date” rights evidenced common share certificates bookentry shares abovenet inc subsidiaries notes consolidated financial statements millions except share per share information rights exercisable distribution date right upon becoming exercisable entitle holder purchase company specified fraction share company’s series junior participating preferred stock “preferred shares” effective purchase price rights expire august 7 2012 unless earlier redeemed exchanged number outstanding rights number preferred shares issuable upon exercise rights also subject adjustment event stock split common shares stock dividend common shares payable common shares subdivisions consolidation combinations common shares occurring case prior distribution date purchase price payable number preferred shares securities property issuable upon exercise rights subject adjustment time prevent dilution described amended restated rights agreement result company’s stock split discussed appropriate adjustments amended restated rights agreement made event person group affiliated associated persons becomes acquiring person proper provision made holder right rights beneficially owned acquiring person associates affiliates thereafter void right receive upon exercise lieu preferred shares number common shares market value two times effective exercise price right number shares cannot authorized company may issue preferred shares cash debt stock combination thereof exchange rights event company acquired merger business combination transaction 50 consolidated assets earning power sold acquiring person associates affiliates certain persons proper provision made holder right rights beneficially owned acquiring person associates affiliates thereafter void thereafter right receive upon exercise thereof current exercise price right lieu preferred shares number shares common stock acquiring company time transaction market value two times effective exercise price per right time person becomes acquiring person prior acquisition acquiring person 50 outstanding common shares company may exchange rights owned acquiring person group become void whole part exchange ratio one share common stock per right election company may issue cash debt stock combination thereof exchange rights subject adjustment time prior earlier time person become acquiring person ii final expiration date company may redeem less outstanding rights price 0005 per right “redemption price” rights may also redeemed certain times described amended restated rights agreement immediately upon redemption rights right exercise rights terminate right holders rights receive redemption price terms rights may amended company’s board directors without consent holders rights except time rights distributed amendment may adversely affect interest holders rights interests acquiring person affiliates associates right exercised holder thereof rights stockholder company including without limitation right vote receive dividends abovenet inc subsidiaries notes consolidated financial statements millions except share per share information repurchase program december 7 2011 board directors company authorized share repurchase program 2000 company’s common stock december 31 2012 “repurchase program” board also authorized management enter one prearranged stock repurchase plans rule 10b51 securities act 1934 connection repurchase program december 31 2011 company purchased 29457 shares pursuant repurchase program cost 19 january 1 2012 february 24 2012 company purchased additional 11700 shares pursuant repurchase program cost 08 stock warrants plan reorganization unsecured note holder claims general secured claims settled part distribution five year warrants seven year warrants see note 1 “background organization bankruptcy filing reorganization” following table summarizes activity company’s warrants periods presented 1 includes 105094 shares returned treasury settle aggregate exercise price connection net exercises 2 includes 476 shares returned treasury settle aggregate exercise price connection net exercises 3 includes 89430 shares returned treasury settle aggregate exercise price connection net exercises abovenet inc subsidiaries notes consolidated financial statements millions except share per share information terms warrant agreements described note 2 “basis presentation significant accounting policies stock warrants” market price company’s common stock defined warrant agreements 60 days prior expiration date respective warrants greater warrant exercise price company required give warrant holder notice warrant expiration date warrants would deemed exercised pursuant net exercise provisions respective warrant agreements “net exercise” unless warrant holder elected written notice exercise warrants net exercise shares issued warrant holders would reduced number shares necessary cover aggregate exercise price shares valuing shares current market price defined warrant agreements fractional shares otherwise issuable would paid cash prior expiration date five year warrants five year warrants purchase 778 shares common stock exercised net exercise basis resulting issuance 520 common shares issued 258 common shares returned treasury september 8 2008 expiration date five year warrants required conditions met net exercise five year warrants purchase 50 shares common stock cancelled accordance instructions warrant holders additionally five year warrants purchase 317748 shares common stock deemed exercised net exercise basis 212912 shares issued warrant holders additional 104836 shares returned treasury 0004 paid recipients fractional shares september 8 2010 expiration date seven year warrants required conditions met net exercise accordingly seven year warrants purchase 13626 shares common stock exercised expiration 10409 shares issued warrant holders 3217 shares returned treasury 0004 paid recipients fractional shares total seven year warrants purchase 443504 shares common stock deemed exercised net exercise basis 353598 shares issued warrant holders 89906 shares returned treasury 0004 paid recipients fractional shares addition seven year warrants purchase 26 shares common stock determined undeliverable cancelled note 11 income per common share basic net income per common share computed net income divided weighted average number common shares outstanding period total weighted average shares utilized computing basic net income per common share 25902123 25293188 23504077 years ended december 31 2011 2010 2009 respectively total weighted average shares utilized computing diluted net income per common share 26822614 26242696 25468405 years ended december 31 2011 2010 2009 respectively dilutive securities include options purchase shares common stock restricted stock units stock warrants years ended december 31 2011 2009 2010 potentially dilutive securities excluded calculation diluted income per common share abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 12 stockbased compensation 2011 equity incentive plan 2008 equity incentive plan 2003 plan may 11 2011 board directors company adopted abovenet inc 2011 equity incentive plan “2011 plan” provides availability maximum 1600000 shares company’s common stock awarded company’s employees including officers directors consultants form restricted stock unit awards restricted stock awards incentive stock options nonqualified stock options stock appreciation rights performancebased awards stock cashbased awards 2011 plan approved company’s stockholders company’s 2011 annual meeting stockholders held june 23 2011 plan administered compensation committee sole discretion determine individuals may participate 2011 plan type extent terms awards granted number shares available grant terms outstanding grants subject adjustment stock splits stock dividends capital adjustments december 31 2011 396200 common shares reserved pursuant outstanding restricted stock units 1203800 common shares available future grants august 29 2008 board directors company approved company’s 2008 plan 2008 plan administered company’s compensation committee employee officer director consultant company subsidiary company selected compensation committee eligible receive awards 2008 plan stock options restricted unrestricted stock restricted unrestricted stock units stock appreciation rights may awarded eligible participants stand alone combination tandem basis 1500000 shares company’s common stock initially reserved issuance pursuant awards granted 2008 plan number shares available grant terms outstanding grants subject adjustment stock splits stock dividends capital adjustments 2008 plan december 31 2011 940418 common shares issued pursuant delivery vested restricted stock units including shares repurchased company 3288 common shares issued pursuant exercise options purchase shares common stock 9281 common shares issued pursuant option dividend december 20 2010 403196 common shares reserved pursuant outstanding restricted stock units 6712 common shares reserved pursuant outstanding options purchase shares common stock 137105 common shares available future grants september 8 2003 plan became effective 2003 plan company authorized issue aggregate sharebased awards 2129912 common shares employees directors consultants selected participate number shares available grant terms outstanding grants subject adjustment stock splits stock dividends capital adjustments 2003 plan december 31 2011 1169432 common shares issued pursuant vested restricted stock units including shares repurchased company 850643 common shares issued pursuant options exercised purchase common shares 75459 common shares reserved pursuant outstanding vested options purchase shares common stock 34378 common shares cancelled shares available future grants 2003 plan stockbased compensation expense period presented relates sharebased awards granted company’s 2011 plan described 2008 plan described company’s 2003 plan applicable reflects awards outstanding applicable period including awards granted prior period stock options purchase shares common stock granted years ended december 31 2011 2010 2009 company recognized noncash stockbased compensation expense amounting 02 year ended december 31 2009 respect stock options granted effect decreasing net income 001 per basic common share 001 per diluted common share year ended december 31 2009 noncash stockbased compensation expense recognized respect options purchase shares common stock years ended december 31 2011 2010 options subject forfeiture specified respective award agreement abovenet inc subsidiaries notes consolidated financial statements millions except share per share information regarding options purchase common stock granted exercised outstanding years ended december 31 2011 2010 2009 summarized grant date fair value vested options purchase common stock follows december 31 aggregate grant date fair value options purchase shares common stock vested year ended december 31 2009 02 10000 shares options purchase shares common stock vested years ended december 31 2011 2010 december 31 2010 options purchase shares common stock vested accordingly company unearned stockbased compensation expense associated options purchase shares common stock november 2005 fasb issued fasb staff position sfas 123r3 “transition election related accounting tax effects sharebased payment awards” alternative transition method includes simplified methods establish beginning balance additional paidin capital pool “apic pool” related tax effects employee sharebased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee sharebased compensation awards outstanding upon adoption sfas 123r company adopted method determined apic pool 28 company reduced apic pool 01 2008 reflect tax effect delivery common shares underlying restricted stock units 2008 24527 86778 742626 options purchase common shares exercised years ended december 31 2011 2010 2009 respectively abovenet inc subsidiaries notes consolidated financial statements millions except share per share information following table summarizes information concerning outstanding exercisable options purchase common stock december 31 2011 restricted stock units december 1 2011 pursuant 2011 plan board directors company awarded 381200 restricted stock units certain employees including 3000 five nonemployee members board directors aggregate 152000 restricted stock units company’s named executive officers follows fair value grants 5949 per share closing price company’s common stock new york stock exchange day restricted stock units scheduled vest 127059 127082 november 16 2012 november 16 2013 november 16 2014 respectively august 26 2011 pursuant 2011 plan board directors company awarded 15000 restricted stock units named executive officer fair value grant 5754 per share closing price company’s common stock new york stock exchange day restricted stock units scheduled vest 10000 shares november 16 2012 5000 shares november 16 2013 january 25 2011 pursuant 2008 plan company granted aggregate 213100 restricted stock units 190000 granted company’s named executive officers follows including 15000 restricted stock units granted mr datta connection appointment chief operating officer fair value restricted stock unit granted 5925 closing price company’s common stock new york stock exchange january 25 2011 213100 restricted stock units originally scheduled vest follows 15000 november 16 2011 132066 november 16 2012 66034 november 16 2013 mr jacquay’s restricted stock units scheduled vest 2012 2013 forfeited upon resignation effective december 31 2011 additional 21000 restricted stock units granted 2011 forfeited 2011 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information december 20 2010 pursuant 2008 plan company awarded 254700 restricted stock units certain employees nonemployee members board directors fair value grants 5682 per share closing price company’s common stock day 10800 restricted stock units granted employees vested november 16 2011 balance 243900 restricted stock units including 3000 restricted stock units five nonemployee members board directors 161267 originally scheduled vest november 16 2012 82633 scheduled vest november 16 2013 date 10050 restricted stock units pursuant grant forfeited additionally december 20 2010 pursuant 2008 plan board directors company awarded 40508 restricted stock units pursuant rsu dividend 24918 restricted stock units vested november 15 2011 8846 restricted stock units vested november 16 2011 1246 vested along 14000 previously granted restricted stock units february 2011 based upon attainment certain performancebased metrics respect fiscal year 2010 1246 restricted stock units vested along 14000 previously granted restricted stock units february 10 2012 based upon determination compensation committee board directors certain performance targets established fiscal year 2011 met 4252 restricted stock units forfeited december 2 2010 pursuant 2008 plan company awarded 5900 restricted stock units ie agreement provide common shares future certain employees fair value grant 5657 per share closing company’s common stock day restricted stock units vested november 16 2011 december 3 2009 pursuant 2008 plan company awarded 182700 restricted stock units originally scheduled vest november 16 2010 certain employees nonemployee members board directors fair value grant 5390 per share closing price company’s common stock day 1600 restricted stock units accelerated vested delivered october 25 2010 74220 restricted stock units vested delivered november 16 2010 93690 restricted stock units vested delivered november 16 2011 13190 restricted stock units forfeited september 8 2011 222008 restricted stock units originally granted september 8 2008 vested november 15 2011 58000 restricted stock units vested 16000 granted september 8 2008 42000 granted october 27 2008 restricted stock units delivered november 15 2011 additionally 42000 restricted stock units granted september 8 2008 originally scheduled vest september 8 2011 forfeited 2011 company records stockbased compensation expense fair value restricted stock units awarded grant date ratably vesting period company recognized noncash stockbased compensation expense amounting 243 119 95 years ended december 31 2011 2010 2009 respectively respect restricted stock units awarded effect decreasing net income 056 per basic common share 054 per diluted common share year ended december 31 2011 028 per basic common share 027 per diluted common share year ended december 31 2010 040 per basic common share 037 per diluted common share year ended december 31 2009 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information following schedule summarizes activity company’s “restricted stock units” periods presented 1 includes 14000 restricted stock units previously granted 1246 granted pursuant rsu dividend vested 2011 based achievement certain performance targets established february 2010 fiscal 2010 also includes another 1246 restricted stock units granted pursuant rsu dividend vested february 2012 based upon achievement certain performance targets established february 2011 fiscal 2011 2 excludes 14000 restricted stock units previously granted vested 2012 based achievement certain performance targets established february 2011 fiscal 2011 14000 restricted stock units referenced footnote 3 includes 14000 restricted stock units previously granted vested 2012 based achievement certain performance targets established february 2011 fiscal 2011 company 228 81 21 unearned stockbased compensation expense associated expected future vesting restricted stock unit awards outstanding december 31 2011 expected recognized 2012 2013 2014 respectively abovenet inc subsidiaries notes consolidated financial statements millions except share per share information 2010 employee stock purchase plan june 24 2010 company’s stockholders approved abovenet inc 2010 employee stock purchase plan adopted board directors april 28 2010 amended “stock purchase plan” stock purchase plan administered compensation committee board directors aggregate number shares common stock may issued pursuant stock purchase plan 300000 subject increase decrease reason stock splits reclassifications stock dividends similar corporate events determined compensation committee eligibility participation employees company designated subsidiaries completed least ninety 90 days employment first day applicable offering period eligible participate stock purchase plan subject certain limitations imposed internal revenue code certain limitations set forth stock purchase plan employee may participate stock purchase plan immediately joined would stock andor hold rights purchase stock possessing 5 total combined voting power value classes stock company subsidiary company officers company subject reporting requirements section 16a securities exchange act 1934 “section 16 officers” also eligible participate stock purchase plan also limits employee’s rights purchase stock employee stock purchase plans subject section 423 internal revenue code company subsidiaries rights may accrue rate exceeds 0025 fair market value stock determined first day offering period calendar year right purchase stock outstanding time addition employee may purchase 200 shares common stock purchase plan offering period employees may withdraw stock purchase plan time prior end current offering period december 31 2011 total approximately 700 employees eligible participate stock purchase plan offering periods purchase price stock purchase plan operates series offering periods approximately 10 months duration commencing january 16 ending november 15 except 2010 offering period september 1 2010 november 15 2010 purchases made participants end offering period applying payroll deductions accumulated course offering period towards purchases payroll deductions accumulated course offering period included “accrued expenses” company’s consolidated balance sheet price purchases made equal 85 lesser fair market value common stock first day offering period fair market value last day offering period offering periods 108 employees participated january 16 2011 november 15 2011 offering period payroll withholdings make purchases 06 2011 offering period 86 employees participated september 1 2010 november 15 2010 offering pursuant 02 withheld 2010 offering period company follows fasb technical bulletin 971 “accounting statement 123 certain employee stock purchase plans lookback option” known fasb asc 718 sfas 123r also known fasb asc 718 account stock purchase plan stock purchase plan provides discount greater 5 compensatory plan qualifies fair value accounting accordingly fair market value grant calculated grant date accordance sfas 123r additionally fair value lookback option calculated similar basis company also estimates future forfeitures withdrawals stock purchase plan provided fasb asc 718 company recognized noncash stockbased compensation expense respect stock purchase plan 012 year ended december 31 2011 company issued 12288 shares respect 2011 offering period stockbased compensation expense recognized respect stock purchase plan year ended december 31 2010 002 company issued 4414 common shares respect 2010 offering period abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 13 expense income net income expense net consists following represents reversal certain transaction tax liabilities resulting primarily expiration statute limitations note 14 commitments contingencies company commitments various noncancelable operating leases office equipment space equipment rentals rightofway contracts building access franchise fees network capacity contracts terms expiring 2030 company various sublet arrangements third parties estimated future payments net receipts respect contractual obligations follows rent expense component table 361 350 332 years ended december 31 2011 2010 2009 respectively net sublease rents 15 12 22 respective years rent expense reflected also net amortization deferred fair value rent liability represents difference present value contractual obligations leases place fresh start date fair market value obligations company recorded 06 08 12 years ended december 31 2011 2010 2009 respectively reductions rent expense december 31 2011 2010 deferred fair value rent liability 11 15 respectively 06 included accrued expenses dates 05 09 respectively included longterm liabilities related consolidated balance sheets december 31 2011 company commitments customer buildouts infrastructure totaling 177 appointment chief operating officer january 25 2011 board directors company appointed rajiv datta senior vice president chief technology officer company’s chief operating officer connection appointment company’s board directors approved increase mr datta’s annual base salary 03 04 made special grant mr datta 15000 restricted stock units vested delivered november 16 2011 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information employment contracts company maintains employment agreements key executives agreements include among things certain change control severance provisions september 2008 company entered new employment agreements william g laperch chief executive officer president mr datta john jacquay senior vice president sales marketing robert sokota senior vice president general counsel collectively mr joseph p ciavarella described “named executive officers” contracts provides base rate compensation may increase cannot decrease term contract additionally contract provides incentive cash bonus targets named executive officers named executive officers generally entitled benefits offered company’s executives employment contracts provides payment severance provision certain benefits connection certain termination events employment contracts also include confidentiality noncompete assignment intellectual property covenants named executive officers october 2008 company entered employment agreement mr joseph p ciavarella mr ciavarella agreed become company’s senior vice president chief financial officer employment agreement substantially general terms september 2008 employment agreements described employment agreements amended effective january 25 2011 amendments extend term named executive officer’s employment agreement november 16 2011 december 31 2011 subject automatic extensions additional oneyear periods unless cancelled named executive officers company writing least 120 days prior end applicable term b clarify named executive officer employed company december 31 calendar year bonus earned named executive officer would entitled receive bonus payable year mr datta’s employment agreement also amended reflect new title base salary employment agreements messrs ciavarella jacquay sokota also amended clarify determined discretion company’s chief executive officer would report company’s chief operating officer september 4 2011 employment agreements messrs laperch datta ciavarella sokota automatically renewed one year terms december 31 2012 april 27 2011 company john jacquay company’s senior vice president sales marketing agreed mr jacquay would resign position senior vice president sales marketing july 15 2011 mr jacquay continued employed company provided services projects december 31 2011 expiration date employment agreement company “contract expiration date” time separated company connection separation company contract expiration date mr jacquay forfeited unvested stock units held date company mr jacquay also agreed bonus target amount 2011 would 03 july 25 2011 company entered employment agreement mr nicholas ridolfi mr ridolfi agreed become company’s senior vice president sales employment agreement provides annual base salary 025 target bonus 01 2011 025 2012 term extending december 31 2012 mr ridolfi’s employment agreement provides payment severance connection certain termination events includes confidentiality noncompete assignment intellectual property covenants effective november 30 2011 company william g laperch chief executive officer president rajiv datta chief operating officer joseph p ciavarella senior vice president chief financial officer robert sokota senior vice president general counsel entered amendments respective employment agreements providing extension termination date december 31 2012 december 31 2013 changes employment agreements effected employment agreements currently provides term shall automatically extended unless sooner terminated provided therein successive additional oneyear periods unless least 120 days prior end term company respective executive notified term extended abovenet inc subsidiaries notes consolidated financial statements millions except share per share information internal revenue service september 2008 company notified internal revenue service “irs” reclassifying certain individuals classified company independent contractors employees accordingly assessing certain payroll taxes penalties totaling 03 company disputed position citing relief provided irc section 530 irc section 3509 january 13 2009 irs made settlement offer company executed march 10 2009 irs countersigned may 11 2009 terms settlement agreement company agreed pay 0015 irs fully discharge federal employment tax liability may owed 2005 irs agreed dispute classification “such workers” federal employment tax purposes period january 1 2005 march 31 2009 beginning april 1 2009 company agreed treat “consultants” described settlement agreement perform equivalent duties employees company employees finally company agreed extend statute limitations respect federal employment tax payments period covered settlement agreement january 1 2005 march 31 2009 april 1 2012 new york city franchise agreement result certain ongoing litigation third party several years department information technology telecommunications city new york “doitt” suspended discussions regarding renewals telecommunications franchises city new york result company’s understanding doitt renewed recently expired franchise agreement including company’s franchise agreement expired december 20 2008 prior expiration company’s franchise agreement company sought received written confirmation doitt company’s franchise agreement provides basis company continue operate city new york pending conclusion renewal discussions company believes number operators city new york operating similar basis doitt recently issued solicitation bids franchises authorizing installation landline facilities city new york’s rightofway provision information services telecommunication services based company’s review solicitation discussion officials doitt company understands franchises issued connection solicitation replace existing broadband franchise services providers city new york fees providers proposed solicitation substantially higher franchise fees paid company plans submit application franchise solicitation capital investments network expansion company time commits capital among things customer capital connect customers network ii expansion improvement infrastructure iii equipment company also commits capital investments selected markets 2010 company incurred expenses open denver market expand paris amsterdam frankfurt europe additionally company connected miami long haul network received favorable ruling canadian authorities regarding ability lease light fiber operations toronto company intends open toronto market 2012 company may increase presence markets company may develop markets us internationally company believes liquiditycapacity execute plans environmental protection agency obligations company recently became aware certain reports environmental protection agency “epa” requires company file reports relate storage sulfuric acid fuel lead company rules governing epa reporting provide penalties failure timely file reports rules include provisions allow companies voluntarily disclose failure file potentially mitigate penalties otherwise due company disclosed epa failure file past subsequently made required filings company believes rules mitigate substantially penalties accordingly consolidated financial statements included herein include accrual penalties period ended december 31 2011 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information lease amendment june 24 2011 company lessee entered fourth amendment lease originally dated april 23 1999 “lease amendment” respect facilities leased company one main pop locations terms lease amendment expiration date lease portion space extended september 30 2014 september 30 2029 simultaneously company entered amendment coterminous sublease “sublease” portion space extending term september 29 2029 terms lease amendment company obligated rents aggregating 294 commencing october 1 2014 sublease provides sublease rents aggregating 120 period effect lease amendment sublease renewal increase net rent expense 04 per annum 10 per annum beginning june 2011 additionally pursuant lease amendment company agreed surrender portion space originally leased september 30 2014 exchange release remaining financial obligations respect space company vacated space september 30 2011 time company recorded gain 02 june 30 2011 company entered ten year lease replacement space provides rent 06 per annum first five years 07 per annum second five years term lease landlord provide four month rent holiday 06 improvement allowance note 15 litigation company subject various legal proceedings claims arise normal course business company evaluates among things degree probability unfavorable outcome ability estimate amount potential loss anticipate outcome matters described material adverse effect business financial condition results operations global voice networks limited “gvn” abovenet communications uk limited company’s uk operating subsidiary “acuk” party duct purchase fiber lease agreement “duct purchase agreement” eu networks fiber uk ltd formerly gvn dispute parties arose regarding extent network duct sold fiber leased gvn pursuant duct purchase agreement result dispute 2006 gvn filed claim acuk high court justice london seeking ownership disputed portion network duct right lease certain fiber associated damages december 2007 court ruled favor gvn respect disputed duct fiber early february 2008 acuk delivered disputed duct fiber gvn additionally original ruling company also required construct balance disputed duct fiber deliver gvn pursuant schedule ordered court additional portions disputed duct fiber constructed subsequently delivered portions scheduled delivery company also certain repair maintenance obligations must perform respect duct gvn also seeking enforce option requiring acuk construct 180 200 chambers gvn along network june 2008 company paid 30 damages pursuant liability trial additionally company reimbursed gvn 18 legal fees additionally company’s legal fees aggregated 24 company incurred obligated costs totaling 27 build additional network early august 2008 company reached settlement agreement company paid gvn 06 agreed provide additional construction duct estimated cost 12 provide gvn limited additional access acuk’s network gvn acuk provided mutual releases claims including acuk’s repair obligation chamber construction obligations discussed company recorded loss litigation 117 december 31 2007 december 31 2010 company paid 109 connection litigation 2010 company recorded additional provision 09 record additional expenses repairs covered settlement obligations denominated british pounds accordingly amounts adjusted changes currency translation rates appropriate company remaining accrual balance 07 relating litigation included company’s consolidated balance sheets december 31 2011 2010 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information employment contract termination july 11 2011 company terminated employment douglas jendras former senior vice president operations august 3 2011 mr jendras filed complaint united states district court southern district new york alleging breach employment contract seeking damages 04 salary benefits approximately 46 specific performance respect 66738 restricted stock units cancelled connection termination mr jendras’ employment plus recovery legal fees costs punitive damages september 30 2011 company filed answer complaint company believes meritorious defenses intends pursue vigorously time legal matters company may named defendant arise normal course business activities resolution legal matters company cannot accurately predicted company anticipate outcome matters described material adverse effect business financial condition results operations note 16 related party transactions member company’s board directors richard postma also cochairman chief executive officer cofounder telecommunications company sold services andor material normal course business telecommunications company amount 044 039 035 years ended december 31 2011 2010 2009 respectively amounts outstanding december 31 2011 december 31 2010 mr postma also serves chief executive officer holds minority ownership interest construction company purchased certain installation construction services totaling 0002 2010 003 2009 construction firm company purchases construction firm 2011 activities company entities conducted independent arms length transactions consistent similar terms circumstances customers vendors accounts two parties settled accordance invoice terms note 17 segment reporting sfas 131 “disclosures segments enterprise related information” known fasb asc 28010 defines operating segments components enterprise separate financial information available evaluated regularly company’s chief operating decision maker deciding assess performance allocate resources company operates business one operating segment geographic information company’s revenue based location entity providing service longlived assets based physical location assets following table presents revenue longlived asset information geographic areas abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 18 quarterly financial data unaudited following table presents unaudited quarterly consolidated results year ended december 31 2011 fluctuations revenue reported period impacted contract termination revenue recognized quarter follows 1 includes provision equipment impairment 01 2 includes provisions equipment impairment totaling 11 3 fourth quarter 2011 based upon company’s review profitability uk internal financial forecasts demonstrating expected capacity utilize deferred tax assets company reduced valuation allowance 91 respect deferred tax assets associated uk operations comprised 92 tax benefit recognized partially offset 01 due foreign currency translation abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 18 quarterly financial data unaudited cont’d following table presents unaudited quarterly consolidated results year ended december 31 2010 fluctuations revenue reported period impacted contract termination revenue recognized quarter follows 1 includes provision equipment impairment 02 2 includes provision equipment impairment 02 3 includes provision impairment 16 4 fourth quarter 2010 based upon company’s review profitability uk internal financial forecasts demonstrating expected capacity utilize deferred tax assets company reduced valuation allowance 77 respect deferred tax assets associated uk operations comprised 73 tax benefit recognized 10 attributable reduction uk tax rates partially offset 06 due foreign currency translation item 9 item 8 financial statements supplementary data abovenet inc subsidiaries index consolidated financial statements report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audited accompanying consolidated balance sheets abovenet inc “company” december 31 2007 2006 related consolidated statements operations shareholders’ equity cash flows comprehensive income loss three years period ended december 31 2007 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position abovenet inc december 31 2007 2006 results operations cash flows three years ended period december 31 2007 conformity accounting principles generally accepted united states discussed note 2 consolidated financial statements company adopted provisions statement financial accounting standards 123r “share based payments” utilizing modified prospective transition method effective january 1 2006 also audited accordance standards public company accounting oversight board united states effectiveness abovenet inc’s internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organization treadway commission coso report dated september 29 2008 expressed adverse opinion thereon bdo seidman llp new york ny september 29 2008 abovenet inc subsidiaries consolidated balance sheets millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements operations millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements shareholders’ equity millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements comprehensive income loss millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 1 background organization bankruptcy filing reorganization may 20 2002 metromedia fiber network inc “mfn” substantially domestic subsidiaries “debtor” collectively “debtors” filed voluntary petitions reorganization chapter 11 united states bankruptcy code “bankruptcy code” united states bankruptcy court southern district new york “bankruptcy court” debtors remained possession assets properties continued operate businesses manage properties debtorsinpossession jurisdiction bankruptcy court july 1 2003 debtors filed amended plan reorganization “plan reorganization” amended disclosure statement “disclosure statement” july 2 2003 bankruptcy court approved disclosure statement related voting procedures august 21 2003 bankruptcy court confirmed plan reorganization plan reorganization governed treatment claims interest debtors plan reorganization creditors debtors received receive following distributions set forth greater detail therein debtors emerged proceedings chapter 11 bankruptcy code september 8 2003 “effective date” accordance plan reorganization mfn changed name abovenet inc together subsidiaries “company” august 29 2003 equity interests mfn received distribution plan reorganization equity securities mfn cancelled business company facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure colocation services communications carriers corporate government customers principally united states “us” united kingdom “uk” note 2 basis presentation significant accounting policies summary basis presentation significant accounting policies followed preparation consolidated financial statements follows basis presentation use estimates accompanying consolidated financial statements prepared accordance accounting principles generally accepted united states america “us gaap” pursuant rules regulations securities exchange commission “sec” consolidated financial statements include accounts company applicable opinion management accompanying consolidated financial statements reflect adjustments considered necessary fair presentation company’s results december 31 2007 2006 years ended december 31 2007 2006 2005 preparation consolidated financial statements conformity us gaap requires management make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements disclosure contingent assets liabilities consolidated financial statements accompanying notes reported amounts revenue expenses periods presented estimates used accounting certain items accounts receivable allowances property taxes transaction taxes deferred taxes estimates company makes based historical factors current circumstances experience judgment company’s management company evaluates assumptions estimates ongoing basis may employ outside experts assist company’s evaluations actual amounts results could differ estimates due subsequent events could material effect company’s financial statements covering future periods abovenet inc subsidiaries notes consolidated financial statements millions except share per share information misstatements connection audit financial statements year ended december 31 2006 company determined certain errors primarily related income taxes depreciation certain accruals included financial statements previously issued years ended december 31 2005 2004 period ended december 31 2003 including fresh start balance sheet september 8 2003 adjustments made applicable period effect adjustments would increase net loss 09 009 per basic diluted share year ended december 31 2005 increase net loss 01 001 per basic diluted share year ended december 31 2004 decrease net loss 02 002 per basic diluted share period ended december 31 2003 management believe based upon qualitative quantitative analysis errors material require restatement previously issued financial statements accordingly corrections reflected financial statements year ended december 31 2006 resulted reduction net income 03 003 per basic diluted share reclassification february 29 2008 company filed current report form 8k among things included consolidated statement operations year ended december 31 2006 consolidated statement operations year ended december 31 2006 included company’s annual report form 10k year ended december 31 2006 herein reflects change classification certain expenses amounts recorded consolidated statement operations included current report form 8k dated february 29 2008 change resulted costs revenue decreasing 93 1312 1219 selling general administrative expenses increasing 93 618 711 year ended december 31 2006 reclassification affect operating loss net income earnings per share basic diluted assets liabilities shareholders’ equity year ended december 31 2006 fresh start accounting september 8 2003 company authorized 10000000 shares preferred stock 001 par value 30000000 shares common stock 001 par value holders common stock entitled one vote issued outstanding share entitled receive dividends subject rights holders preferred stock declared board directors preferred stock may issued time one classes series classes series shall distributive designation determined board directors 2006 company reserved issuance 10000000 shares authorized preferred stock described 500000 shares 001 par value junior preferred stock connection adoption shareholders’ rights plan event liquidation holders common stock entitled receive assets company available distribution payments creditors holders preferred stock pursuant plan reorganization upon company’s emergence bankruptcy company issued prepetition creditors 8750000 shares common stock rights purchase 1669210 shares common stock price 299543 rights offering rights purchase 1668992 shares exercised fiveyear stock purchase warrants purchase 709459 shares common stock exercisable price 2000 per share sevenyear stock purchase warrants purchases 834658 shares common stock exercisable price 2400 per share addition 1064956 shares common stock reserved issuance company’s equity incentive plan see note 9 “stockbased compensation” company’s emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 company accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires company allocate reorganization value assets liabilities based upon estimated fair values accordance statement position 907 “financial reporting entities reorganization bankruptcy code” “sop 907” company developed set financial projections utilized expert assist us estimating fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries company 3 calculation enterprise value based upon future cash flows based upon company’s projections adopting fresh start accounting resulted material adjustments historical carrying values company’s assets liabilities reorganization value allocated company assets liabilities based upon fair values company engaged independent appraiser assist us determining fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination comprehensive loss accumulated deficit accounts principles consolidation consolidated financial statements include accounts company applicable whollyowned subsidiaries consolidation generally required investments 50 outstanding voting stock investee except control held majority owner significant intercompany accounts transactions eliminated consolidation revenue recognition revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income related service period accordance sec staff accounting bulletin 101 “revenue recognition financial statements” amended sec staff accounting bulletin 104 “revenue recognition” company generally amortizes revenue related installation services straightline basis contracted customer relationship generally ranges two twenty years abovenet inc subsidiaries notes consolidated financial statements millions except share per share information termination revenue recognized customer discontinues service prior end contract period company previously received consideration revenue recognition deferred termination revenue also recognized customers made early termination payments company settle contractually committed purchase amounts customer longer expects meet company renegotiates contract customer result longer obligated provide services consideration previously received revenue recognition deferred 2007 2006 2005 company included receipts bankruptcy claim settlements former customers termination revenue termination revenue reported manner original service provided amounted 85 83 121 2007 2006 2005 respectively nonmonetary transactions company may exchange capacity service providers december 2004 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 153 “exchanges nonmonetary assets amendment apb opinion 29” “sfas 153” sfas 153 amends accounting principles board opinion 29 “accounting nonmonetary transactions” “apb 29” eliminate exception nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance sfas 153 applied prospectively nonmonetary exchanges occurring fiscal periods beginning june 15 2005 company’s adoption sfas 153 july 1 2005 material effect consolidated financial position results operations company prior company’s adoption sfas 153 nonmonetary transactions accounted accordance apb 29 exchange similar capacity recorded historical carryover basis dissimilar capacity accounted fair market value recognition gain loss gains losses nonmonetary transactions years ended december 31 2007 2006 2005 operating leases company leases office equipment space maintains equipment rentals rightofway contracts building access fees network capacity various noncancelable operating leases lease agreements expire various dates 2023 subject many cases renewal options provide payment taxes utilities maintenance certain lease agreements contain escalation clauses term lease related scheduled rent increases resulting pass increases operating costs property taxes effect costs changes consumer price indices accordance sfas 13 “accounting leases” company recognizes rent expense straightline basis records liability representing difference straightline rent expense amount payable increase decrease deferred liability leasehold improvements related operating leases amortized lesser economic lives remaining lease term rentfree periods incentives granted certain leases recorded reductions rent expense straightline basis related lease terms cash equivalents restricted cash equivalents purposes consolidated statements cash flows company considers cash banks shortterm highly liquid investments original maturity three months less cash equivalents cash equivalents restricted cash equivalents stated cost approximates fair value restricted cash equivalents comprised outstanding letters credit issued favor various third parties accounts receivable allowance doubtful accounts sales credits accounts receivable customer obligations services sold customers normal trade terms company’s customers primarily communications carriers corporate government customers located primarily us uk company performs periodic credit evaluations customers’ financial condition company provides allowances doubtful accounts sales credits provisions doubtful accounts recorded selling general administrative expenses allowances sales credits recorded reductions revenue adequacy reserves evaluated utilizing several factors including length time receivable past due changes customer’s credit worthiness customer’s payment history length customer’s relationship company current industry trends current economic climate property equipment property equipment stated preliminary estimated fair values effective date based company’s reorganization value purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress included network infrastructure assets respective balance sheets certain internal direct labor costs constructing installing property equipment capitalized direct labor amounted 86 51 47 years ended december 31 2007 2006 2005 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease estimated useful lives company’s property equipment follows building except certain storage huts 20 years 375 years network infrastructure assets years software computer equipment 4 years transmission equipment 7 years furniture fixtures equipment 10 years leasehold improvements lesser estimated useful life lease term property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income loss abovenet inc subsidiaries notes consolidated financial statements millions except share per share information time company required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances company fully depreciates remaining carrying value network infrastructure removed rendered unusable capitalizes new fiber associated construction costs relocation placed service reduced reimbursements received costs company capitalized relocation costs amounting 22 89 20 years ended december 31 2007 2006 2005 respectively company fully depreciated remaining carrying value network infrastructure rendered unusable amounting 03 16 04 original cost basis years ended december 31 2007 2006 2005 respectively accordance sfas 144 “accounting impairment disposal longlived assets” company periodically evaluates recoverability longlived assets evaluates assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value asset included costs revenue year ended december 31 2007 provision equipment impairment 22 recorded recognize loss value certain equipment held inventory amounts provided years ended december 31 2006 2005 treasury stock treasury stock accounted cost method asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” company recognizes fair value liability asset retirement obligation period incurred reasonable estimate fair value made asset retirement obligations related decommissioning electronics removal certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities asset retirement obligations generally recorded “other longterm liabilities” capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 61 56 december 31 2007 2006 respectively 33 31 respectively included “accrued expenses” 28 25 respectively included “other longterm liabilities” accretion expense included “interest expense” amounted 02 years ended december 31 2007 2006 2005 income taxes company accounts income taxes accordance sfas 109 “accounting income taxes” “sfas 109” deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases net operating loss tax credit carryforwards tax contingencies deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled company records valuation allowance deferred tax assets extent likely portion deferred tax assets realized subject audit various taxing authorities audits may result proposed assessments ultimate resolution results us owing additional taxes required establish reserves fasb interpretation 48 “accounting uncertainty income taxes” “interpretation 48” despite belief tax return positions appropriate supportable local tax law believe uncertainty respect certain positions may succeed realizing tax benefit evaluated tax positions items uncertainty accordance interpretation 48 determined tax positions highly certain believe estimates assumptions used support evaluation tax benefit realization reasonable accordingly adjustments made consolidated financial statements year ended december 31 2007 provision income taxes income taxes payable deferred income taxes provided accordance liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured applying enacted tax rates laws taxable years differences expected reverse valuation allowance provided company determines likely portion deferred tax asset balance realized company’s reorganization resulted significantly modified capital structure result applying freshstart accounting accordance sop 907 effective date fresh start accounting important consequences accounting realization valuation allowances related net deferred tax assets existed effective date arose preemergence periods specifically fresh start accounting requires reversal allowances recorded reduction intangible assets exhausted thereafter additional paid capital treatment result change liabilities taxing authorities cash flows undistributed earnings company’s foreign subsidiaries considered indefinitely reinvested therefore provision domestic taxes provided thereon upon repatriation earnings form dividends otherwise company would subject domestic income taxes offset part foreign tax credits related income withholding taxes payable various foreign countries determination amount unrecognized deferred domestic income tax liability practicable due complexities associated hypothetical calculations however unrecognized foreign tax credit carryforwards would available reduce portion domestic liability company’s policy recognize interest penalties accrued component operating expense date adoption interpretation 48 company accrued interest penalties associated unrecognized income tax benefits interest expense recognized year ended december 31 2007 tax expense primarily due current federal income taxes minimum state local income taxes abovenet inc subsidiaries notes consolidated financial statements millions except share per share information foreign currency translation transactions company’s functional currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive income loss company’s foreign exchange transaction gains losses generally included “other income” consolidated statements operations stock options september 8 2003 company adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 9 “stockbased compensation” fair value provisions sfas 123 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards company historical basis determining volatility expected life assumptions model due company’s limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period company recognizes related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation company’s plan reorganization outstanding stock options respect mfn’s common stock cancelled effective january 1 2006 company adopted sfas 123r “sharebased payment” “sfas 123r” using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 allowed companies estimate forfeitures recognize impact forfeitures occur company recognized impact forfeitures occur upon adoption sfas 123 adoption sfas 123r result different accounting treatment material impact company’s consolidated financial statements following assumptions used company calculate weighted average fair value stock options granted restricted stock units compensation cost restricted stock unit awards measured based upon quoted closing market price stock date grant compensation cost recognized straightline basis vesting period see note 9 “stockbased compensation” stock warrants connection plan reorganization described note 1 “background organization” company issued holders general unsecured claims part settlement claims five year warrants purchase 709459 shares common stock exercise price 2000 per share expiring september 8 2008 ii seven year warrants purchase 834658 shares common stock exercise price 2400 per share expiring september 8 2010 stock warrants treated equity upon exercise based upon terms warrant cash received stock warrants exercised totaled 48941 6945 1229 2007 2006 2005 respectively terms five year seven year warrant agreements collectively “warrant agreements” market price common stock defined warrant agreements 60 days prior expiration date respective warrants greater warrant exercise price company required give warrant holder notice warrant expiration date warrants would deemed exercised pursuant net exercise provisions respective warrant agreements “net exercise” unless warrant holder elected written notice exercise warrants net exercise shares issued warrant holders would reduced number shares necessary cover aggregate exercise price shares valuing shares current market price defined warrant agreements fractional shares otherwise issuable would paid cash expiration date five year warrants september 8 2008 company exercised unexercised five year warrants pursuant net exercise see note 16 “subsequent events exercise warrants” fair value financial instruments company’s consolidated balance sheets include following financial instruments shortterm cash investments trade accounts receivable trade accounts payable company believes carrying amounts financial statements approximates fair value financial instruments due relatively short period time origination instruments expected realization interest rates approximate current market rates abovenet inc subsidiaries notes consolidated financial statements millions except share per share information concentration credit risk financial instruments potentially subject company concentration credit risk consist principally temporary cash investments accounts receivable company enter financial instruments trading speculative purposes company’s cash equivalents invested investmentgrade shortterm investment instruments high quality financial institutions company’s trade receivables unsecured geographically dispersed single customer accounts greater 10 consolidated revenue accounts receivable net company performs ongoing credit evaluations customers’ financial condition allowance noncollection accounts receivable based upon expected collectability accounts receivable company places cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits 401k postretirement benefits company profit sharing 401k plan “plan” employees us permits employees make contributions plan pretax salary reduction basis accordance provisions internal revenue code permits employer provide discretionary contributions fulltime us employees eligible participate plan beginning month following three months service eligible employees may make contributions subject limitations defined internal revenue code company matches 50 us employee’s contributions amount set forth plan matched amounts vest based upon employee’s length service company’s subsidiaries uk plan contributions made maximum 8 uk employee contributions reach 5 salary company contributed 14 07 06 years ended december 31 2007 2006 2005 respectively net forfeitures obligations plans recently issued accounting pronouncements june 2006 emerging issues task force “eitf” ratified consensus eitf 063 “how taxes collected customers remitted governmental authorities presented income statement gross versus net presentation” “eitf 063” eitf 063 requires companies disclose accounting policies regarding gross net presentation certain taxes within scope eitf 063 taxes assessed governmental authority directly imposed revenueproducing transaction seller customer may include limited sales use value added excise taxes addition taxes significant presented gross basis amounts taxes disclosed company adopted eitf 063 effective january 1 2007 policy record taxes within scope eitf 063 net basis september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” effective fiscal years beginning november 15 2007 interim periods within fiscal years sfas 157 establishes framework measuring fair value accounting principles generally accepted us expands disclosures fair value measurement february 2008 fasb deferred adoption sfas 157 one year applies certain items including assets liabilities initially measured fair value business combination reporting units certain assets liabilities measured fair value connection goodwill impairment tests accordance sfas 142 “goodwill intangible assets” longlived assets measured fair value impairment assessments sfas 144 “accounting impairment disposal longlived assets” sfas 157 requires among things enhanced disclosures investments measured reported fair value establishes hierarchical disclosure framework prioritizes ranks level market price observability used measuring investments fair value three levels fair value hierarchy sfas 157 described level 1 valuations based quoted prices active markets identical assets liabilities entity ability access level 2 valuations based quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable data substantially full term assets liabilities level 3 valuations based inputs supported little market activity significant fair value assets liabilities financial instrument’s level within fair value hierarchy based lowest level input significant fair value measurement currently evaluating impact adoption sfas 157 financial position results operations february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” “sfas 159” sfas 159 gives entities option carry financial assets liabilities fair value changes fair value recorded earnings statement effective first quarter fiscal 2009 expected material impact consolidated financial position results operations cash flows december 2007 fasb issued sfas 141r “business combination revised” “sfas 141r” replace sfas 141 “business combinations” sfas 141r requires use acquisition method accounting defines acquirer establishes acquisition date broadens scope transactions events one entity obtains control one businesses statement effective business combinations transactions entered fiscal years beginning december 15 2008 still evaluating impact sfas 141r however adoption statement expected material impact financial position results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” “sfas 160” sfas 160 establishes accounting reporting standards noncontrolling interest subsidiary retained interest gain loss subsidiary deconsolidated statement effective financial statements issued fiscal years beginning december 15 2008 still evaluating impact sfas 160 expect material impact financial position results operations february 2008 fasb issued fasb staff position fas 1572 “fsp fas 1572” fsp fas 1572 permits delay effective date sfas 157 fiscal years beginning november 15 2008 nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis least annually delay intended allow fasb constituents additional time consider effect various implementation issues arisen may arise application sfas 157 march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” “sfas 161” requires additional disclosures objectives using derivative instruments method derivative instruments related hedged items accounted fasb statement 133 related interpretations effect derivative instruments related hedged items financial position financial performance cash flows sfas 161 also requires disclosure fair values derivative instruments gains losses tabular format sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 early adoption encouraged currently assessing impact adoption sfas 161 financial position results operations abovenet inc subsidiaries notes consolidated financial statements millions except share per share information april 2008 fasb issued eitf 0705 “determining whether instrument embedded feature indexed entity’s stock” “eitf 0705” eitf 0705 provides guidance determining types instruments embedded features instrument held reporting entity considered indexed stock purpose evaluating first criteria scope exception paragraph 11 sfas 133 eitf 0705 effective financial statements issued fiscal years beginning december 15 2008 early application permitted still evaluating effect eitf 0705 financial position results operations june 2008 fasb issued eitf 083 “accounting lessees maintenance deposits lease agreements” “eitf 083” eitf 083 mandates nonrefundable maintenance deposits accounted deposit underlying maintenance performed deposit expensed capitalized accordance lessee’s maintenance accounting policy eitf 083 effective fiscal years interim periods within fiscal years beginning december 15 2008 expect adoption material impact financial position results operations june 2008 fasb issued eitf 0361 “determining whether instruments granted sharedbased payment transactions participating securities” “eitf 0361” eitf 0361 provides unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities shall included computation earnings per share pursuant twoclass method eitf 0361 effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years upon adoption company required retrospectively adjust earnings per share date including amounts related interim periods summaries earnings selected financial data conform provisions eitf 0361 currently evaluating impact adoption eitf 0361 financial position results operations reclassifications certain reclassifications made 2005 consolidated financial statements conform classifications used 2006 consolidated financial statements note 3 prepaid expenses current assets prepaid expenses current assets continuing operations consist following abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 4 property equipment property equipment continuing operations consist following included network infrastructure assets certain assets equipment including transmission equipment held inventory future use original cost adjusted provision equipment impairment 22 605 466 accumulated depreciation 490 289 net carrying values 115 177 december 31 2007 2006 respectively depreciation amortization expense related property equipment continuing operations years ended december 31 2007 2006 2005 approximately 475 472 431 respectively fourth quarter 2006 company sold certain assets net certain liabilities related data center facilities located new york california virginia cash proceeds 431 sold stock abovenet uk limited uk company “auk” operated london data center price £135 british pounds sterling 26 usd £0675 british pounds sterling approximately 13 usd measured date receipt received closing £0675 british pounds sterling approximately 13 usd measured date receipt received january 2007 included accounts receivable net consolidated balance sheet december 31 2006 operations data center london uk accounted discontinued operation periods presented sale legal entity discreet financial information company recognized aggregate gain sale data centers amounting 521 280 60 represented reversal deferred fair value rent liability sfas 13 obligations respectively associated related properties gain summarized follows note 5 accrued expenses accrued expenses consist following abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 6 income taxes income taxes provided based upon tax laws rates countries operations conducted income earned provision income taxes years ended december 31 2007 2006 2005 follows deferred income taxes result temporary differences financial reporting basis tax basis assets liabilities amounts shown following table represent total differences company’s consolidated tax return basis assets liabilities corresponding basis assets liabilities financial reporting following summary significant items giving rise components company’s deferred tax assets liabilities company adopted provisions interpretation 48 january 1 2007 december 31 2007 company’s tax positions highly certain tax positions accordingly adjustments required consolidated financial statements periods presented company established valuation allowance related deferred tax assets based current years’ results operations anticipated profit levels future periods since likely deferred tax assets realized future connection company’s emergence bankruptcy company realized substantial cancellation debt income “codi” income taxable us income tax purposes codi resulted company’s reorganization bankruptcy code however us income tax reporting purposes company required reduce certain tax attributes including net operating loss carryforwards b capital losses c certain tax credit carryforwards tax basis assets total amount equal gain extinguishment debt reorganization company effective date constituted ownership change section 382 internal revenue code use company’s nol’s capital losses tax credit carryforwards reduced pursuant provisions certain subsequently recognized “builtin” losses deductions existing prior ownership change subject overall annual limitation december 31 2007 company domestic nol carryforwards 6869 foreign nol carryforwards 1845 certain nol carryforwards begin expire 2024 company’s annual limitation ownership change rules us 81 accordingly company estimates 2020 domestic nol carryforwards may subject limitation united states internal revenue code section 382 additionally approximately 1850 future depreciation deductions subject limitation ownership change company subsidiaries’ income tax returns routinely examined various tax authorities statute limitations open respect tax years 2001 2006 statute limitations years begin expire 2011 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 7 discontinued operations dispositions march 2004 company sold 100 issued outstanding stock abovenet communications’ gmbh operated austria unaffiliated third parties nominal amount company recognized loss 04 upon disposition june 2004 company sold 100 issued outstanding stock metromedia fiber network italia srl unaffiliated third party nominal amount company recognized gain 02 upon disposition march 2005 company liquidated mfn international cv operated netherlands company written interest mfn international cv estimated fair value fresh start date accordingly gain loss recognized upon disposition april 2005 company liquidated metromedia fiber network switzerland gmbh company written interest metromedia fiber network switzerland gmbh estimated fair value fresh start date accordingly gain loss recognized upon disposition june 2005 company liquidated metromedia fiber network belgium bvba gain loss recognized upon disposition august 2005 company liquidated metromedia fiber network services gmbh austria gain loss recognized upon disposition january 2006 company liquidated sitesmith netherlands bv gain loss recognized upon disposition february 2006 company liquidated metromedia fiber network sweden ab gain loss recognized upon disposition november 2006 company sold 100 issued outstanding stock auk aggregate purchase price £135 british pounds sterling 26 usd £0675 british pounds sterling approximately 13 usd measured date receipt received closing £0675 british pounds sterling approximately 13 usd measured date receipt received january 2007 included accounts receivable net consolidated balance sheet december 31 2006 company recorded gain 39 respect sale auk generated operating loss 09 2006 prior sale following summary results discontinued operations described late 2007 company liquidated metromedia fiber network bv additionally late 2007 company commenced liquidation metromedia fiber network services ltd sitesmith ltd company recognized reversal currency translation adjustments 103 income consolidated statement operations year ended december 31 2007 note 8 income loss per common share basic income loss per common share computed net income net loss divided weighted average number common shares outstanding period total weighted average shares utilized computing basic net income loss per common share 10751921 10669365 10596244 years ended december 31 2007 2006 2005 respectively total weighted average shares utilized computing diluted net income loss per common share 12184139 11794279 10596244 years ended december 31 2007 2006 2005 respectively dilutive securities include options purchase shares common stock restricted stock units stock warrants due company’s net loss potentially dilutive securities totaling 565240 year ended december 31 2005 excluded calculation income per share antidilutive years ended december 31 2007 2006 potentially dilutive securities excluded calculation income per common share abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 9 stockbased compensation stockbased compensation expense period relates sharebased awards granted company’s 2003 incentive stock option stock grant plan “2003 stock incentive plan” reflect awards outstanding period including awards granted prior period 2003 stock incentive plan became effective september 8 2003 stock incentive plan company authorized issue aggregate sharebased awards 1064956 common shares employees directors consultants selected participate december 31 2007 company 11293 shares available future awards 2003 stock incentive plan stockbased compensation recorded selling general administrative expenses stock options year ended december 31 2007 company awarded options purchase 21325 shares common stock ten year life date grant vest first anniversary date grant per share exercise prices 5600 13475 options 7300 7850 options year ended december 31 2006 company awarded options purchase 26800 shares common stock options purchase 7500 shares ten year life date grant vest first anniversary date grant per share exercise price 4850 options purchase 19300 shares vest one year period date grant ten year life per share exercise prices 4000 11700 shares 5375 7450 shares 5900 150 shares year ended december 31 2005 company awarded options purchase 111000 shares common stock options purchase 91330 shares ten year life vest ratably first second third anniversaries date grant exercise prices ranging 2500 per share 3300 per share options purchase 19670 shares vest vested pursuant certain previous grants ten year life exercise price 2500 per share company recognized noncash stockbased compensation expense amounting 17 15 22 years ended december 31 2007 2006 2005 respectively respect stock options granted effect decreasing net income 016 per basic common share 014 per diluted common share year ended december 31 2007 014 per basic common share 013 per diluted common share year ended december 31 2006 effect increasing net loss 021per basic diluted common share year ended december 31 2005 options subject forfeiture specified respective award agreement information regarding options purchase common stock granted outstanding years ended december 31 2007 2006 2005 summarized fair value vested options purchase common stock follows december 31 aggregate fair value options purchase shares common stock vested years ended december 31 2007 2006 2005 14 62059 19 118338 22 142038 respectively information regarding fair value vested unvested options purchase common stock follows abovenet inc subsidiaries notes consolidated financial statements millions except share per share information december 31 2007 company 09 unearned stockbased compensation expense associated options purchase shares common stock expected incurred 2008 2009 november 2005 fasb issued fasb staff position sfas 123r3 “transition election related accounting tax effects sharebased payment awards” alternative transition method includes simplified methods establish beginning balance additional paidin capital pool “apic pool” related tax effects employee sharebased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee sharebased compensation awards outstanding upon adoption sfas 123r company adopted method determined apic pool zero following table summarizes information concerning outstanding exercisable options purchase common stock december 31 2007 restricted stock units years ended december 31 2007 2006 2005 company awarded 161500 32000 26000 respectively restricted stock units employees company 2003 stock incentive plan 105000 restricted stock units granted 2007 scheduled vest one year anniversary date grant 56500 restricted stock units granted 2007 scheduled vest ratably first second anniversaries date grant restricted stock units granted 2006 12000 scheduled vest ratably first four anniversaries date grant 20000 scheduled vest upon completion company’s audited financial statements year ended december 31 2006 february 29 2008 26000 restricted stock units granted 2005 scheduled vest ratably first four anniversaries date grant restricted stock units require company deliver fixed number shares employees fixed date shares vested restricted stock units subject full partial vesting event employee’s employment terminated without cause vest fully event employee’s death issuance vested shares related restricted stock units subject certain restrictions provided 2003 stock incentive plan compliant section 409a internal revenue code pursuant restricted stock unit agreements company executives time delivery stock underlying restricted stock units may sold executive reasons set forth agreements executive’s request company obligated purchase sufficient shares stock satisfy executive’s minimum tax withholding obligations 2007 2005 company issued 310719 41122 common shares respectively vested restricted stock units 129816 15277 shares respectively purchased company shares issued pursuant restricted stock units 2006 company records stockbased compensation expense fair value restricted stock units awarded grant date ratably vesting period company recognized noncash stockbased compensation expense amounting 65 24 18 years ended december 31 2007 2006 2005 respectively respect restricted stock units awarded effect decreasing net income 060 per basic common share 053 per diluted common share year ended december 31 2007 022 per basic common share 020 per diluted common share year ended december 31 2006 increasing net loss 017 per basic diluted common share year ended december 31 2005 following schedule summarizes activity company’s “restricted stock units” periods presented abovenet inc subsidiaries notes consolidated financial statements millions except share per share information december 31 2007 company 97 unearned stockbased compensation expense associated vesting restricted stock unit awards 78 consideration forfeitures expected recognized 2008 balance expected recognized 2009 stock warrants plan reorganization unsecured note holder claims general secured claims settled part distribution fiveyear warrants purchase 709459 shares common stock 2000 per share sevenyear warrants purchase 834658 shares common stock 2400 per share see note 1 following table summarizes activity company’s warrants periods presented terms five year seven year warrant agreements collectively “warrant agreements” market price common stock defined respective warrant agreements 60 days prior expiration date respective warrants greater warrant exercise price company required give warrant holder notice warrant expiration date warrants deemed exercised pursuant net exercise provisions respective warrant agreements “net exercise” unless warrant holder elected written notice exercise warrants net exercise shares issued warrant holders reduced number shares necessary cover aggregate exercise price shares valuing shares current market price defined warrant agreements fractional shares otherwise issuable paid cash expiration date five year warrants september 8 2008 company exercised unexercised five year warrants pursuant net exercise see note 16 “subsequent events exercise warrants” note 10 longterm debt obligation capital lease company obligated capital lease certain indefeasible rightsofuse included network infrastructure assets property equipment net december 31 2007 future minimum payments capital lease follows current portion obligation capital lease reported within “accrued expenses” longterm portion reported within “other longterm liabilities” abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 11 income consists following 1 represents reversal certain tax liabilities resulting primarily settlements certain taxing authorities 2 represents reversal certain tax liabilities resulting either favorable ruling jurisdiction determining company subject certain transaction related taxes accrued prior years determination company respect certain jurisdictions taxes accrued prior years apply company’s operations 3 represents settlement contractual obligation accrued prior years note 12 commitments contingencies company commitments various noncancelable operating leases office equipment space equipment rentals rightofway contracts building access franchise fees network capacity contracts terms expiring 2026 company various sublet arrangements third parties estimated future payments net receipts respect contractual obligations follows expenses incurred described obligations years ended december 31 2007 2006 2005 continuing operations 305 333 respectively net sublease receipts 19 20 19 years ended december 31 2007 2006 2005 respectively rental expense reflected also net amortization deferred fair value rent liability represents difference present value contractual obligations leases place fresh start date fair market value obligations company recorded 16 42 51 years ended december 31 2007 2006 2005 respectively reductions rent expense continuing operations december 31 2007 2006 deferred fair value rent liability 40 55 respectively 15 17 respectively included accrued expenses 25 38 respectively included longterm liabilities related consolidated balance sheets december 31 2007 company committed construct approximately 260 related network infrastructure company maintains employment agreements key executives agreements include among things certain change control severance provisions see note 16 “subsequent events employment contracts” abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 13 litigation company subject various legal proceedings claims arise normal course business company evaluates among things degree probability unfavorable outcome reasonably estimates amount potential loss plan reorganization became effective september 8 2003 “plan reorganization” “plan” essentially claims company’s us subsidiaries arose prior confirmation plan august 21 2003 discharged accordance plan reorganization summary treatment claims bankruptcy proceeding provided note 1 global voice networks limited “gvn” abovenet communications uk limited company’s uk operating subsidiary “acuk” party duct purchase fiber lease agreement “duct purchase agreement” eu networks fiber uk ltd formerly gvn dispute parties arose regarding extent network duct sold fiber leased gvn pursuant duct purchase agreement result dispute 2006 gvn filed claim acuk high court justice london seeking ownership disputed portion network duct right lease certain fiber associated damages december 2007 court ruled favor gvn respect disputed duct fiber early february 2008 acuk delivered disputed duct fiber gvn additionally original ruling company also required construct balance disputed duct fiber deliver gvn pursuant schedule ordered court additional portions disputed duct fiber constructed subsequently delivered portions scheduled delivery company also certain repair maintenance obligations must perform respect duct gvn also seeking enforce option requiring acuk construct 180 200 chambers gvn along network june 2008 company paid 30 damages pursuant liability trial additionally company reimbursed gvn 18 legal fees additionally company’s legal fees aggregated 24 company incurred obligated costs totaling 27 build additional network early august 2008 company reached settlement agreement company paid gvn 06 agreed provide additional construction duct estimated cost 12 provide gvn limited additional access acuk’s network gvn acuk provided mutual releases claims including acuk’s repair obligation chamber construction obligations discussed recorded loss litigation 117 december 31 2007 08 paid 2007 109 included accrued expenses consolidated balance sheet december 31 2007 sbc telecom inc “sbc” company party fiber lease agreement sbc subsidiary att entered may 2000 company believed sbc obligated agreement lease 40000 fiber miles reducible 30000 certain circumstances term 20 years price set forth agreement subject adjustment based upon number fiber miles leased higher volume fiber miles leased lower price per fiber mile sbc disagreed interpretation agreement 2003 issue litigated bankruptcy court southern district court new york “bankruptcy court” november 2003 bankruptcy court agreed company’s interpretation agreement decision sbc appeal subsequently sbc also alleged company breach obligations agreement therefore company unable assume agreement upon emergence bankruptcy company disagreed sbc’s position however december 2005 bankruptcy court agreed sbc 2006 company appealed certain aspects decision district court southern district new york district court denied companys appeal march 2007 company filed notice appeal second circuit court appeals seeking relief respect bankruptcy court’s determination company default agreement sbc term contract sbc paid company higher rate per fiber mile reflect reduced volume services sbc believes obligated take accordance understanding fiber lease agreement however financial statement purposes company billed recorded revenue based lower amount per fiber mile fiber miles accepted sbc see note 16 “subsequent events litigation” discussion sec investigation sec initiated formal investigation mfn prebankruptcy emergence predecessor company june 2002 december 15 2006 company received “wells” notice sec staff connection investigation indicating sec staff considering recommending sec bring civil injunctive action company alleging company violated various provisions federal securities laws response wells notice company provided sec written submission setting forth reasons company believed civil injunctive action authorized sec march 19 2007 company received notice sec staff stating investigation mfn terminated enforcement action recommended sec notice provided company guidelines final paragraph securities act release 5310 states among things “such notice must way construed indicating party exonerated action may ultimately result staff’s investigation particular matter communication means staff completed investigation time enforcement action recommended commission” note 14 related party transactions member company’s board directors also cochairman chief executive officer cofounder telecommunications company sold services andor material normal course business telecommunications company amount 03 2007 01 2006 01 2005 respectively amounts outstanding december 31 2007 2006 activity parties conducted independent arms length transactions consistent similar terms circumstances customers vendors accounts two parties settled accordance invoice terms abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 15 segment reporting sfas 131 “disclosures segments enterprise related information” defines operating segments components enterprise separate financial information available evaluated regularly company’s chief operating decision maker deciding assess performance allocate resources company operates business one operating segment geographic information revenue based location entity providing service longlived assets based physical location assets following table presents revenue longlived asset information geographic areas note 16 subsequent events employment contract termination march 4 2008 employment contract michael doris company’s former senior vice president chief financial officer modified terminated pursuant modification company agreed pay mr doris upon termination 03 ii salary bonuses earned yet paid iii accrued unused paid time days iv health welfare benefits eighteen 18 months execute deliver consulting agreement mr doris consulting agreement provides exchange mr doris’ provision consulting services company period nine months mr doris shall paid 03 annual amount pro rated per week nine months ii extent previously paid mr doris’ employment agreement bonus 005 “2006 filing bonus” within ten 10 days company completes files sec form 10k respect company’s fiscal year ended december 31 2006 b bonus 005 “2007 filing bonus” within ten 10 days company completes files sec either form 10k form 8k respect company’s fiscal year ended december 31 2007 event 2006 filing bonus paid time 2007 filing bonus paid 2006 filing bonus shall paid time well addition mr doris’ stock unit agreement dated august 7 2007 amended provide shares underlying 10000 restricted stock units became vested upon termination without cause shall delivered mr doris january 5 2009 ii company shall repurchase market price number shares required meet company’s estimate mr doris’ federal state income taxes due respect delivery restricted stock units aggregate value benefits delivered mr doris 16 recognized selling general administrative expenses financial statement purposes quarter ended march 31 2008 bank financing february 29 2008 company excluding certain foreign subsidiaries obtained 60 senior secured credit facility “credit facility” consisting 18 revolving credit facility “revolver” 42 term loan facility “term loan” credit facility secured substantially company’s assets term loan comprised 24 advanced closing 18 originally could drawn within nine months closing company’s option “delayed draw” september 2008 delayed draw option originally scheduled expire november 25 2008 extended june 30 2009 certain conditions credit facility may increased 100 option company upon receipt additional commitments lenders new third party lenders credit facility used general corporate purposes capital investment revolver term loan term five years closing date credit facility company paid nonrefundable work fee 01 lenders credited upfront fee 15 09 total amount credit facility paid closing paid 03 unaffiliated third party financial advisors assisted company additionally company liable unused commitment fee 050 per annum 075 per annum depending utilization credit facility interest accrue libor 30 60 90 180 day rates announced base rate administrative agent company’s option plus applicable margins defined additionally company required maintain unrestricted cash balance times least 20 february 29 2008 company received proceeds 24 term loan required provisions term loan initial advance base rate interest plus margin 825 february 29 2008 converted libor plus 325 per annum 626 march 5 2008 september 26 2008 executed joinder agreement credit facility adds additional lender increases amount credit facility 90 effective october 1 2008 subject terms joinder agreement including payment 045 fee closing 01 advisory fee availability revolver increased 27 term loan increased 36 available delayed draw term loan increased 27 effective august 4 2008 company entered swap arrangement fixed borrowing costs respect 24 outstanding three years 365 plus applicable margin 325 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information adoption 2008 equity incentive plan august 29 2008 board directors company approved company’s 2008 equity incentive plan “2008 plan” 2008 plan administered company’s compensation committee unless otherwise determined board directors employee officer director consultant company subsidiary company selected compensation committee eligible receive awards 2008 plan stock options restricted stock restricted unrestricted stock units stock appreciation rights may awarded eligible participants stand alone combination tandem basis 750000 shares company common stock may issued pursuant awards granted 2008 plan accordance terms number shares available grant terms outstanding grants subject adjustment stock splits stock dividends capital adjustments provided 2008 plan september 8 2008 company granted certain employees aggregate 345100 restricted stock units 190000 vest 30 one year 10 two years 60 three years 86000 vest ratably first second third anniversaries date grant 48100 vest first anniversary date grant additionally william g laperch president chief executive officer company may earn 21000 restricted stock units vest ratably 2010 2011 2012 based upon certain performance targets fiscal years 2009 2010 2011 additionally company awarded options purchase 1000 shares common stock five outside directors options exercise price 6000 per share ten year life vest first anniversary date grant employment contracts september 2008 company entered new employment agreements certain senior officers “executive officers” employment agreements term ends november 16 2011 automatic extensions additional oneyear period unless cancelled executive company writing least 120 days prior end applicable term contracts provides base rate compensation may increase cannot decrease term contract additionally contract provides incentive cash bonus targets executive officers generally entitled benefits offered company’s executives employment contracts provides payment severance provision certain benefits connection certain termination events employment contracts also include confidentiality noncompete assignment intellectual property covenants executive officers litigation may 2008 telekenex inc “telekenex” customer filed complaint company san francisco county superior court alleging company failed deliver telekenex fiber optic capacity certain ten year contract telekenex company telekenex asserts complaint entitled fiber optic capacity unspecified damages september 29 2008 signed settlement agreement telekenex pursuant agreed pay 035 million provide telekenex additional fiber access order resolve dispute pursuant settlement agreement parties released claims related dispute telekenex required dismiss complaint july 2008 company sbc entered “stipulation release agreement” new service agreement executed period july 10 2008 december 31 2010 new service agreement sbc agreed continue purchase existing services current rate services sbc fixed minimum payment commitment declines contract term sbc may cancel service time subject notice provisions subject payment commitment payment commitment may satisfied existing services sbc may order new services additionally may 2000 fiber lease agreement sbc terminated company sbc released claims related agreement difference amount paid sbc amount recognized company revenue aggregated 35 july 10 2008 32 december 31 2007 recorded settlement revenue third quarter 2008 exercise warrants terms warrant agreements described note 2 “basis presentation significant accounting policies stock warrants” note 9 “stockbased compensation stock warrants” market price common stock defined respective warrant agreements 60 days prior expiration date respective warrants greater warrant exercise price company required give warrant holder notice warrant expiration date warrants would deemed exercised pursuant net exercise provisions respective warrant agreements “net exercise” unless warrant holder elected written notice exercise warrants net exercise shares issued warrant holders reduced number shares necessary cover aggregate exercise price shares valuing shares current market price defined warrant agreements fractional shares otherwise issuable paid cash expiration date five year warrants september 8 2008 accordingly five year warrants purchase 158874 shares common stock deemed exercised pursuant net exercise 106456 shares issued warrant holders 52418 shares returned treasury 4295 paid recipients fractional shares addition five year warrants purchase 25 shares common stock cancelled accordance instructions warrant holders asset abandonment 2006 company acquired software enterprise resource planning system “erp system” expected company’s information technology platform capitalized costs totaling 23 september 2008 management decided abandon implementation erp system investigate alternatives including enhancements upgrades current systems accordingly company take impairment charge 23 respect abandonment quarter ended september 30 2008 additionally company accrued maintenance fees 01 year ended december 31 2007 paid abovenet inc subsidiaries notes consolidated financial statements millions except share per share information rights agreement amendment august 3 2006 company entered rights agreement “rights agreement” american stock transfer trust company rights agent following description rights agreement purport complete qualified entirety reference rights agreement included exhibit 41 company’s current report form 8k filed sec august 4 2006 connection rights agreement company’s board directors declared dividend distribution one preferred share purchase right “right” outstanding share company’s common stock par value 001 per share “common shares” dividend paid august 7 2006 “record date” stockholders record date right entitles registered holder purchase company one onehundredth share series junior participating preferred stock par value 001 per share “preferred shares” price 10000 per one onehundredth preferred share “purchase price” subject adjustment one onehundredth share preferred shares designations powers preferences rights qualifications limitations restrictions make value approximately equal value common share earlier occur date public announcement person entity group affiliated associated persons acquired beneficial ownership 15 outstanding common shares “acquiring person” ii 10 business days later date may determined action company’s board directors prior time person entity becomes acquiring person following commencement announcement intention commence tender offer exchange offer consummation would result person entity becoming acquiring person earlier dates called “distribution date” rights evidenced respect common share certificates outstanding record date common share certificate discussed definition “acquiring person” amended august 2008 rights exercisable distribution date rights expire august 7 2009 unless rights earlier redeemed exchanged company number outstanding rights number one onehundredths preferred share issuable upon exercise right also subject adjustment event stock split common shares stock dividend common shares payable common shares subdivisions consolidation combinations common shares occurring case prior distribution date purchase price payable number preferred shares securities property issuable upon exercise rights subject adjustment time prevent dilution described rights agreement preferred shares purchasable upon exercise rights redeemable preferred share entitled minimum preferential quarterly dividend payment 100 entitled aggregate dividend times dividend declared per common share event liquidation holders preferred shares would entitled minimum preferential liquidation payment 10000 per share would entitled receive aggregate payment equal 100 times payment made per common share preferred share 100 votes voting together common shares finally event merger consolidation transaction common shares exchanged preferred share entitled receive 100 times amount consideration received per common share rights protected customary antidilution provisions preferred shares would rank junior series company’s preferred stock event person group affiliated associated persons becomes acquiring person proper provision made holder right rights beneficially owned acquiring person associates affiliates thereafter void 60day period right receive upon exercise number common shares market value two times exercise price right number shares cannot authorized company may issue preferred shares cash debt stock combination thereof exchange rights right terminate 60 days date rights become nonredeemable described unless injunction similar obstacle exercise rights event right terminate 60 days date rights become exercisable time prior earlier time person become acquiring person ii final expiration date company may redeem less outstanding rights price 001 per right “redemption price” rights may also redeemed certain times described rights agreement immediately upon redemption rights right exercise rights terminate right holders rights receive redemption price terms rights may amended company’s board directors without consent holders rights except time rights distributed amendment may adversely affect interest holders rights interests acquiring person affiliates associates right exercised holder thereof rights stockholder company including without limitation right vote receive dividends august 7 2008 company entered amendment “rights agreement amendment” rights agreement rights agreement amendment filed exhibit 47 company’s current report form 8k filed sec august 12 2008 also august 7 2008 company entered standstill agreement jgd management corp york capital management lp certain affiliated funds holding company securities parties thereto collectively “york group” rights agreement amendment amends rights agreement among things add exception definition “acquiring person” defined rights agreement excluded stockholder add definition “excluded stockholder” “excluded stockholder” defined mean individually identified members york group funds accounts managed york capital management lp hold company securities respective affiliates associates provided however except otherwise provided definition “acquiring person” none members york group affiliates associates excluded stockholder party individually collectively become beneficial owner 20 outstanding company common stock without prior written consent company abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 17 quarterly financial data unaudited following tables present unaudited quarterly results years ended december 31 2007 2006 includes provision equipment impairment 22 fluctuations revenue reported period impacted termination revenue recognized quarter follows abovenet inc subsidiaries notes consolidated financial statements millions except share per share information operating results fourth quarter 2006 reflect gain sales domestic data centers unaffiliated third parties three sold october 2006 one sold november 2006 fourth quarter 2006 also includes gain sale auk november 15 2006 auk operated company’s data center london accounted discontinued operation periods presented revenue lower fourth quarter 2006 prior quarters 2006 due sale domestic data centers additionally quarterly revenue includes termination revenue follows selling general administrative expenses lower quarter ended september 30 2006 due primarily decrease commission expenses audit fees item 9 item 8 financial statements supplementary data abovenet inc subsidiaries index consolidated financial statements report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audited accompanying consolidated balance sheets abovenet inc “company” december 31 2009 2008 related consolidated statements operations shareholders’ equity cash flows comprehensive income three years period ended december 31 2009 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position abovenet inc december 31 2009 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness abovenet inc’s internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organization treadway commission coso report dated march 16 2010 expressed unqualified opinion thereon bdo seidman llp new york ny march 16 2010 abovenet inc subsidiaries consolidated balance sheets millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements operations millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements shareholders’ equity millions except share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements comprehensive income millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 1 background organization bankruptcy filing reorganization may 20 2002 metromedia fiber network inc “mfn” substantially domestic subsidiaries “debtor” collectively “debtors” filed voluntary petitions reorganization chapter 11 united states bankruptcy code “bankruptcy code” united states bankruptcy court southern district new york “bankruptcy court” debtors remained possession assets properties continued operate businesses manage properties debtorsinpossession jurisdiction bankruptcy court july 1 2003 debtors filed amended plan reorganization “plan reorganization” amended disclosure statement “disclosure statement” july 2 2003 bankruptcy court approved disclosure statement related voting procedures august 21 2003 bankruptcy court confirmed plan reorganization debtors emerged proceedings chapter 11 bankruptcy code september 8 2003 “effective date” accordance plan reorganization mfn changed name abovenet inc together subsidiaries “company” august 29 2003 equity interests mfn received distribution plan reorganization equity securities mfn cancelled business company facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure colocation services communications carriers corporate government customers principally united states “us” united kingdom “uk” note 2 basis presentation significant accounting policies summary basis presentation significant accounting policies followed preparation consolidated financial statements follows stock split august 3 2009 board directors company authorized twoforone common stock split effected form 100 stock dividend distributed september 3 2009 shareholder record august 20 2009 received one additional share common stock share common stock held date share per share information periods presented including warrants options purchase common shares restricted stock units warrant option exercise prices shares reserved company’s 2003 incentive stock option stock unit grant plan “2003 plan” company’s 2008 equity incentive plan “2008 plan” weighted average fair value options granted common stock additional paidin capital accounts consolidated balance sheets consolidated statement shareholders’ equity retroactively adjusted reflect twoforone stock split abovenet inc subsidiaries notes consolidated financial statements millions except share per share information basis presentation use estimates accompanying consolidated financial statements prepared accordance accounting principles generally accepted united states america “us gaap” pursuant rules regulations securities exchange commission “sec” consolidated financial statements include accounts company applicable opinion management accompanying consolidated financial statements reflect adjustments considered necessary fair presentation company’s results december 31 2009 2008 years ended december 31 2009 2008 2007 preparation consolidated financial statements conformity us gaap requires management make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements disclosure contingent assets liabilities consolidated financial statements accompanying notes reported amounts revenue expenses periods presented estimates used accounting certain items accounts receivable allowances property taxes transaction taxes deferred taxes estimates company makes based historical factors current circumstances experience judgment company’s management company evaluates assumptions estimates ongoing basis may employ outside experts assist company’s evaluations actual amounts results could differ estimates due subsequent events could material effect company’s financial statements covering future periods fresh start accounting september 8 2003 company authorized 10000000 shares preferred stock 001 par value 30000000 shares common stock 001 par value holders common stock entitled one vote issued outstanding share entitled receive dividends subject rights holders preferred stock declared board directors preferred stock may issued time one classes series classes series shall distributive designation determined board directors 2006 company reserved issuance 10000000 shares authorized preferred stock described 500000 shares 001 par value junior preferred stock connection adoption shareholders’ rights plan event liquidation holders common stock entitled receive assets company available distribution payments creditors holders preferred stock 2003 company issued 17500000 shares common stock 17498276 delivered 1724 shares determined undeliverable cancelled rights purchase 3338420 shares common stock price 1497715 per share rights offering rights purchase 3337984 shares common stock exercised five year stock purchase warrants purchase 1418918 shares common stock exercisable price 1000 per share seven year stock purchase warrants purchase 1669316 shares common stock exercisable price 1200 per share addition 2129912 shares common stock originally reserved issuance company’s 2003 plan see note 12 “stockbased compensation” abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company’s emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 company accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires company allocate reorganization value assets liabilities based upon estimated fair values accordance statement position 907 “financial reporting entities reorganization bankruptcy code” known financial accounting standards board accounting standards codification “fasb asc” 85210 company developed set financial projections utilized expert assist company estimating fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries company 3 calculation enterprise value based upon future cash flows company’s projections adopting fresh start accounting resulted material adjustments historical carrying values company’s assets liabilities reorganization value allocated company assets liabilities based upon fair values company engaged independent appraiser assist company determining fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination comprehensive loss accumulated deficit accounts principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries consolidation generally required investments 50 outstanding voting stock investee except control held majority owner significant intercompany accounts transactions eliminated consolidation revenue recognition company follows sec staff accounting bulletin sab 101 “revenue recognition financial statements” known fasb asc 60510 amended sec sab 104 “revenue recognition” also known fasb asc 60510 revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income fixed contract term prior october 1 2009 company generally amortized revenue related installation services straightline basis contracted customer relationship two twenty years fourth quarter 2009 company completed study historic customer relationship period result commencing october 1 2009 company began amortizing revenue related installation services straightline basis generally estimated customer relationship period generally ranging three twenty years abovenet inc subsidiaries notes consolidated financial statements millions except share per share information contract termination revenue recognized customer discontinues service prior end contract period company previously received consideration revenue recognition deferred contract termination revenue also recognized customers made early termination payments company settle contractually committed purchase amounts customer longer expects meet company renegotiates discontinues contract customer result longer obligated provide services consideration previously received revenue recognition deferred 2009 2008 2007 company included receipts bankruptcy claim settlements former customers contract termination revenue contract termination revenue reported together service revenue amounted 39 154 85 2009 2008 2007 respectively nonmonetary transactions company may exchange capacity service providers december 2004 fasb issued statement financial accounting standards “sfas” 153 “exchanges nonmonetary assets amendment apb opinion 29” “sfas 153” known fasb asc 84510 sfas 153 amends accounting principles board opinion 29 “accounting nonmonetary transactions” “apb 29” also known fasb asc 84510 eliminate exception nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance sfas 153 applied prospectively nonmonetary exchanges occurring fiscal periods beginning june 15 2005 company’s adoption sfas 153 july 1 2005 material effect consolidated financial position results operations company prior company’s adoption sfas 153 nonmonetary transactions accounted accordance apb 29 exchange similar capacity recorded historical carryover basis dissimilar capacity accounted fair market value recognition gain loss gains losses nonmonetary transactions years ended december 31 2009 2008 2007 operating leases company leases office equipment space maintains equipment rentals rightofway contracts building access fees network capacity various noncancelable operating leases lease agreements expire various dates 2023 subject many cases renewal options provide payment taxes utilities maintenance certain lease agreements contain escalation clauses term lease related scheduled rent increases resulting pass increases operating costs property taxes effect costs changes consumer price indices accordance sfas 13 “accounting leases” known fasb asc 840 company recognizes rent expense straightline basis records liability representing difference straightline rent expense amount payable increase decrease deferred liability leasehold improvements related operating leases amortized lesser economic lives remaining lease term rentfree periods incentives granted certain leases recorded reductions rent expense straightline basis related lease terms cash equivalents restricted cash equivalents purposes consolidated statements cash flows company considers cash banks shortterm highly liquid investments original maturity three months less cash equivalents cash equivalents restricted cash equivalents stated cost approximates fair value restricted cash equivalents comprised amounts secure outstanding letters credit issued favor various third parties abovenet inc subsidiaries notes consolidated financial statements millions except share per share information accounts receivable allowance doubtful accounts sales credits accounts receivable customer obligations services sold customers normal trade terms company’s customers primarily communications carriers corporate enterprise government customers located primarily us uk company performs periodic credit evaluations customers’ financial condition company provides allowances doubtful accounts sales credits provisions doubtful accounts recorded selling general administrative expenses allowances sales credits recorded reductions revenue adequacy reserves evaluated utilizing several factors including length time receivable past due changes customer’s creditworthiness customer’s payment history length customer’s relationship company current industry trends current economic climate property equipment property equipment owned effective date stated estimated fair values effective date based company’s reorganization value net accumulated depreciation amortization incurred since effective date purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress part network infrastructure assets described included property equipment respective balance sheets december 31 2009 december 31 2008 company 269 148 respectively construction progress certain internal direct labor costs constructing installing property equipment capitalized direct labor determined based upon core group field engineers ip engineers reflects capitalized salary plus related benefits based upon allocation time capitalized noncapitalized projects individuals’ salaries considered costs directly associated construction certain infrastructure customer installations salaries related benefits nonengineers supporting staff part engineering departments considered part pool subject capitalization capitalized direct labor amounted 114 107 86 years ended december 31 2009 2008 2007 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease estimated useful lives company’s property equipment follows property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income abovenet inc subsidiaries notes consolidated financial statements millions except share per share information time company required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances company fully depreciates remaining carrying value network infrastructure removed rendered unusable capitalizes new fiber associated construction costs relocation placed service reduced reimbursements received costs company capitalized relocation costs amounting 31 26 22 years ended december 31 2009 2008 2007 respectively company fully depreciated remaining carrying value network infrastructure rendered unusable original cost basis totaled 03 02 net book value basis years ended december 31 2009 2008 2007 extent relocation requires movement existing network infrastructure another location related costs included results operations accordance sfas 34 “capitalization interest cost” known fasb asc 83520 interest certain construction projects would capitalized amounts considered immaterial accordingly amounts capitalized years ended december 31 2009 2008 2007 accordance sfas 144 “accounting impairment disposal longlived assets” known fasb asc 3601035 company periodically evaluates recoverability longlived assets evaluates assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value asset company considers various factors determine impairment test necessary factors include consideration overall economic climate technological advances respect equipment strategy capital planning since june 30 2006 event occurred business environment changed trigger impairment test assets revenue service operations company also considers removal assets network triggering event performing impairment test item removed service unless redeployed may little future cash flows related company performed annual physical counts assets revenue service operations eg inventory primarily spare parts september 30 2009 2008 assistance valuation report assets inventory prepared independent third party basis consistent sfas 157 “fair value measurements” known fasb asc 82010 pursuant fasb asc 3601035 company determined fair value certain assets less carrying value thus recorded provision equipment impairment 04 22 years ended december 31 2009 2008 2007 respectively company also recorded provision equipment impairment 08 year ended december 31 2009 record loss value certain equipment eventually sold unaffiliated third party see note 6 “change estimate” treasury stock treasury stock accounted cost method asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” known fasb asc 41020 company recognizes fair value liability asset retirement obligation period incurred reasonable estimate fair value made company asset retirement obligations related decommissioning removal equipment restoration leased facilities removal certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities asset retirement obligations generally recorded “other longterm liabilities” capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 72 71 december 31 2009 2008 respectively 38 39 respectively included “accrued expenses” 34 32 respectively included “other longterm liabilities” dates accretion expense included “interest expense” amounted 03 years ended december 31 2009 2008 02 year ended december 31 2007 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information income taxes company accounts income taxes accordance sfas 109 “accounting income taxes” known fasb asc 740 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases net operating loss tax credit carryforwards tax contingencies deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled evaluation realizability company’s deferred tax assets company reduced valuation allowance 1830 million fourth quarter 2009 see note 8 “income taxes” discussion company subject audit various taxing authorities audits may result proposed assessments ultimate resolution results company owing additional taxes company required establish reserves fasb interpretation 48 “accounting uncertainty income taxes” known fasb asc 74010 company believes uncertainty respect certain positions company may succeed realizing tax benefit company believes tax return positions appropriate supportable local tax law company evaluated tax positions items uncertainty accordance fasb asc 74010 determined tax positions highly certain within meaning fasb asc 74010 company believes estimates assumptions used support evaluation tax benefit realization reasonable accordingly adjustments made consolidated financial statements years ended december 31 2009 2008 provision income taxes income taxes payable deferred income taxes provided accordance liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured applying enacted tax rates laws taxable years differences expected reverse company’s reorganization resulted significantly modified capital structure result applying freshstart accounting accordance fasb asc 85210 effective date fresh start accounting important consequences accounting realization valuation allowances related net deferred tax assets existed effective date arose preemergence periods prior 2009 fresh start accounting required reversal allowances recorded reduction intangible assets exhausted thereafter additional paid capital beginning 2009 accordance sfas141r “business combinations revised” known fasb asc 805 future utilization benefit reduce income tax expense treatment result change liabilities taxing authorities cash flows undistributed earnings company’s foreign subsidiaries considered indefinitely reinvested therefore provision domestic taxes provided thereon upon repatriation earnings form dividends otherwise company would subject domestic income taxes offset part foreign tax credits related income withholding taxes payable various foreign countries determination amount unrecognized deferred domestic income tax liability practicable due complexities associated hypothetical calculations however unrecognized foreign tax credit carryforwards would available reduce portion domestic liability company’s policy recognize interest penalties accrued component operating expense date adoption fasb asc 74010 company accrued interest penalties associated unrecognized income tax benefits interest expense recognized years ended december 31 2009 2008 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information foreign currency translation transactions company’s functional currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive income company’s foreign exchange transaction gains losses generally included “other income expense net” consolidated statements operations stock options september 8 2003 company adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” known fasb asc 71810 sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” also known fasb asc 71810 provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 12 “stockbased compensation” fair value provisions sfas 123 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards company historical basis determining volatility expected life assumptions model due company’s limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period company recognizes related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation company’s plan reorganization outstanding stock options cancelled effective january 1 2006 company adopted sfas 123r “sharebased payment” “sfas 123r” known fasb asc 718 using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 allowed companies estimate forfeitures recognize impact forfeitures occur company recognized impact forfeitures occurred sfas 123 adoption sfas 123r result different accounting treatment material impact company’s consolidated financial statements following assumptions used company calculate weighted average fair value stock options granted options purchase shares common stock granted year ended december 31 2009 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information restricted stock units compensation cost restricted stock unit awards measured based upon quoted closing market price stock date grant compensation cost recognized straightline basis vesting period see note 12 “stockbased compensation” stock warrants connection plan reorganization described note 1 “background organization” company issued holders general unsecured claims part settlement claims five year warrants purchase 1418918 shares common stock exercise price 1000 per share expired september 8 2008 ii seven year warrants purchase 1669316 shares common stock exercise price 1200 per share expiring september 8 2010 stock warrants treated equity upon exercise based upon terms warrant cash received stock warrants purchase shares common stock exercised totaled 725326 1379850 97882 2009 2008 2007 respectively terms five year seven year warrant agreements collectively “warrant agreements” market price common stock defined warrant agreements 60 days prior expiration date respective warrants greater warrant exercise price company required give warrant holder notice warrant expiration date warrants would deemed exercised pursuant net exercise provisions respective warrant agreements “net exercise” unless warrant holder elects written notice exercise warrants net exercise shares issued warrant holders would reduced number shares necessary cover aggregate exercise price shares valuing shares current market price defined warrant agreements fractional shares otherwise issuable would paid cash september 8 2008 expiration date five year warrants required conditions met net exercise total five year warrants purchase 318526 shares common stock deemed exercised pursuant net exercise including warrants purchase 778 shares common stock exercised net exercise basis prior expiration 213432 shares issued warrant holders 105094 shares returned treasury 0004 paid recipients fractional shares addition five year warrants purchase 50 shares common stock cancelled accordance instructions warrant holders 2009 seven year warrants purchase 1816 shares common stock exercised pursuant net exercise seven year warrants purchase 26 shares common stock determined undeliverable cancelled december 31 2009 seven year warrants purchase 858530 shares common stock outstanding abovenet inc subsidiaries notes consolidated financial statements millions except share per share information derivative financial instruments company utilizes interest rate swaps derivative financial instruments “derivatives” mitigate exposure interest rate risk company purchased first interest rate swap august 4 2008 hedge interest rate 24 original principal portion term loan term defined note 3 “note payable” company purchased second interest rate swap november 14 2008 hedge interest rate additional 12 original principal portion term loan provided suntrust bank company accounted derivatives sfas 133 “accounting derivative instruments hedging activities” known fasb asc 815 fasb asc 815 requires derivatives recognized financial statements measured fair value regardless purpose intent holding policy company historically entered derivatives trading purposes speculation based criteria defined fasb asc 815 interest rate swaps considered cash flow hedges 100 effective accordingly changes fair value derivatives recorded period accumulated comprehensive loss changes fair value derivatives reported accumulated comprehensive loss reclassified earnings period earnings impacted variability cash flows hedged item ineffective portion hedges recognized current period earnings unrealized net loss recorded accumulated comprehensive loss december 31 2009 december 31 2008 12 16 respectively interest rate swaps marktomarket value cash flow hedges recorded noncurrent assets longterm liabilities applicable offsetting gains losses accumulated comprehensive loss january 1 2009 company adopted sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” known fasb asc 81510 fasb asc 81510 changes disclosure requirements derivatives hedging activities entities required provide enhanced disclosures entity uses derivatives ii derivatives related hedged items accounted fasb asc 815 iii derivatives related hedged items affect entity’s financial position cash flows company minimizes credit risk relating counterparties derivatives transacting multiple highquality counterparties thereby limiting exposure individual counterparties monitoring financial condition counterparties company enter derivatives trading speculative purposes derivatives recorded company’s consolidated balance sheets fair value accounting gains losses resulting changes fair value derivatives depends use derivative whether qualifies hedge accounting accordance fasb asc 815 december 31 2009 december 31 2008 company’s consolidated balance sheets included net interest rate swap derivative liabilities 12 16 respectively derivatives recorded fair value company’s consolidated balance sheets december 31 2009 december 31 2008 consisted following derivative liabilities two interest rate swap agreements original three year terms considered longterm liabilities financial statement purposes abovenet inc subsidiaries notes consolidated financial statements millions except share per share information interest rate swap agreements notional amounts provide indication extent company’s involvement agreements represent exposure market risk following table shows notional amount outstanding maturity date weighted average receive pay rates interest rate swap agreement december 31 2009 interest expense agreements respective debt instruments hedge recorded net effective interest rate hedged transaction fair value financial instruments company adopted sfas 157 “fair value measurements” known fasb asc 82010 company’s financial assets liabilities effective january 1 2008 pronouncement defines fair value establishes framework measuring fair value requires expanded disclosures fair value measurements fasb asc 82010 emphasizes fair value marketbased measurement entityspecific measurement defines fair value price would received sell asset transfer liability orderly transaction market participants measurement date fasb asc 82010 discusses valuation techniques market approach comparable market prices income approach present value future income cash flow cost approach cost replace service capacity asset replacement cost based upon observable unobservable inputs observable inputs reflect market data obtained independent sources unobservable inputs reflect company’s market assumptions fasb asc 82010 utilizes fair value hierarchy prioritizes inputs fair value measurement techniques three broad levels level 1 observable inputs quoted prices identical assets liabilities active markets level 2 observable inputs quoted prices directly indirectly observable asset liability including quoted prices similar assets liabilities active markets quoted prices similar identical assets liabilities markets active modelderived valuations whose inputs observable whose significant value drivers observable level 3 unobservable inputs reflect reporting entity’s assumptions company’s investment overnight money market institutional funds amounted 1541 819 december 31 2009 december 31 2008 respectively included cash equivalents accompanying balance sheets classified level 1 asset company party two interest rate swaps utilized modify company’s interest rate risk company recorded marktomarket value interest rate swap contracts 12 16 longterm liabilities consolidated balance sheets december 31 2009 december 31 2008 respectively company used third parties value interest rate swap agreements december 31 2009 december 31 2008 well market analysis determine fair value fair value interest rate swap contracts classified level 2 liabilities company’s consolidated balance sheets include following financial instruments shortterm cash investments trade accounts receivable trade accounts payable note payable company believes carrying amounts financial statements approximate fair value financial instruments due relatively short period time origination instruments expected realization interest rates approximate current market rates abovenet inc subsidiaries notes consolidated financial statements millions except share per share information concentration credit risk financial instruments potentially subject company concentration credit risk consist principally temporary cash investments accounts receivable company enter financial instruments trading speculative purposes company’s cash equivalents invested investmentgrade shortterm investment instruments high quality financial institutions company’s trade receivables unsecured geographically dispersed single customer accounts greater 10 consolidated revenue accounts receivable net company performs ongoing credit evaluations customers’ financial condition allowance noncollection accounts receivable based upon expected collectability accounts receivable company places cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits 401k postretirement benefits company profit sharing 401k plan “plan” employees us permits employees make contributions plan pretax salary reduction basis accordance provisions internal revenue code permits employer provide discretionary contributions fulltime us employees eligible participate plan beginning month following three months service eligible employees may make contributions subject limitations defined internal revenue code company matches 50 us employee’s contributions amount set forth plan matched amounts vest based upon employee’s length service company’s subsidiaries uk plan contributions made maximum 8 uk employee contributions reach 5 salary company’s subsidiaries uk plan contributions made two levels uk employee contributes 3 less 5 salary plan company’s contribution fixed 5 salary uk employee contributes 5 salary plan company’s contribution fixed 8 salary regardless percentage contribution excess 5 company contributed 15 years ended december 31 2009 2008 14 year ended december 31 2007 net forfeitures obligations plans taxes collected customers june 2006 emerging issues task force “eitf” ratified consensus eitf 063 “how taxes collected customers remitted governmental authorities presented income statement gross versus net presentation” “eitf 063” known fasb asc 60545 fasb asc 60545 requires companies disclose accounting policies regarding gross net presentation certain taxes within scope fasb asc 60545 taxes assessed governmental authority directly imposed revenueproducing transaction seller customer may include limited sales use value added excise taxes addition taxes significant presented gross basis amounts taxes disclosed company adopted eitf 063 effective january 1 2007 company’s policy record taxes within scope fasb asc 60545 net basis 2007 reclassifications certain reclassifications made consolidated financial statements years ended december 31 2008 2007 conform classifications used year ended december 31 2009 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information recently issued accounting pronouncements third quarter 2009 company adopted fasb accounting standards update 200901 “amendments based sfas 168 fasb accounting standards codification tm hierarchy generally accepted accounting principles” “codification” codification became single source authoritative gaap us rules interpretative releases issued sec codification reorganized gaap topical format eliminates previous gaap hierarchy instead established two levels guidance authoritative nonauthoritative nongrandfathered nonsec accounting literature included codification became nonauthoritative adoption codification change previous gaap rather simplified user access authoritative literature related particular accounting topic one place accordingly adoption impact company’s financial position results operations cash flows references previous gaap citations company’s consolidated financial statements updated new references codification september 2006 fasb issued sfas 157 “the fair value measurements” “sfas 157” known fasb asc 82010 effective fiscal years beginning november 15 2007 interim periods within fiscal years fasb asc 82010 establishes framework measuring fair value accounting principles generally accepted us expands disclosures fair value measurement february 2008 fasb deferred adoption sfas 157 provided fasb staff position fas 1572 also known fasb asc 82010 one year applies certain items including assets liabilities initially measured fair value business combination reporting units certain assets liabilities measured fair value connection goodwill impairment tests accordance sfas 142 “goodwill intangible assets” known fasb asc 350 longlived assets measured fair value impairment assessments sfas 144 “accounting impairment disposal longlived assets” known fasb asc 3601035 company adopted statement january 1 2008 respect financial assets liabilities discussed february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” known fasb asc 825 fasb asc 825 gives entities option carry financial assets liabilities fair value changes fair value recorded earnings statement effective first quarter fiscal 2009 material impact company’s consolidated financial position results operations cash flows december 2007 fasb issued sfas 141r “business combinations revised” “sfas 141r” known fasb asc 805 replace sfas 141 “business combinations” fasb asc 805 requires use acquisition method accounting defines acquirer establishes acquisition date broadens scope transactions events one entity obtains control one businesses statement effective business combinations transactions entered fiscal years beginning december 15 2008 adoption statement material impact company’s financial position results operations cash flows december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” “sfas 160” known fasb asc 8101065 fasb asc 8101065 establishes accounting reporting standards noncontrolling interest subsidiary retained interest gain loss subsidiary deconsolidated statement effective financial statements issued fiscal years beginning december 15 2008 adoption statement material impact company’s financial position results operations cash flows abovenet inc subsidiaries notes consolidated financial statements millions except share per share information december 2007 sec issued sab 110 “certain assumptions used valuation methods expected term” known fasb asc 71810 fasb asc 71810 allows companies continue use simplified method defined sab 107 “sharebased payment” also known fasb asc 71810 estimate expected term stock options certain circumstances simplified method estimating expected term uses midpoint vesting term contractual term stock option company analyzed circumstances use simplified method allowed company opted use simplified method stock options granted 2008 management believes company sufficient historical exercise data provide reasonable basis upon estimate expected term due limited period time company’s shares common stock publicly traded options purchase shares common stock granted year ended december 31 2009 march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” “sfas 161” known fasb asc815 requires additional disclosures objectives using derivative instruments method derivative instruments related hedged items accounted fasb statement 133 also known fasb asc 815 related interpretations effect derivative instruments related hedged items financial position financial performance cash flows statement also requires disclosure fair values derivative instruments gains losses tabular format statement effective financial statements issued fiscal years interim periods beginning november 15 2008 early adoption encouraged adoption statement material impact company’s financial position results operations cash flows april 2008 fasb issued eitf 075 “determining whether instrument embedded feature indexed entity’s stock” “eitf 075” known fasb asc 81540 fasb asc 81540 provides guidance determining types instruments embedded features instrument held reporting entity considered indexed stock purpose evaluating first criteria scope exception paragraph 11 sfas 133 issue effective financial statements issued fiscal years beginning december 15 2008 early application permitted adoption issue material impact company’s financial position results operations cash flows june 2008 fasb issued eitf 083 “accounting lessees maintenance deposits lease agreements” “eitf 083” known fasb asc 84010 fasb asc 84010 mandates nonrefundable maintenance deposits accounted deposit underlying maintenance performed deposit expensed capitalized accordance lessee’s maintenance accounting policy issue effective fiscal years interim periods within fiscal years beginning december 15 2008 adoption issue material impact company’s financial position results operations cash flows june 2008 fasb issued eitf 0361 “determining whether instruments granted sharedbased payment transactions participating securities” “eitf 0361” known fasb asc 26010 fasb asc 26010 provides unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities shall included computation earnings per share pursuant twoclass method issue effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years upon adoption company required retrospectively adjust earnings per share date including amounts related interim periods summaries earnings selected financial data conform provisions fasb asc 26010 adoption issue material impact company’s financial position results operations cash flows april 2009 fasb issued staff position fas 1071 apb 281 “interim disclosures fair value financial instruments” “fsp fas 1071 apb 281” known fasb asc 825 statement amends sfas 107 “disclosures fair value financial instruments” known fasb asc 82510 require disclosures fair value financial instruments interim well annual financial statements statement also amends apb opinion 28 “interim financial reporting” known fasb asc 2701050 require disclosures interim financial results financial position financial statement disclosures statement became effective company three months ended june 30 2009 statement material impact company’s financial position results operations cash flows abovenet inc subsidiaries notes consolidated financial statements millions except share per share information may 2009 fasb issued sfas 165 subsequent events sfas 165 known fasb asc 85510 effective interim annual financial periods ending june 15 2009 calendar year entities sfas 165 became effective three months ended june 30 2009 objective fasb asc 85510 establish general standards accounting disclosure events occur balance sheet date financial statements issued available issued particular fasb asc 85510 sets forth 1 period balance sheet date management reporting entity evaluate events transactions may occur potential recognition disclosure financial statements 2 circumstances entity recognize events transactions occurring balance sheet date financial statements 3 disclosures entity make events transactions occurred balance sheet date adoption statement material impact company’s financial position results operations cash flows august 2009 fasb issued asu 20095 fair value measurements disclosures topic 820 measuring liabilities fair value asu 20095 provides clarification circumstances quoted price active market identical liability available reporting entity required measure fair value using valuation technique uses quoted price identical liability traded asset quoted prices similar liabilities similar liabilities traded assets another valuation technique consistent principles asc topic 820 asu 20095 effective first reporting period including interim periods beginning issuance adoption asu 20095 material impact company’s financial position results operations cash flows october 2009 fasb issued asu 200913 revenue recognition topic 605 multiple deliverable revenue arrangements asu 200913 eliminates residual method allocation requires arrangement consideration allocated inception arrangement deliverables using relative selling price method expands disclosures related multipledeliverable revenue arrangements asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 earlier adoption permitted adoption asu 200913 material impact company’s financial position results operations cash flows january 2010 fasb issued asu 201002 consolidation topic 810 accounting reporting decreases ownership subsidiary scope clarification asu 201002 clarifies scope decrease ownership provisions topic 810 applies subsidiary group assets business subsidiary business transferred equity method investee joint venture exchange group assets constitutes business noncontrolling interest entity apply sales substance real estate asu 201002 effective beginning period entity adopts sfas 160 sfas 160 previously adopted first interim annual period ending december 15 2009 applied retrospectively first period entity adopted sfas 160 adoption asu 201002 impact company’s financial position results operations cash flows january 2010 fasb issued asu 201006 fair value measurements disclosures topic 820 improving disclosures fair value measurements asu 201006 requires new disclosures regarding transfers level 1 2 activity within level 3 fair value measurements clarifies existing disclosures inputs valuation techniques level 2 3 fair value measurements asu 201006 also includes conforming amendments employers disclosures postretirement benefit plan assets new disclosures clarifications existing disclosures effective interim annual reporting periods beginning december 15 2009 except disclosure activity within level 3 fair value measurements effective fiscal years beginning december 15 2010 interim periods within years abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 3 prepaid expenses current assets prepaid expenses current assets consist following note 4 property equipment property equipment consist following included network infrastructure assets certain transmission ip equipment held inventory future use original cost adjusted provisions equipment impairment 04 december 31 2009 2008 393 446 accumulated depreciation 257 346 net carrying values 136 100 december 31 2009 2008 respectively addition december 31 2009 2008 company assets held sale disposition net book values totaling 02 11 respectively adjusted provisions equipment impairment 03 december 31 2009 2008 included property equipment accompanying consolidated balance sheets depreciation amortization expense related property equipment years ended december 31 2009 2008 2007 approximately 520 483 475 respectively included costs revenue years ended december 31 2009 2008 2007 provisions equipment impairment 12 04 22 respectively respect certain assets removed network either sold disposed made available sale disposition abovenet inc subsidiaries notes consolidated financial statements millions except share per share information asset abandonment 2006 company acquired software enterprise resource planning system “erp system” expected company’s information technology platform capitalized costs totaling 23 september 2008 management decided abandon implementation erp system investigate alternatives including enhancements upgrades current systems accordingly company recorded impairment charge 23 respect abandonment reflected selling general administrative expenses year ended december 31 2008 additionally company accrued maintenance fees 03 year ended december 31 2008 paid settled december 31 2009 note 5 subordinated investment january 2008 company became strategic member defined mediaxstream llc newly formed limited liability company created provide transport managed network services production broadcast industries “mediax” mediax formed preferred members contributed cash strategic members management members contribute services company’s interest provide voting rights mediax’s board managers company agreed contribute certain monthly services pursuant 51 month contract commenced april 2008 interest mediax distributions company subordinated distributions preferred members original investment plus preferred return based upon amounts contributed company’s nominal ownership interest approximately 154 equity mediax startup company operating history distributions company’s investment subordinated distributions preferred members company’s interest provide level control factors indicated fair value company’s investment mediax significant accordingly company reflected services contributed revenue corresponding investment mediax financial statements cost providing services included costs revenue relevant period company contributed services mediax 17 13 years ended december 31 2009 2008 respectively represents estimated fair value services actual costs providing services significant december 2009 ownership interests mediax including ownership interest held us purchased hibernia group ehf “hibernia” pursuant purchase agreement company entitled earnout payment event mediax achieves certain financial performance results company continue contribute services accordance original contract company record distributions investment mediax income received additionally company provides services mediax basis provides customers company billed mediax services reimbursements 06 05 years ended december 31 2009 2008 respectively services provided year ended december 31 2007 note 6 change estimate effective january 1 2008 company changed estimated useful lives spare parts classified inventory five years respective asset class lives parts range seven twenty years effect change material effective october 1 2009 company changed estimated useful lives certain hvac power equipment 20 years 12 15 years certain components infrastructure risers 20 years 5 years effect changes operating results future operating results material abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 7 accrued expenses accrued expenses consist following note 8 income taxes income taxes provided based upon tax laws rates countries operations conducted income earned benefit provision income taxes years ended december 31 2009 2008 2007 follows abovenet inc subsidiaries notes consolidated financial statements millions except share per share information deferred income taxes result temporary differences financial reporting basis tax basis assets liabilities following summary significant items giving rise components company’s deferred tax assets liabilities respect 2009 table reflects reduction deferred tax assets totaling 4290 significant portion domestic nols limited section 382 united states internal revenue code realizable value based company’s ability fully absorb current book income utilization deferred tax assets company’s current provision income taxes 2009 2008 2007 years principally related us alternative minimum tax year ended december 31 2009 company recorded current net tax benefit income taxes 46 composed 53 federal benefit income taxes offset 07 provision state income taxes representing carryback certain tax losses generated 2009 additionally fourth quarter 2009 company recognized 1830 noncash tax benefits december 31 2009 result reducing certain valuation allowances previously established respect deferred tax assets us uk believe likely utilize assets reduce eliminate tax payments future periods company’s evaluation encompassed review recent history profitability us past three years ii review internal financial forecasts demonstrating expected capacity utilize deferred tax assets iii reassessment tax benefits recognition fasb asc 740 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information connection company’s emergence bankruptcy company realized substantial cancellation debt income “codi” income taxable us income tax purposes codi resulted company’s reorganization bankruptcy code however us income tax reporting purposes company required reduce certain tax attributes including net operating loss carryforwards b capital losses c certain tax credit carryforwards tax basis assets total amount equal gain extinguishment debt reorganization company effective date constituted ownership change section 382 internal revenue code use company’s nol’s capital losses tax credit carryforwards remaining applying provisions certain subsequently recognized “builtin” losses deductions existing prior ownership change subject overall annual limitation december 31 2008 december 31 2009 company domestic nol carryforwards 1950 foreign nol carryforwards 408 certain nol carryforwards begin expire 2024 company’s use 1621 domestic nol carryforward limited 81 per annum 329 unlimited nol carryforwards may subject future limitation section 382 united states internal revenue code company subsidiaries’ income tax returns routinely examined various tax authorities statute limitations open respect tax years 2001 2008 statute limitations years begin expire 2011 note 9 longterm debt secured february 29 2008 company excluding certain foreign subsidiaries entered credit guaranty agreement amended “credit agreement” providing 60 senior secured credit facility “secured credit facility” consisting 18 revolving credit facility “revolver” 42 term loan facility “term loan” initial lenders secured credit facility societe generale cit lending services corporation secured credit facility secured substantially company’s domestic assets term loan comprised 24 advanced closing 18 originally could drawn within nine months closing company’s option “delayed draw term loan” september 2008 delayed draw term loan option originally scheduled expire november 25 2008 extended june 30 2009 subsequently extended december 31 2009 revolver term loan term five years closing date secured credit facility company paid nonrefundable work fee 01 lenders credited upfront fee 15 09 total amount secured credit facility paid closing paid 03 unaffiliated third party financial advisors assisted company additionally company liable unused commitment fee 050 per annum 075 per annum depending utilization secured credit facility interest accrues libor 30 60 90 180 day rates announced base rate administrative agent company’s option plus applicable margins defined company chosen 30 day libor interest rate term interest rate swap 30 day libor 023531 december 31 2009 additionally company originally required maintain unrestricted cash balance times least 20 february 29 2008 company received proceeds 24 deduction debt acquisition costs term loan required provisions term loan initial advance base rate interest plus margin 825 february 29 2008 converted libor plus 325 per annum 626 march 5 2008 addition company’s ability draw upon available commitments revolver subject compliance covenants contained credit agreement company’s continued ability make certain representations warranties among things covenants limit annual capital expenditures 2008 2009 2010 provide company’s net total funded debt ratio cannot time exceed specified amount require company maintain minimum consolidated fixed charges coverage ratio addition credit agreement prohibits company paying dividends shares equity securities making certain payments including payments acquire company’s equity securities specified circumstances include repurchase company’s equity securities employees directors aggregate amount exceed 15 company compliance debt covenants december 31 2009 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information september 26 2008 company executed joinder agreement secured credit facility added suntrust bank additional lender increased amount secured credit facility 90 effective october 1 2008 connection joinder agreement company paid 045 fee closing aggregate 025 advisory fees availability revolver increased 27 term loan increased 36 available delayed draw term loan increased 27 additional amount term loan 12 advanced october 1 2008 term loan provides monthly payments interest quarterly installments principal 108 beginning june 30 2009 increasing 144 june 30 2012 balance 1872 plus accrued unpaid interest due february 28 2013 effective august 4 2008 company entered swap arrangement fixed borrowing costs respect 24 outstanding three years 365 plus applicable margin 325 reduced 300 upon filing company’s annual report form 10k year ended december 31 2007 november 14 2008 company entered swap arrangement fixed borrowing costs respect 12 borrowed october 1 2008 three years 2635 per annum plus applicable margin 300 june 29 2009 company lenders entered amendment credit agreement “amendment 2 credit agreement” extended availability delayed draw term loan commitments june 30 2009 december 31 2009 provided reduction commitments 081 million june 30 2009 september 30 2009 081 million reduction december 31 2009 addition obligation commence making principal payments outstanding delayed draw term loan extended march 31 2010 company’s obligation maintain minimum balance 20 million cash deposits times eliminated december 23 2009 company provided notice lenders intention borrow 2457 million available delayed draw term loan effective december 31 2009 borrowings delayed draw term loan bear interest 30 day libor 023094 december 29 2009 plus applicable margin 300 delayed draw term loan provides monthly payments interest beginning march 31 2010 quarterly payments principal 081 million increasing 108 million starting june 30 2012 balance 1404 million plus accrued interest due february 28 2013 outstanding amounts 573 term loan secured credit facility december 31 2009 scheduled repaid follows additionally company executed 10 standby letter credit favor new york city secure company’s franchise agreement collateralized 10 availability revolver standby letter credit originally scheduled expire may 1 2009 renewed extended may 1 2010 december 31 2009 company 26 available revolver abovenet inc subsidiaries notes consolidated financial statements millions except share per share information obligation capital lease company obligated capital lease certain indefeasible rightsofuse included network infrastructure assets property equipment net december 31 2009 future minimum payments capital lease follows longterm portion reported within “other longterm liabilities” note 10 shareholders’ equity rights agreement august 3 2006 company entered rights agreement “rights agreement” american stock transfer trust company rights agent amended restated august 3 2009 amended “amended restated rights agreement” rights defined amended restated rights agreement expire august 3 2010 amended restated rights agreement ratified company’s stockholders date ratified continue remain effect august 7 2012 unless sooner terminated company’s board directors amended restated rights agreement amended remove exception definition “acquiring person” excluded stockholder “excluded stockholder” defined mean jgd management corp york capital management lp certain affiliated funds managed accounts holding company securities “york group” respective affiliates associates provided however except otherwise provided definition “acquiring person” amended restated rights agreement none members york group affiliates associates would excluded stockholder party individually collectively became beneficial owner 20 outstanding common shares without prior written consent company following description amended restated rights agreement purport complete qualified entirety reference amended restated rights agreement included exhibit 41 company’s current report form 8k filed sec august 3 2009 amendment amended restated rights agreement dated january 26 2010 abovenet inc american stock transfer trust company llc included exhibit 41 company’s current report form 8k filed sec january 28 2010 connection initial rights agreement company’s board directors declared dividend distribution one preferred share purchase right “right” outstanding share company’s common stock par value 001 per share “common shares” dividend paid august 7 2006 stockholders record date abovenet inc subsidiaries notes consolidated financial statements millions except share per share information earlier occur date 10 days following date public announcement person entity group affiliated associated persons acquired beneficial ownership 15 outstanding common shares “acquiring person” ii 10 business days later date may determined action company’s board directors prior time person entity becomes acquiring person following commencement announcement intention commence tender offer exchange offer consummation would result person entity becoming acquiring person earlier dates called “distribution date” rights evidenced common share certificates bookentry shares rights exercisable distribution date rights expire august 7 2012 unless earlier redeemed exchanged subject shareholder ratification august 3 2010 number outstanding rights number preferred shares issuable upon exercise rights also subject adjustment event stock split common shares stock dividend common shares payable common shares subdivisions consolidation combinations common shares occurring case prior distribution date purchase price payable number preferred shares securities property issuable upon exercise rights subject adjustment time prevent dilution described amended restated rights agreement event person group affiliated associated persons becomes acquiring person proper provision made holder right rights beneficially owned acquiring person associates affiliates thereafter void 60day period right receive upon exercise number common shares market value two times exercise price right number shares cannot authorized company may issue preferred shares cash debt stock combination thereof exchange rights right terminate 60 days date rights become nonredeemable described unless injunction similar obstacle exercise rights event right terminate 60 days date rights become exercisable time prior earlier time person become acquiring person ii final expiration date company may redeem less outstanding rights price 0005 per right “redemption price” rights may also redeemed certain times described amended restated rights agreement immediately upon redemption rights right exercise rights terminate right holders rights receive redemption price terms rights may amended company’s board directors without consent holders rights except time rights distributed amendment may adversely affect interest holders rights interests acquiring person affiliates associates right exercised holder thereof rights stockholder company including without limitation right vote receive dividends stock split august 3 2009 board directors company authorized twoforone common stock split effected form 100 stock dividend distributed september 3 2009 shareholder record august 20 2009 received one additional share common stock share common stock held date share per share information periods presented including warrants options purchase common shares restricted stock units warrant option exercise prices shares reserved 2003 plan 2008 plan weighted average fair value options granted common stock additional paidin capital accounts consolidated balance sheets consolidated statement shareholders’ equity retroactively adjusted reflect twoforone stock split abovenet inc subsidiaries notes consolidated financial statements millions except share per share information stock warrants plan reorganization unsecured note holder claims general secured claims settled part distribution five year warrants purchase 1418918 shares common stock 1000 per share seven year warrants purchase 1669316 shares common stock 1200 per share see note 1 “background organization” following table summarizes activity company’s warrants periods presented net exercise provisions 105094 shares returned treasury settle aggregate exercise price related shares net exercise provision 476 shares returned treasury settle aggregate exercise price related shares terms warrant agreements described note 2 “basis presentation significant accounting policies stock warrants” market price common stock defined respective warrant agreements 60 days prior expiration date respective warrants greater warrant exercise price company required give warrant holder notice warrant expiration date warrants would deemed exercised pursuant net exercise provisions respective warrant agreements “net exercise” unless warrant holder elects written notice exercise warrants net exercise shares issued warrant holders reduced number shares necessary cover aggregate exercise price shares valuing shares current market price defined warrant agreements fractional shares otherwise issuable paid cash prior expiration date five year warrants five year warrants purchase 778 shares common stock exercised net exercise basis resulting issuance 520 common shares issued 258 common shares returned treasury september 8 2008 expiration date five year warrants required conditions met net exercise five year warrants purchase 50 shares common stock cancelled accordance instructions warrant holders additionally five year warrants purchase 317748 shares common stock deemed exercised net exercise basis 212912 shares issued warrant holders 104836 shares returned treasury 0004 paid recipients fractional shares abovenet inc subsidiaries notes consolidated financial statements millions except share per share information stock purchase agreements october 2008 company purchased employees previously received distributions common stock pursuant vested restricted stock units 37220 shares common stock price 25035 per share aggregate purchase price 09 price determined based average trading price set board directors filing company’s annual report form 10k year ended december 31 2007 purchases pursuant stock purchase agreement also included provision restricts employee selling otherwise transferring shares common stock securities company earlier six months date company becomes current respect securities exchange act filing obligations b time company’s common stock becomes listed national securities exchange note 11 income per common share basic net income per common share computed net income net loss divided weighted average number common shares outstanding period total weighted average shares utilized computing basic net income per common share 23504077 21985284 21503842 years ended december 31 2009 2008 2007 respectively total weighted average shares utilized computing diluted net income per common share 25468405 24454150 24368278 years ended december 31 2009 2008 2007 respectively dilutive securities include options purchase shares common stock restricted stock units stock warrants years ended december 31 2009 2007 potentially dilutive securities excluded calculation diluted income per common share year ended december 31 2008 potentially dilutive securities acquire 23800 shares common stock excluded calculation diluted income per common share antidilutive note 12 stockbased compensation adoption 2008 equity incentive plan august 29 2008 board directors company approved company’s 2008 plan 2008 plan administered company’s compensation committee unless otherwise determined board directors employee officer director consultant company subsidiary company selected compensation committee eligible receive awards 2008 plan stock options restricted stock restricted unrestricted stock units stock appreciation rights may awarded eligible participants stand alone combination tandem basis 1500000 shares company common stock may issued pursuant awards granted 2008 plan number shares available grant terms outstanding grants subject adjustment stock splits stock dividends capital adjustments stockbased compensation expense period relates sharebased awards granted company’s 2008 plan described company’s 2003 plan reflect awards outstanding period including awards granted prior period 2003 plan became effective september 8 2003 plan company authorized issue aggregate sharebased awards 2129912 common shares employees directors consultants selected participate december 31 2009 1169432 common shares issued pursuant vested restricted stock units including shares repurchased 740626 shares issued pursuant options exercised purchase common shares 185976 common shares reserved pursuant outstanding options purchase shares common stock 33878 common shares cancelled 2008 plan company authorized issue sharebased awards 1500000 common shares accordance terms december 31 2009 2000 common shares issued pursuant exercise options purchase shares common stock 293862 common shares issued pursuant delivery vested restricted stock units 8000 common shares reserved pursuant outstanding options purchase shares common stock 654372 reserved pursuant outstanding restricted stock units 541766 common shares reserved future grants abovenet inc subsidiaries notes consolidated financial statements millions except share per share information stock options pursuant 2008 plan year ended december 31 2008 company awarded options purchase 10000 shares common stock ten year life date grant vested first anniversary date grant per share exercise prices 3000 year ended december 31 2007 company awarded options purchase 42650 shares common stock ten year life date grant vested first anniversary date grant per share exercise prices 2800 26950 options 3650 15700 options purchase shares common stock granted year ended december 31 2009 company recognized noncash stockbased compensation expense amounting 02 12 17 years ended december 31 2009 2008 2007 respectively respect stock options granted effect decreasing net income 001 per basic common share 001 per diluted common share year ended december 31 2009 006 per basic common share 005 per diluted common share year ended december 31 2008 008 per basic common share 007 per diluted common share year ended december 31 2007 options subject forfeiture specified respective award agreement information regarding options purchase common stock granted exercised outstanding years ended december 31 2009 2008 2007 summarized grant date fair value vested options purchase common stock follows december 31 aggregate grant date fair value options purchase shares common stock vested years ended december 31 2009 2008 2007 02 10000 shares 10 72008 shares 14 124118 shares respectively abovenet inc subsidiaries notes consolidated financial statements millions except share per share information regarding fair value unvested options purchase common stock follows december 31 2009 options purchase shares common stock vested accordingly company unearned stockbased compensation expense associated options purchase shares common stock november 2005 fasb issued fasb staff position sfas 123r3 “transition election related accounting tax effects sharebased payment awards” alternative transition method includes simplified methods establish beginning balance additional paidin capital pool “apic pool” related tax effects employee sharebased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee sharebased compensation awards outstanding upon adoption sfas 123r company adopted method determined apic pool 28 company reduced apic pool 01 2008 reflect tax effect delivery common shares underlying restricted stock units 2008 742626 options exercised purchase common shares year ended december 31 2009 options purchase common shares exercised years ended december 31 2008 2007 following table summarizes information concerning outstanding exercisable options purchase common stock december 31 2009 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information restricted stock units december 3 2009 pursuant 2008 plan company awarded 182700 restricted stock units ie agreement provide common shares future certain employees independent members board directors fair value grant 5390 per share closing price company’s common stock day 5900 restricted stock units vest november 16 2010 12000 vest equally november 16 2010 november 16 2011 164800 restricted stock units including 3000 restricted stock units five independent members board directors vest 40 november 16 2010 60 november 16 2011 september 8 2008 pursuant 2008 plan company granted certain employees aggregate 648200 restricted stock units 380000 vested 30 first anniversary date grant 10 scheduled vest second anniversary date grant 60 scheduled vest third anniversary date grant 172000 vested scheduled vest ratably first second third anniversaries date grant 96200 scheduled vest 2666 restricted stock unit forfeited first anniversary date grant fair value grants 3000 per share closing price company’s stock day grant additionally william g laperch president chief executive officer company granted additional 42000 restricted stock units vest ratably 2010 2011 2012 based upon achievement certain performance targets fiscal years 2009 2010 2011 established december 31 2009 respect 2010 2011 grants company also granted 70000 restricted stock units fourth quarter 2008 vested 30 november 16 2009 scheduled vest 10 november 15 2010 60 november 15 2011 fair value grant 1950 per share closing price company’s stock day grant additionally fourth quarter 2008 company granted 8000 restricted stock units vested november 16 2009 may 2 2008 company awarded 18000 restricted stock units employees 2003 plan underlying shares fair value 3500 per share closing price stock date grant stock units vested first anniversary date grant additionally 2008 connection delivery 81750 shares pursuant vested restricted stock units 175250 shares described company repurchased 34154 shares fund estimated income tax obligations exceeded company’s minimum tax withholding obligations accordingly company recorded compensation charge 09 year ended december 31 2008 accordance provisions sfas 123r amounts recorded year ended december 31 2007 year ended december 31 2007 company awarded restricted stock units employees company 2003 plan 210000 restricted stock units granted august 7 2007 vested one year anniversary date grant 113000 restricted stock units granted october 17 2007 scheduled vest ratably first second anniversaries date grant underlying shares fair value 4125 4150 per share respect august 7 2007 october 17 2007 grants represented closing price stock respective grant dates company records stockbased compensation expense fair value restricted stock units awarded grant date ratably vesting period company recognized noncash stockbased compensation expense amounting 95 113 65 years ended december 31 2009 2008 2007 respectively respect restricted stock units awarded effect decreasing net income 040 per basic common share 037 per diluted common share year ended december 31 2009 051 per basic common share 046 per diluted common share year ended december 31 2008 030 per basic common share 027 per diluted common share year ended december 31 2007 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information following schedule summarizes activity company’s “restricted stock units” periods presented table excludes restricted stock units granted mr laperch president chief executive officer company may vest additional 14000 restricted stock units 2010 2011 2012 based upon achievement certain performance targets 2009 2010 2011 december 31 2009 company 210 unearned stockbased compensation expense associated vesting outstanding restricted stock unit awards expected recognized 2010 2011 excluding 28000 restricted stock units granted mr laperch described note 13 employment contract termination march 4 2008 employment contract michael doris company’s former senior vice president chief financial officer modified terminated pursuant modification company paid mr doris upon termination 03 ii salary bonuses earned yet paid iii accrued unused paid time days iv health welfare benefits eighteen 18 months executed delivered consulting agreement mr doris consulting agreement provided exchange mr doris’ provision consulting services company period nine months mr doris paid annual salary 03 pro rated per week nine months ii bonus 005 “2006 filing bonus” upon filing sec form 10k respect company’s fiscal year ended december 31 2006 b bonus 005 “2007 filing bonus” upon filing sec form 10k respect company’s fiscal year ended december 31 2007 addition mr doris’ stock unit agreement dated august 7 2007 amended provide shares underlying 10000 restricted stock units became vested upon termination without cause delivered mr doris january 5 2009 ii company repurchase market price number shares required meet company’s estimate mr doris’ federal state income taxes due respect delivery restricted stock units aggregate value benefits delivered mr doris including value restricted stock units vested accordance terms 16 12 recognized selling general administrative expenses 2008 additionally company recorded additional noncash stockbased compensation expense 07 relating modification options purchase common shares connection modification termination mr doris’ employment agreement abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 14 income expense net income expense net consists following represents reversal certain transaction tax liabilities resulting primarily expiration statute limitations 2007 settlements certain taxing authorities note 15 commitments contingencies company commitments various noncancelable operating leases office equipment space equipment rentals rightofway contracts building access franchise fees network capacity contracts terms expiring 2026 company various sublet arrangements third parties estimated future payments net receipts respect contractual obligations follows expenses incurred described obligations years ended december 31 2009 2008 2007 operations 332 303 305 respectively net sublease receipts 22 24 19 years ended december 31 2009 2008 2007 respectively rental expense reflected also net amortization deferred fair value rent liability represents difference present value contractual obligations leases place fresh start date fair market value obligations company recorded 12 15 16 years ended december 31 2009 2008 2007 respectively reductions rent expense continuing operations december 31 2009 2008 deferred fair value rent liability 21 29 respectively 08 12 respectively included accrued expenses 13 17 respectively included longterm liabilities related consolidated balance sheets december 31 2009 company commitments customer buildouts infrastructure totaling 167 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information employment contracts company maintains employment agreements key executives agreements include among things certain change control severance provisions september 2008 company entered new employment agreements certain senior officers “executive officers” employment agreements term ends november 16 2011 automatic extensions additional oneyear period unless cancelled executive company writing least 120 days prior end applicable term contracts provides base rate compensation may increase cannot decrease term contract additionally contract provides incentive cash bonus targets executive officers generally entitled benefits offered company’s executives employment contracts provides payment severance provision certain benefits connection certain termination events employment contracts also include confidentiality noncompete assignment intellectual property covenants executive officers october 2008 company entered employment agreement mr joseph p ciavarella mr ciavarella agreed become company’s senior vice president chief financial officer employment agreement substantially general terms september 2008 employment agreements described internal revenue service september 2008 company notified internal revenue service “irs” reclassifying certain individuals classified company independent contractors employees accordingly assessing certain payroll taxes penalties totaling 03 company disputed position citing relief provided irc section 530 irc section 3509 january 13 2009 irs made settlement offer company executed march 10 2009 irs countersigned may 11 2009 terms proposed settlement agreement company agreed pay 0015 irs fully discharge federal employment tax liability may owe 2005 irs agreed dispute classification “such workers” federal employment tax purposes period january 1 2005 march 31 2009 beginning april 1 2009 company agreed treat “consultants” described settlement agreement perform equivalent duties employees company employees finally company agreed extend statute limitations respect federal employment tax payments period covered settlement agreement january 1 2005 march 31 2009 april 1 2012 new york city franchise agreement result certain ongoing litigation third party department information technology telecommunications city new york “doitt” informed company temporarily suspended discussions regarding renewals telecommunications franchises city new york result company’s understanding doitt renewed recently expired franchise agreement including company’s franchise agreement expired december 20 2008 prior expiration company’s franchise agreement company sought received written confirmation doitt company’s franchise agreement provides basis company continue operate city new york pending conclusion renewal discussions company intends continue operate expired franchise agreement pending renewal company believes number operators city new york operating similar basis based company’s discussions doitt written confirmation company received company believe doitt intends take adverse actions respect operation telecommunications providers result expired franchise agreements attempted would face number legal obstacles nevertheless attempt doitt limit company’s operations result expired franchise agreement could material adverse effect company’s business financial condition results operations abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 16 litigation company subject various legal proceedings claims arise normal course business company evaluates among things degree probability unfavorable outcome reasonably estimates amount potential loss global voice networks limited “gvn” abovenet communications uk limited company’s uk operating subsidiary “acuk” party duct purchase fiber lease agreement “duct purchase agreement” eu networks fiber uk ltd formerly gvn dispute parties arose regarding extent network duct sold fiber leased gvn pursuant duct purchase agreement result dispute 2006 gvn filed claim acuk high court justice london seeking ownership disputed portion network duct right lease certain fiber associated damages december 2007 court ruled favor gvn respect disputed duct fiber early february 2008 acuk delivered disputed duct fiber gvn additionally original ruling company also required construct balance disputed duct fiber deliver gvn pursuant schedule ordered court additional portions disputed duct fiber constructed subsequently delivered portions scheduled delivery company also certain repair maintenance obligations must perform respect duct gvn also seeking enforce option requiring acuk construct 180 200 chambers gvn along network june 2008 company paid 30 damages pursuant liability trial additionally company reimbursed gvn 18 legal fees additionally company’s legal fees aggregated 24 company incurred obligated costs totaling 27 build additional network early august 2008 company reached settlement agreement company paid gvn 06 agreed provide additional construction duct estimated cost 12 provide gvn limited additional access acuk’s network gvn acuk provided mutual releases claims including acuk’s repair obligation chamber construction obligations discussed recorded loss litigation 117 december 31 2007 08 paid 2007 109 included accrued expenses consolidated balance sheet december 31 2007 85 paid 2008 07 paid 2009 06 included accrued expenses december 31 2009 obligation denominated british pounds therefore amounts affected currency fluctuations sbc telecom inc “sbc” company party fiber lease agreement sbc subsidiary att entered may 2000 company believed sbc obligated agreement lease 40000 fiber miles reducible 30000 certain circumstances term 20 years price set forth agreement subject adjustment based upon number fiber miles leased higher volume fiber miles leased lower price per fiber mile sbc disagreed interpretation agreement 2003 issue litigated bankruptcy court november 2003 bankruptcy court agreed company’s interpretation agreement decision sbc appeal subsequently sbc also alleged company breach obligations agreement therefore company unable assume agreement upon emergence bankruptcy company disagreed sbc’s position however december 2005 bankruptcy court agreed sbc 2006 company appealed certain aspects decision district court southern district new york district court denied company’s appeal march 2007 company filed notice appeal second circuit court appeals seeking relief respect bankruptcy court’s determination company default agreement sbc term agreement sbc paid company higher rate per fiber mile reflect reduced volume services sbc believes obligated take accordance understanding fiber lease agreement however financial statement purposes company billed recorded revenue based lower amount per fiber mile fiber miles accepted sbc 23 20 years ended december 31 2008 2007 respectively abovenet inc subsidiaries notes consolidated financial statements millions except share per share information july 2008 company sbc entered “stipulation release agreement” new service agreement executed period july 10 2008 december 31 2010 new service agreement sbc agreed continue purchase existing services current rate services sbc fixed minimum payment commitment declines contract term sbc may cancel service time subject notice provisions subject payment commitment payment commitment may satisfied existing services sbc may order new services additionally may 2000 fiber lease agreement sbc terminated company sbc released claims related agreement difference amount paid sbc amount recognized company revenue aggregated 35 july 10 2008 32 december 31 2007 recorded termination revenue year ended december 31 2008 telekenex may 2008 telekenex inc “telekenex” customer filed complaint company san francisco county superior court alleging company failed deliver telekenex fiber optic capacity certain ten year contract telekenex company telekenex asserted complaint entitled fiber optic capacity unspecified damages september 29 2008 company signed settlement telekenex pursuant company agreed pay 035 provide telekenex additional fiber access order resolve dispute amount paid october 2008 pursuant settlement agreement parties released claims related dispute telekenex dismissed complaint december 2008 company recovered entire amount insurance policy sec investigation sec initiated formal investigation mfn prebankruptcy emergence predecessor company june 2002 december 15 2006 company received “wells” notice sec staff connection investigation indicating sec staff considering recommending sec bring civil injunctive action company alleging company violated various provisions federal securities laws response wells notice company provided sec written submission setting forth reasons company believed civil injunctive action authorized sec march 19 2007 company received notice sec staff stating investigation mfn terminated enforcement action recommended sec notice provided company guidelines final paragraph securities act release 5310 states among things “such notice must way construed indicating party exonerated action may ultimately result staff’s investigation particular matter communication means staff completed investigation time enforcement action recommended sec” southeastern pennsylvania transportation authority “septa” october 2008 septa filed claim philadelphia county court common pleas company trespass regard portions company’s network allegedly residing septa property pennsylvania septa seeks unspecified damages trespass andor determination company’s network must removed septa’s property company responded claim also filed motion bankruptcy court seeking determination claim barred based discharge claims injunction contained plan reorganization company believes meritorious defenses septa’s claims abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 17 related party transactions member company’s board directors also cochairman chief executive officer cofounder telecommunications company sold services andor material normal course business telecommunications company amount 035 year ended december 31 2009 03 2008 2007 related accounts receivable outstanding december 31 2009 2008 activity parties conducted independent arms length transactions consistent similar terms circumstances customers vendors accounts two parties settled accordance invoice terms note 18 segment reporting sfas 131 “disclosures segments enterprise related information” defines operating segments components enterprise separate financial information available evaluated regularly company’s chief operating decision maker deciding assess performance allocate resources company operates business one operating segment geographic information revenue based location entity providing service longlived assets based physical location assets following table presents revenue longlived asset information geographic areas abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 19 quarterly financial data unaudited following table present unaudited quarterly results year ended december 31 2009 fluctuations revenue reported period impacted contract termination revenue recognized quarter follows 1 includes provision equipment impairment 05 2 includes provision equipment impairment 04 3 includes provision equipment impairment 03 4 includes recognition 1830 noncash tax benefits resulting reduction certain valuation allowances previously established respect deferred tax assets us uk abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 19 quarterly financial data unaudited cont’d following table present unaudited quarterly results year ended december 31 2008 fluctuations revenue reported period impacted contract termination revenue recognized quarter follows 1 included selling general administrative expenses three months ended march 31 2008 noncash compensation expense 07 associated modification certain stock option agreement noncash compensation 05 associated acceleration vesting options granted mr doris 07 severance related expenses associated modification termination employment agreement see note 13 “employment contract termination” 2 included selling general administrative expenses three months ended june 30 2008 noncash compensation expense 08 associated repurchase shares excess minimum tax withholding requirements 3 includes charge lease termination 07 4 includes reversal certain rightofway obligations reduced pursuant negotiated settlement totaling 05 5 included selling general administrative expenses three months ended september 30 2008 impairment charge 23 respect abandonment information technology platform 6 depreciation expense decreased three months ended december 31 2008 compared three months ended september 30 2008 certain assets principally inventory became fully depreciated three months ended september 30 2008 item 9 item 8 financial statements supplementary data response item incorporated reference pages s1 herein item 9 item 8 financial statements supplementary data abovenet inc subsidiaries index consolidated financial statements report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audited accompanying consolidated balance sheets abovenet inc “company” december 31 2008 2007 related consolidated statements operations shareholders’ equity cash flows comprehensive income three years period ended december 31 2008 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position abovenet inc december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states also audited accordance standards public company accounting oversight board united states effectiveness abovenet inc’s internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organization treadway commission coso report dated march 13 2009 expressed adverse opinion thereon bdo seidman llp new york ny march 13 2009 abovenet inc subsidiaries consolidated balance sheets millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements operations millions except share per share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements shareholders’ equity millions except share information accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements cash flows millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries consolidated statements comprehensive income millions accompanying notes integral part consolidated financial statements abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 1 background organization bankruptcy filing reorganization may 20 2002 metromedia fiber network inc “mfn” substantially domestic subsidiaries “debtor” collectively “debtors” filed voluntary petitions reorganization chapter 11 united states bankruptcy code “bankruptcy code” united states bankruptcy court southern district new york “bankruptcy court” debtors remained possession assets properties continued operate businesses manage properties debtorsinpossession jurisdiction bankruptcy court july 1 2003 debtors filed amended plan reorganization “plan reorganization” amended disclosure statement “disclosure statement” july 2 2003 bankruptcy court approved disclosure statement related voting procedures august 21 2003 bankruptcy court confirmed plan reorganization plan reorganization governed treatment claims interest debtors plan reorganization creditors debtors received following distributions set forth greater detail therein debtors emerged proceedings chapter 11 bankruptcy code september 8 2003 “effective date” accordance plan reorganization mfn changed name abovenet inc together subsidiaries “company” august 29 2003 equity interests mfn received distribution plan reorganization equity securities mfn cancelled business company facilitiesbased provider technologically advanced highbandwidth fiber optic communications infrastructure colocation services communications carriers corporate government customers principally united states “us” united kingdom “uk” note 2 basis presentation significant accounting policies summary basis presentation significant accounting policies followed preparation consolidated financial statements follows basis presentation use estimates accompanying consolidated financial statements prepared accordance accounting principles generally accepted united states america “us gaap” pursuant rules regulations securities exchange commission “sec” consolidated financial statements include accounts company opinion management accompanying consolidated financial statements reflect adjustments considered necessary fair presentation company’s results december 31 2008 2007 years ended december 31 2008 2007 2006 preparation consolidated financial statements conformity us gaap requires management make estimates assumptions affect reported amounts assets liabilities date consolidated financial statements disclosure contingent assets liabilities consolidated financial statements accompanying notes reported amounts revenue expenses periods presented estimates used accounting certain items accounts receivable allowances property taxes transaction taxes deferred taxes estimates company makes based historical factors current circumstances experience judgment company’s management company evaluates assumptions estimates ongoing basis may employ outside experts assist company’s evaluations actual amounts results could differ estimates due subsequent events could material effect company’s financial statements covering future periods abovenet inc subsidiaries notes consolidated financial statements millions except share per share information corrections prior years’ misstatements connection audit financial statements year ended december 31 2006 company determined certain errors primarily related income taxes depreciation certain accruals included financial statements previously issued years ended december 31 2005 2004 period ended december 31 2003 including fresh start balance sheet september 8 2003 adjustments made applicable period effect adjustments would increase net loss 09 009 per basic diluted share year ended december 31 2005 increase net loss 01 001 per basic diluted share year ended december 31 2004 decrease net loss 02 002 per basic diluted share period ended december 31 2003 management believe based upon qualitative quantitative analysis errors material require restatement previously issued financial statements accordingly corrections reflected financial statements year ended december 31 2006 resulted reduction net income 03 003 per basic diluted share reclassification february 29 2008 company filed current report form 8k among things included consolidated statement operations year ended december 31 2006 consolidated statement operations year ended december 31 2006 included company’s annual report form 10k year ended december 31 2006 herein reflects change classification certain expenses amounts recorded consolidated statement operations included current report form 8k dated february 29 2008 change resulted costs revenue decreasing 93 1312 1219 selling general administrative expenses increasing 93 618 711 year ended december 31 2006 reclassification affect company’s operating loss net income earnings per share basic diluted assets liabilities shareholders’ equity year ended december 31 2006 reclassification certain reclassifications made consolidated financial statements year ended december 31 2007 conform classifications used year ended december 31 2008 fresh start accounting september 8 2003 company authorized 10000000 shares preferred stock 001 par value 30000000 shares common stock 001 par value holders common stock entitled one vote issued outstanding share entitled receive dividends subject rights holders preferred stock declared board directors preferred stock may issued time one classes series classes series shall distributive designation determined board directors 2006 company reserved issuance 10000000 shares authorized preferred stock described 500000 shares 001 par value junior preferred stock connection adoption shareholders’ rights plan event liquidation holders common stock entitled receive assets company available distribution payments creditors holders preferred stock pursuant plan reorganization upon company’s emergence bankruptcy company issued prepetition creditors 8750000 shares common stock rights purchase 1669210 shares common stock price 299543 rights offering rights purchase 1668992 shares exercised five year stock purchase warrants purchase 709459 shares common stock exercisable price 2000 per share seven year stock purchase warrants purchases 834658 shares common stock exercisable price 2400 per share addition 1064956 shares common stock reserved issuance company’s 2003 stock incentive plan see note 13 “stockbased compensation” company’s emergence bankruptcy resulted new reporting entity retained earnings accumulated losses effective september 8 2003 although effective date plan reorganization september 8 2003 company accounted consummation plan reorganization occurred august 31 2003 implemented fresh start accounting date significant transactions period august 31 2003 september 8 2003 fresh start accounting requires company allocate reorganization value assets liabilities based upon estimated fair values accordance statement position 907 “financial reporting entities reorganization bankruptcy code” “sop 907” company developed set financial projections utilized expert assist company estimating fair value assets liabilities expert utilized various valuation methodologies including 1 comparison company projected performance comparable companies 2 review analysis several recent transactions companies similar industries company 3 calculation enterprise value based upon future cash flows based upon company’s projections adopting fresh start accounting resulted material adjustments historical carrying values company’s assets liabilities reorganization value allocated company assets liabilities based upon fair values company engaged independent appraiser assist company determining fair market value property equipment determination fair values assets liabilities subject significant estimates assumptions unaudited fresh start adjustments reflected september 8 2003 consisted following reduction property equipment ii reduction indebtedness iii reduction vendor payables iv reduction carrying value deferred revenue v increase deferred rent fair market value vi cancellation mfn’s common stock additional paidin capital accordance plan reorganization vii issuance new abovenet inc common stock additional paidin capital viii elimination comprehensive loss accumulated deficit accounts principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries consolidation generally required investments 50 outstanding voting stock investee except control held majority owner significant intercompany accounts transactions eliminated consolidation revenue recognition revenue derived leasing fiber optic telecommunications infrastructure provision telecommunications colocation services recognized services provided nonrefundable payments received customers relevant criteria revenue recognition satisfied included deferred revenue accompanying consolidated balance sheets subsequently amortized income related service period abovenet inc subsidiaries notes consolidated financial statements millions except share per share information accordance sec staff accounting bulletin sab 101 “revenue recognition financial statements” amended sec sab 104 “revenue recognition” company generally amortizes revenue related installation services straightline basis contracted customer relationship generally ranges two twenty years termination revenue recognized customer discontinues service prior end contract period company previously received consideration revenue recognition deferred termination revenue also recognized customers made early termination payments company settle contractually committed purchase amounts customer longer expects meet company renegotiates contract customer result longer obligated provide services consideration previously received revenue recognition deferred 2008 2007 2006 company included receipts bankruptcy claim settlements former customers termination revenue termination revenue reported together service revenue amounted 154 85 83 2008 2007 2006 respectively nonmonetary transactions company may exchange capacity service providers december 2004 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 153 “exchanges nonmonetary assets amendment apb opinion 29” “sfas 153” sfas 153 amends accounting principles board opinion 29 “accounting nonmonetary transactions” “apb 29” eliminate exception nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance sfas 153 applied prospectively nonmonetary exchanges occurring fiscal periods beginning june 15 2005 company’s adoption sfas 153 july 1 2005 material effect consolidated financial position results operations company prior company’s adoption sfas 153 nonmonetary transactions accounted accordance apb 29 exchange similar capacity recorded historical carryover basis dissimilar capacity accounted fair market value recognition gain loss gains losses nonmonetary transactions years ended december 31 2008 2007 2006 operating leases company leases office equipment space maintains equipment rentals rightofway contracts building access fees network capacity various noncancelable operating leases lease agreements expire various dates 2023 subject many cases renewal options provide payment taxes utilities maintenance certain lease agreements contain escalation clauses term lease related scheduled rent increases resulting pass increases operating costs property taxes effect costs changes consumer price indices accordance sfas 13 “accounting leases” company recognizes rent expense straightline basis records liability representing difference straightline rent expense amount payable increase decrease deferred liability leasehold improvements related operating leases amortized lesser economic lives remaining lease term rentfree periods incentives granted certain leases recorded reductions rent expense straightline basis related lease terms cash equivalents restricted cash equivalents purposes consolidated statements cash flows company considers cash banks shortterm highly liquid investments original maturity three months less cash equivalents cash equivalents restricted cash equivalents stated cost approximates fair value restricted cash equivalents comprised amounts secure outstanding letters credit issued favor various third parties accounts receivable allowance doubtful accounts sales credits accounts receivable customer obligations services sold customers normal trade terms company’s customers primarily communications carriers corporate government customers located primarily us uk company performs periodic credit evaluations customers’ financial condition company provides allowances doubtful accounts sales credits provisions doubtful accounts recorded selling general administrative expenses allowances sales credits recorded reductions revenue adequacy reserves evaluated utilizing several factors including length time receivable past due changes customer’s credit worthiness customer’s payment history length customer’s relationship company current industry trends current economic climate property equipment property equipment owned effective date stated preliminary estimated fair values effective date based company’s reorganization value purchases property equipment subsequent effective date stated cost net depreciation amortization major improvements capitalized expenditures repairs maintenance expensed incurred costs incurred prior capital project’s completion reflected construction progress included network infrastructure assets respective balance sheets certain internal direct labor costs constructing installing property equipment capitalized direct labor amounted 107 86 51 years ended december 31 2008 2007 2006 respectively depreciation amortization provided straightline basis estimated useful lives assets exception leasehold improvements amortized lesser estimated useful lives term lease estimated useful lives company’s property equipment follows abovenet inc subsidiaries notes consolidated financial statements millions except share per share information property equipment retired otherwise disposed cost accumulated depreciation removed accounts resulting gains losses reflected net income loss time company required replace reroute existing fiber due structural changes construction highway expansions defined “relocation” instances company fully depreciates remaining carrying value network infrastructure removed rendered unusable capitalizes new fiber associated construction costs relocation placed service reduced reimbursements received costs company capitalized relocation costs amounting 26 22 89 years ended december 31 2008 2007 2006 respectively company fully depreciated remaining carrying value network infrastructure rendered unusable original cost basis totaled 03 16 02 13 net book value basis years ended december 31 2008 2007 2006 respectively extent relocation requires movement existing network infrastructure another location related costs included results operations accordance sfas 34 “capitalization interest cost” company capitalize interest certain construction projects amounts capitalized years ended december 31 2008 2007 2006 accordance sfas 144 “accounting impairment disposal longlived assets” company periodically evaluates recoverability longlived assets evaluates assets impairment whenever events circumstances indicate carrying amount assets group assets may recoverable impairment determined exist estimated future undiscounted cash flows less carrying value asset included costs revenue years ended december 31 2008 2007 provisions equipment impairment 04 22 recorded recognize loss value certain equipment held inventory amount provided year ended december 31 2006 treasury stock treasury stock accounted cost method asset retirement obligations accordance sfas 143 “accounting asset retirement obligations” company recognizes fair value liability asset retirement obligation period incurred reasonable estimate fair value made company asset retirement obligations related decommissioning removal equipment restoration leased facilities removal certain fiber conduit systems considerable management judgment required estimating obligations important assumptions include estimates asset retirement costs timing future asset retirement activities likelihood contractual asset retirement provisions enforced changes assumptions based future information could result adjustments estimated liabilities asset retirement obligations generally recorded “other longterm liabilities” capitalized part carrying amount related longlived assets included property equipment net depreciated life associated asset retirement obligations aggregated 71 61 december 31 2008 2007 respectively 40 33 respectively included “accrued expenses” 31 28 respectively included “other longterm liabilities” dates accretion expense included “interest expense” amounted 03 year ended december 31 2008 02 years ended december 31 2007 2006 income taxes company accounts income taxes accordance sfas 109 “accounting income taxes” “sfas 109” deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases net operating loss tax credit carryforwards tax contingencies deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled company records valuation allowance deferred tax assets extent likely portion deferred tax assets realized subject audit various taxing authorities audits may result proposed assessments ultimate resolution results us owing additional taxes required establish reserves fasb interpretation 48 “accounting uncertainty income taxes” “interpretation 48” despite belief tax return positions appropriate supportable local tax law believe uncertainty respect certain positions may succeed realizing tax benefit evaluated tax positions items uncertainty accordance interpretation 48 determined tax positions highly certain believe estimates assumptions used support evaluation tax benefit realization reasonable accordingly adjustments made consolidated financial statements years ended december 31 2008 2007 provision income taxes income taxes payable deferred income taxes provided accordance liability method deferred tax assets liabilities determined based differences financial reporting tax basis assets liabilities measured applying enacted tax rates laws taxable years differences expected reverse valuation allowance provided company determines likely portion deferred tax asset balance realized company’s reorganization resulted significantly modified capital structure result applying freshstart accounting accordance sop 907 effective date fresh start accounting important consequences accounting realization valuation allowances related net deferred tax assets existed effective date arose preemergence periods specifically fresh start accounting requires reversal allowances recorded reduction intangible assets exhausted thereafter additional paid capital treatment result change liabilities taxing authorities cash flows undistributed earnings company’s foreign subsidiaries considered indefinitely reinvested therefore provision domestic taxes provided thereon upon repatriation earnings form dividends otherwise company would subject domestic income taxes offset part foreign tax credits related income withholding taxes payable various foreign countries determination amount unrecognized deferred domestic income tax liability practicable due complexities associated hypothetical calculations however unrecognized foreign tax credit carryforwards would available reduce portion domestic liability abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company’s policy recognize interest penalties accrued component operating expense date adoption interpretation 48 company accrued interest penalties associated unrecognized income tax benefits interest expense recognized years ended december 31 2008 2007 tax expense primarily due current federal income taxes state local income taxes foreign currency translation transactions company’s functional currency us dollar subsidiaries using us dollar functional currency assets liabilities translated exchange rates effect balance sheet date income expense transactions translated average exchange rates period resulting translation adjustments recorded directly separate component shareholders’ equity reflected accompanying consolidated statements comprehensive income loss company’s foreign exchange transaction gains losses generally included “other expense income net” consolidated statements operations stock options september 8 2003 company adopted fair value provisions sfas 148 “accounting stockbased compensation transition disclosure” “sfas 148” sfas 148 amended sfas 123 “accounting stockbased compensation” “sfas 123” provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation see note 13 “stockbased compensation” fair value provisions sfas 123 fair value stockbased compensation award estimated date grant using blackscholes option pricing model stock option awards company historical basis determining volatility expected life assumptions model due company’s limited market trading history therefore assumptions used amounts average used select group related industry companies stockbased awards graded vesting ie portions award vest different dates vesting period company recognizes related stockbased compensation expense awards straightline basis vesting period tranche award upon consummation company’s plan reorganization outstanding stock options respect mfn’s common stock cancelled effective january 1 2006 company adopted sfas 123r “sharebased payment” “sfas 123r” using modified prospective method sfas 123r requires sharebased awards granted employees recognized compensation expense vesting period based fair value award fair value method sfas 123r similar fair value method sfas 123 respect measurement recognition stockbased compensation expense except sfas 123r requires estimate future forfeitures whereas sfas 123 allowed companies estimate forfeitures recognize impact forfeitures occur company recognized impact forfeitures occurred sfas 123 adoption sfas 123r result different accounting treatment material impact company’s consolidated financial statements following assumptions used company calculate weighted average fair value stock options granted restricted stock units compensation cost restricted stock unit awards measured based upon quoted closing market price stock date grant compensation cost recognized straightline basis vesting period see note 13 “stockbased compensation” stock warrants connection plan reorganization described note 1 “background organization” company issued holders general unsecured claims part settlement claims five year warrants purchase 709459 shares common stock exercise price 2000 per share expired september 8 2008 ii seven year warrants purchase 834658 shares common stock exercise price 2400 per share expiring september 8 2010 stock warrants treated equity upon exercise based upon terms warrant cash received stock warrants purchase shares common stock exercised totaled 689925 48941 6945 2008 2007 2006 respectively terms five year seven year warrant agreements collectively “warrant agreements” market price common stock defined warrant agreements 60 days prior expiration date respective warrants greater warrant exercise price company required give warrant holder notice warrant expiration date warrants would deemed exercised pursuant net exercise provisions respective warrant agreements “net exercise” unless warrant holder elects written notice exercise warrants net exercise shares issued warrant holders would reduced number shares necessary cover aggregate exercise price shares valuing shares current market price defined warrant agreements fractional shares otherwise issuable would paid cash abovenet inc subsidiaries notes consolidated financial statements millions except share per share information exercise warrants september 8 2008 expiration date five year warrants required conditions met net exercise total five year warrants purchase 159263 shares common stock deemed exercised pursuant net exercise including warrants purchase 389 shares common stock exercised net exercise basis prior expiration 106716 shares issued warrant holders 52547 shares returned treasury 0004 paid recipients fractional shares addition five year warrants purchase 25 shares common stock cancelled accordance instructions warrant holders finally seven year warrants purchase 12 shares common stock determined undeliverable cancelled derivative financial instruments company utilized interest rate swaps derivative instruments mitigate exposure interest rate risk company purchased first interest rate swap august 4 2008 hedge interest rate 24 million portion term loan company purchased second interest rate swap november 14 2008 hedge interest rate additional 12 million portion term loan provided suntrust bank see note 10 “longterm debt” company accounted derivative instrument sfas 133 “accounting derivative instruments hedging activities” “sfas 133” sfas 133 requires derivative instruments recognized financial statements measured fair value regardless purpose intent holding policy company historically entered derivative financial instruments trading purposes speculation based criteria defined sfas 133 interest rate swap considered cash flow hedge 100 effective accordingly changes fair value derivatives recorded period accumulated comprehensive income loss changes fair value derivative instruments reported accumulated comprehensive income loss reclassified earnings period earnings impacted variability cash flows hedged item ineffective portion hedges recognized current period earnings unrealized net loss recorded accumulated comprehensive income loss december 31 2008 16 interest rate swaps amount reclassified earnings underlying forecasted transactions occur marktomarket value cash flow hedge recorded noncurrent assets longterm liabilities offsetting gains losses accumulated comprehensive loss interest rate swap agreements notional amounts provide indication extent company’s involvement agreements represent exposure market risk following table shows notional amount outstanding maturity date weighted average receive pay rates interest rate swap agreement december 31 2008 interest expense agreements respective debt instruments hedge recorded net effective interest rate hedged transaction fair value financial instruments company adopted sfas 157 “fair value measurements” “sfas 157” cash equivalents effective january 1 2008 pronouncement defines fair value establishes framework measuring fair value requires expanded disclosures fair value measurements sfas 157 emphasizes fair value marketbased measurement entityspecific measurement defines fair value price would received sell asset transfer liability orderly transaction market participants measurement date sfas 157 discusses valuation techniques market approach comparable market prices income approach present value future income cash flow cost approach cost replace service capacity asset replacement cost based upon observable unobservable inputs observable inputs reflect market data obtained independent sources unobservable inputs reflect company’s market assumptions sfas 157 utilizes fair value hierarchy prioritizes inputs fair value measurement techniques three broad levels level 1 observable inputs quoted prices identical assets liabilities active markets level 2 observable inputs quoted prices directly indirectly observable asset liability including quoted prices similar assets liabilities active markets quoted prices similar identical assets liabilities markets active modelderived valuations whose inputs observable whose significant value drivers observable level 3 unobservable inputs reflect reporting entity’s assumptions company’s investment overnight money market institutional funds amounted 819 409 december 31 2008 december 31 2007 respectively included cash equivalents accompanying balance sheets classified level 1 asset company party two interest rate swaps utilized modify company’s interest rate risk company recorded marktomarket value interest rate swaps 16 longterm liabilities consolidated balance sheet december 31 2008 company used third parties value interest rate swap agreements december 31 2008 well market analysis determine fair value abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company’s consolidated balance sheets include following financial instruments shortterm cash investments trade accounts receivable trade accounts payable notes payable company believes carrying amounts financial statements approximate fair value financial instruments due relatively short period time origination instruments expected realization interest rates approximate current market rates company’s consolidated balance sheet also includes fair value interest rate swap contract classified level 2 liability concentration credit risk financial instruments potentially subject company concentration credit risk consist principally temporary cash investments accounts receivable company enter financial instruments trading speculative purposes company’s cash equivalents invested investmentgrade shortterm investment instruments high quality financial institutions company’s trade receivables unsecured geographically dispersed single customer accounts greater 10 consolidated revenue accounts receivable net company performs ongoing credit evaluations customers’ financial condition allowance noncollection accounts receivable based upon expected collectability accounts receivable company places cash equivalents primarily commercial bank accounts us account balances generally exceed federally insured limits given recent developments financial markets company’s exposure customers financial services industry company’s ability collect contractual amounts due certain customers severely impacted developments may negatively impacted 401k postretirement benefits company profit sharing 401k plan “plan” employees us permits employees make contributions plan pretax salary reduction basis accordance provisions internal revenue code permits employer provide discretionary contributions fulltime us employees eligible participate plan beginning month following three months service eligible employees may make contributions subject limitations defined internal revenue code company matches 50 us employee’s contributions amount set forth plan matched amounts vest based upon employee’s length service company’s subsidiaries uk plan contributions made maximum 8 uk employee contributions reach 5 salary company’s subsidiaries uk plan contributions made two levels uk employee contributes 3 less 5 salary plan company’s contribution fixed 5 salary uk employee contributes 5 salary plan company’s contribution fixed 8 salary regardless percentage contribution excess 5 company contributed 15 14 07 years ended december 31 2008 2007 2006 respectively net forfeitures obligations plans taxes collected customers june 2006 emerging issues task force “eitf” ratified consensus eitf 063 “how taxes collected customers remitted governmental authorities presented income statement gross versus net presentation” “eitf 063” eitf 063 requires companies disclose accounting policies regarding gross net presentation certain taxes within scope eitf 063 taxes assessed governmental authority directly imposed revenueproducing transaction seller customer may include limited sales use value added excise taxes addition taxes significant presented gross basis amounts taxes disclosed company adopted eitf 063 effective january 1 2007 company’s policy record taxes within scope eitf 063 net basis recently issued accounting pronouncements september 2006 fasb issued sfas 157 effective fiscal years beginning november 15 2007 interim periods within fiscal years sfas 157 establishes framework measuring fair value accounting principles generally accepted us expands disclosures fair value measurement february 2008 fasb deferred adoption sfas 157 provided fasb staff position fas 1572 “fsp fas 1572” one year applies certain items including assets liabilities initially measured fair value business combination reporting units certain assets liabilities measured fair value connection goodwill impairment tests accordance sfas 142 “goodwill intangible assets” longlived assets measured fair value impairment assessments sfas 144 “accounting impairment disposal longlived assets” company adopted sfas 157 january 1 2008 respect financial assets liabilities discussed february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” “sfas 159” sfas 159 gives entities option carry financial assets liabilities fair value changes fair value recorded earnings statement became effective first quarter fiscal 2008 material impact company’s consolidated financial position results operations cash flows december 2007 fasb issued sfas 141r “business combinations revised” “sfas 141r” replace sfas 141 “business combinations” sfas 141r requires use acquisition method accounting defines acquirer establishes acquisition date broadens scope transactions events one entity obtains control one businesses statement effective business combinations transactions entered fiscal years beginning december 15 2008 company still evaluating impact sfas 141r however adoption statement expected material impact financial position results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” “sfas 160” sfas 160 establishes accounting reporting standards noncontrolling interest subsidiary retained interest gain loss subsidiary deconsolidated statement effective financial statements issued fiscal years beginning december 15 2008 company still evaluating impact sfas 160 expect material impact financial position results operations december 2007 sec issued sab 110 “certain assumptions used valuation methods expected term” “sab 110” sab 110 allows companies continue use simplified method defined sab 107 “sharebased payment” estimate expected term stock options certain circumstances simplified method estimating expected term uses midpoint vesting term contractual term stock option company analyzed circumstances use simplified method allowed company opted use simplified method stock options granted 2008 management believes company sufficient historical exercise data provide reasonable basis upon estimate expected term due limited period time company’s shares common stock publicly traded abovenet inc subsidiaries notes consolidated financial statements millions except share per share information march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” “sfas 161” requires additional disclosures objectives using derivative instruments method derivative instruments related hedged items accounted fasb statement 133 related interpretations effect derivative instruments related hedged items financial position financial performance cash flows sfas 161 also requires disclosure fair values derivative instruments gains losses tabular format sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 early adoption encouraged april 2008 fasb issued eitf 0705 “determining whether instrument embedded feature indexed entity’s stock” “eitf 0705” eitf 0705 provides guidance determining types instruments embedded features instrument held reporting entity considered indexed stock purpose evaluating first criteria scope exception paragraph 11 sfas 133 eitf 0705 effective financial statements issued fiscal years beginning december 15 2008 early application permitted adopting eitf 0705 material impact company’s financial position results operations june 2008 fasb issued eitf 083 “accounting lessees maintenance deposits lease agreements” “eitf 083” eitf 083 mandates nonrefundable maintenance deposits accounted deposit underlying maintenance performed deposit expensed capitalized accordance lessee’s maintenance accounting policy eitf 083 effective fiscal years interim periods within fiscal years beginning december 15 2008 company expect eitf 083 material impact financial position results operations cash flows june 2008 fasb issued eitf 0361 “determining whether instruments granted sharedbased payment transactions participating securities” “eitf 0361” eitf 0361 provides unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities shall included computation earnings per share pursuant twoclass method eitf 0361 effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years upon adoption company required retrospectively adjust earnings per share date including amounts related interim periods summaries earnings selected financial data conform provisions eitf 0361 company currently evaluating impact adoption eitf 0361 financial position results operations note 3 prepaid expenses current assets prepaid expenses current assets consist following abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 4 property equipment property equipment consist following included network infrastructure assets certain assets equipment including transmission equipment held inventory future use original cost adjusted provisions equipment impairment 04 22 december 31 2008 2007 respectively 689 605 accumulated depreciation 578 490 net carrying values 111 115 december 31 2008 2007 respectively depreciation amortization expense related property equipment continuing operations years ended december 31 2008 2007 2006 approximately 483 475 472 respectively fourth quarter 2006 company sold certain assets net certain liabilities related data center facilities located new york california virginia cash proceeds 431 sold stock abovenet uk limited uk company “auk” operated london data center price £135 british pounds sterling 26 usd £0675 british pounds sterling approximately 13 usd measured date receipt received closing £0675 british pounds sterling approximately 13 usd measured date receipt received january 2007 included accounts receivable net consolidated balance sheet december 31 2006 operations data center london uk accounted discontinued operation periods presented sale legal entity discreet financial information company recognized aggregate gain sale data centers amounting 521 280 60 represented reversal deferred fair value rent liability sfas 13 obligations respectively associated related properties gain summarized follows asset abandonment 2006 company acquired software enterprise resource planning system “erp system” expected company’s information technology platform capitalized costs totaling 23 september 2008 management decided abandon implementation erp system investigate alternatives including enhancements upgrades current systems accordingly company recorded impairment charge 23 respect abandonment quarter ended september 30 2008 additionally company accrued maintenance fees 03 01 years ended december 31 2008 2007 respectively paid settled december 31 2008 note 5 subordinated investment january 2008 company became strategic member defined mediaxstream llc newly formed limited liability company created provide transport managed network services production broadcast industries “mediax” mediax formed preferred members contributed cash strategic members management members contribute services company’s interest provide voting rights mediax’s board managers company agreed contribute certain monthly services pursuant 51 month contract commenced april 2008 interest mediax distributions company subordinated distributions preferred members original investment plus preferred return based upon amounts contributed december 31 2008 additional amounts committed preferred members company’s nominal ownership interest approximately 154 equity mediax startup company operating history distributions company’s investment subordinated distributions preferred members company’s interest provide level control factors indicated fair value company’s investment mediax significant accordingly company reflected services contributed revenue corresponding investment mediax financial statements cost providing services included costs revenue relevant period company contributed services mediax 13 year ended december 31 2008 represents estimated fair value services actual costs providing services significant company record distributions mediax income received additionally company provides services mediax basis customers company billed mediax services reimbursements 05 year ended december 31 2008 services provided year ended december 31 2007 note 6 change estimate effective january 1 2008 company changed estimated useful lives spare parts classified inventory five years respective asset class lives parts range seven twenty years effect change material abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 7 accrued expenses accrued expenses consist following note 8 income taxes income taxes provided based upon tax laws rates countries operations conducted income earned provisions income taxes years ended december 31 2008 2007 2006 follows deferred income taxes result temporary differences financial reporting basis tax basis assets liabilities following summary significant items giving rise components company’s deferred tax assets liabilities abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company established valuation allowance related deferred tax assets based current years’ results operations anticipated profit levels future periods since likely deferred tax assets realized future connection company’s emergence bankruptcy company realized substantial cancellation debt income “codi” income taxable us income tax purposes codi resulted company’s reorganization bankruptcy code however us income tax reporting purposes company required reduce certain tax attributes including net operating loss carryforwards b capital losses c certain tax credit carryforwards tax basis assets total amount equal gain extinguishment debt reorganization company effective date constituted ownership change section 382 internal revenue code use company’s nol’s capital losses tax credit carryforwards remaining applying provisions certain subsequently recognized “builtin” losses deductions existing prior ownership change subject overall annual limitation december 31 2008 company domestic nol carryforwards 8272 foreign nol carryforwards 523 certain nol carryforwards begin expire 2024 company’s use domestic nol carry forward subject annual limitation ownership change rules us annual limitation 81 accordingly company estimates 1620 domestic nol carryforwards available may subject future limitation united states internal revenue code section 382 company subsidiaries’ income tax returns routinely examined various tax authorities statute limitations open respect tax years 2001 2007 statute limitations years begin expire 2011 note 9 discontinued operations dispositions january 2006 company liquidated sitesmith netherlands bv gain loss recognized upon disposition february 2006 company liquidated metromedia fiber network sweden ab gain loss recognized upon disposition november 2006 company sold 100 issued outstanding stock auk aggregate purchase price £135 british pounds sterling 26 usd £0675 british pounds sterling approximately 13 usd measured date receipt received closing £0675 british pounds sterling approximately 13 usd measured date receipt received january 2007 included accounts receivable net consolidated balance sheet december 31 2006 company recorded gain 39 respect sale auk generated operating loss 09 2006 prior sale following summary 2006 results discontinued operations described late 2007 company liquidated metromedia fiber network bv additionally late 2007 company commenced liquidation metromedia fiber network services ltd sitesmith ltd company recognized reversal currency translation adjustments 103 income consolidated statement operations year ended december 31 2007 note 10 longterm debt secured february 29 2008 company excluding certain foreign subsidiaries entered 60 senior secured credit facility “secured credit facility” consisting 18 revolving credit facility “revolver” 42 term loan facility “term loan” initial lenders secured credit facility societe generale cit lending services corporation secured credit facility secured substantially company’s domestic assets term loan comprised 24 advanced closing 18 originally could drawn within nine months closing company’s option “delayed draw term loan” september 2008 delayed draw term loan option originally scheduled expire november 25 2008 extended june 30 2009 secured credit facility used general corporate purposes capital investment revolver term loan term five years closing date secured credit facility company paid nonrefundable work fee 01 lenders credited upfront fee 15 09 total amount secured credit facility paid closing paid 03 unaffiliated third party financial advisors assisted company additionally company liable unused commitment fee 050 per annum 075 per annum depending utilization secured credit facility interest accrues libor 30 60 90 180 day rates announced base rate administrative agent company’s option plus applicable margins defined company chosen 30 day libor interest rate term interest rate swap 30 day libor 190 december 31 2008 additionally company required maintain unrestricted cash balance times least 20 february 29 2008 company received proceeds 24 deduction debt acquisition costs term loan required provisions term loan initial advance base rate interest plus margin 825 february 29 2008 converted libor plus 325 per annum 626 march 5 2008 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information september 26 2008 company executed joinder agreement secured credit facility added suntrust bank additional lender increased amount secured credit facility 90 effective october 1 2008 connection joinder agreement company paid 045 fee closing aggregate 025 advisory fees availability revolver increased 27 term loan increased 36 available delayed draw term loan increased 27 additional amount term loan 12 advanced october 1 2008 term loan provides monthly payments interest quarterly installments principal 108 beginning june 30 2009 increasing 144 june 30 2012 balance 1872 plus accrued unpaid interest due february 28 2013 effective august 4 2008 company entered swap arrangement fixed borrowing costs respect 24 outstanding three years 365 plus applicable margin 325 reduced 300 upon filing company’s annual report form 10k year ended december 31 2007 november 14 2008 company entered swap arrangement fixed borrowing costs respect 12 borrowed october 1 2008 three years 2635 per annum plus applicable margin 300 outstanding amounts 360 term loan secured credit facility december 31 2008 scheduled repaid follows additionally company executed 10 standby letter credit favor new york city secure company’s franchise agreement collateralized 10 availability revolver standby letter credit expires may 1 2009 expected renewed company’s secured credit facility contains certain financial nonfinancial covenants “debt covenants” company compliance debt covenants december 31 2008 obligation capital lease company obligated capital lease certain indefeasible rightsofuse included network infrastructure assets property equipment net december 31 2008 future minimum payments capital lease follows current portion obligation capital lease reported within “accrued expenses” longterm portion reported within “other longterm liabilities” abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 11 shareholders’ equity rights agreement amendment august 3 2006 company entered rights agreement “rights agreement” american stock transfer trust company rights agent following description rights agreement purport complete qualified entirety reference rights agreement included exhibit 41 company’s current report form 8k filed sec august 4 2006 connection rights agreement company’s board directors declared dividend distribution one preferred share purchase right “right” outstanding share company’s common stock par value 001 per share “common shares” dividend paid august 7 2006 “record date” stockholders record date right entitles registered holder purchase company one onehundredth share series junior participating preferred stock par value 001 per share “preferred shares” price 10000 per one onehundredth preferred share “purchase price” subject adjustment one onehundredth share preferred shares designations powers preferences rights qualifications limitations restrictions make value approximately equal value common share earlier occur date public announcement person entity group affiliated associated persons acquired beneficial ownership 15 outstanding common shares “acquiring person” ii 10 business days later date may determined action company’s board directors prior time person entity becomes acquiring person following commencement announcement intention commence tender offer exchange offer consummation would result person entity becoming acquiring person earlier dates called “distribution date” rights evidenced respect common share certificates outstanding record date common share certificate discussed definition “acquiring person” amended august 2008 rights exercisable distribution date rights expire august 7 2009 unless rights earlier redeemed exchanged company number outstanding rights number one onehundredths preferred share issuable upon exercise right also subject adjustment event stock split common shares stock dividend common shares payable common shares subdivisions consolidation combinations common shares occurring case prior distribution date purchase price payable number preferred shares securities property issuable upon exercise rights subject adjustment time prevent dilution described rights agreement preferred shares purchasable upon exercise rights redeemable preferred share entitled minimum preferential quarterly dividend payment 100 entitled aggregate dividend 100 times dividend declared per common share event liquidation holders preferred shares would entitled minimum preferential liquidation payment 10000 per share would entitled receive aggregate payment equal 100 times payment made per common share preferred share 100 votes voting together common shares finally event merger consolidation transaction common shares exchanged preferred share entitled receive 100 times amount consideration received per common share rights protected customary antidilution provisions preferred shares would rank junior series company’s preferred stock event person group affiliated associated persons becomes acquiring person proper provision made holder right rights beneficially owned acquiring person associates affiliates thereafter void 60day period right receive upon exercise number common shares market value two times exercise price right number shares cannot authorized company may issue preferred shares cash debt stock combination thereof exchange rights right terminate 60 days date rights become nonredeemable described unless injunction similar obstacle exercise rights event right terminate 60 days date rights become exercisable time prior earlier time person become acquiring person ii final expiration date company may redeem less outstanding rights price 001 per right “redemption price” rights may also redeemed certain times described rights agreement immediately upon redemption rights right exercise rights terminate right holders rights receive redemption price terms rights may amended company’s board directors without consent holders rights except time rights distributed amendment may adversely affect interest holders rights interests acquiring person affiliates associates right exercised holder thereof rights stockholder company including without limitation right vote receive dividends august 7 2008 company entered amendment “rights agreement amendment” rights agreement rights agreement amendment filed exhibit 47 company’s current report form 8k filed sec august 12 2008 also august 7 2008 company entered standstill agreement jgd management corp york capital management lp certain affiliated funds holding company securities parties thereto collectively “york group” rights agreement amendment amends rights agreement among things add exception definition “acquiring person” defined rights agreement excluded stockholder add definition “excluded stockholder” “excluded stockholder” defined mean individually identified members york group funds accounts managed york capital management lp hold company securities respective affiliates associates provided however except otherwise provided definition “acquiring person” none members york group affiliates associates excluded stockholder party individually collectively become beneficial owner 20 outstanding company common stock without prior written consent company abovenet inc subsidiaries notes consolidated financial statements millions except share per share information stock warrants plan reorganization unsecured note holder claims general secured claims settled part distribution five year warrants purchase 709459 shares common stock 2000 per share seven year warrants purchase 834658 shares common stock 2400 per share see note 1 “background organization” following table summarizes activity company’s warrants periods presented net exercise provisions 52547 shares returned treasury settle aggregate exercise price related shares terms warrant agreements described note 2 “basis presentation significant accounting policies stock warrants” market price common stock defined respective warrant agreements 60 days prior expiration date respective warrants greater warrant exercise price company required give warrant holder notice warrant expiration date warrants would deemed exercised pursuant net exercise provisions respective warrant agreements “net exercise” unless warrant holder elects written notice exercise warrants net exercise shares issued warrant holders reduced number shares necessary cover aggregate exercise price shares valuing shares current market price defined warrant agreements fractional shares otherwise issuable paid cash prior expiration date five year warrants five year warrants purchase 389 shares common stock exercised net exercise basis resulting issuance 260 common shares issued 129 common shares returned treasury september 8 2008 expiration date five year warrants required conditions met net exercise five year warrants purchase 25 shares common stock cancelled accordance instructions warrant holders remaining unexercised five year warrants purchase 158874 shares common stock deemed exercised net exercise basis 106456 shares issued warrant holders 52418 shares returned treasury 0004 paid recipients fractional shares stock purchase agreements october 2008 company purchased employees previously received distributions common stock pursuant vested restricted stock units 18610 shares common stock price 5007 per share aggregate purchase price 09 price determined based average trading price set board directors filing company’s annual report form 10k year ended december 31 2007 purchases pursuant stock purchase agreement also included provision restricts employee selling otherwise transferring shares common stock securities company earlier six months date company becomes current respect securities exchange act filing obligations b time company’s common stock becomes listed national securities exchange note 12 income per common share basic income per common share computed net income net loss divided weighted average number common shares outstanding period total weighted average shares utilized computing basic net income per common share 10992642 10751921 10669365 years ended december 31 2008 2007 2006 respectively total weighted average shares utilized computing diluted net income per common share 12227075 12184139 11794279 years ended december 31 2008 2007 2006 respectively dilutive securities include options purchase shares common stock restricted stock units stock warrants years ended december 31 2007 2006 potentially dilutive securities excluded calculation income per common share year ended december 31 2008 11900 potentially dilutive securities excluded calculation income per common share note 13 stockbased compensation adoption 2008 equity incentive plan august 29 2008 board directors company approved company’s 2008 equity incentive plan “2008 plan” 2008 plan administered company’s compensation committee unless otherwise determined board directors employee officer director consultant company subsidiary company selected compensation committee eligible receive awards 2008 plan stock options restricted stock restricted unrestricted stock units stock appreciation rights may awarded eligible participants stand alone combination tandem basis 750000 shares company common stock may issued pursuant awards granted 2008 plan number shares available grant terms outstanding grants subject adjustment stock splits stock dividends capital adjustments abovenet inc subsidiaries notes consolidated financial statements millions except share per share information stockbased compensation expense period relates sharebased awards granted company’s 2008 plan described company’s 2003 incentive stock option stock grant plan “2003 stock incentive plan” reflect awards outstanding period including awards granted prior period 2003 stock incentive plan became effective september 8 2003 stock incentive plan company authorized issue aggregate sharebased awards 1064956 common shares employees directors consultants selected participate december 31 2008 439466 common shares issued pursuant vested restricted stock units 466051 common shares reserved pursuant outstanding options purchase shares common stock 145250 common shares reserved pursuant outstanding restricted stock units 106500 vested reserves 14189 common shares cancelled 2008 plan company authorized issue sharebased awards 750000 common shares accordance terms december 31 2008 389100 common shares reserved pursuant outstanding options purchase shares common stock outstanding restricted stock units 360900 common shares reserved future grants stock options pursuant 2008 plan year ended december 31 2008 company awarded options purchase 5000 shares common stock ten year life date grant vest first anniversary date grant per share exercise prices 6000 year ended december 31 2007 company awarded options purchase 21325 shares common stock ten year life date grant vest first anniversary date grant per share exercise prices 5600 13475 options 7300 7850 options year ended december 31 2006 company awarded options purchase 26800 shares common stock options purchase 7500 shares ten year life date grant vest first anniversary date grant per share exercise price 4850 options purchase 19300 shares vest one year period date grant ten year life per share exercise prices 4000 11700 shares 5375 7450 shares 5900 150 shares company recognized noncash stockbased compensation expense amounting 12 17 15 years ended december 31 2008 2007 2006 respectively respect stock options granted effect decreasing net income 011 per basic common share 010 per diluted common share year ended december 31 2008 016 per basic common share 014 per diluted common share year ended december 31 2007 014 per basic common share 013 per diluted common share year ended december 31 2006 options subject forfeiture specified respective award agreement information regarding options purchase common stock granted outstanding years ended december 31 2008 2007 2006 summarized grant date fair value vested options purchase common stock follows december 31 aggregate grant date fair value options purchase shares common stock vested years ended december 31 2008 2007 2006 10 36004 shares 14 62059 shares 19 118338 shares respectively abovenet inc subsidiaries notes consolidated financial statements millions except share per share information regarding fair value unvested options purchase common stock follows december 31 2008 company 01 unearned stockbased compensation expense associated options purchase shares common stock expected incurred 2009 november 2005 fasb issued fasb staff position sfas 123r3 “transition election related accounting tax effects sharebased payment awards” alternative transition method includes simplified methods establish beginning balance additional paidin capital pool “apic pool” related tax effects employee sharebased compensation determine subsequent impact apic pool consolidated statements cash flows tax effects employee sharebased compensation awards outstanding upon adoption sfas 123r company adopted method determined apic pool 28 company reduced apic pool 01 2008 reflect tax effect delivery common shares underlying restricted stock units 2008 options exercised purchase common shares three years period ended december 31 2008 following table summarizes information concerning outstanding exercisable options purchase common stock december 31 2008 restricted stock units may 2 2008 company awarded 9000 restricted stock units ie agreement provide common shares future employees 2003 stock incentive plan stock units scheduled vest first anniversary date grant september 8 2008 company granted certain employees aggregate 324100 restricted stock units 190000 vest 30 first anniversary date grant 10 second anniversary date grant 60 third anniversary date grant 86000 vest rateably first second third anniversaries date grant 48100 vest first anniversary date grant additionally william g laperch president chief executive officer company granted additional 21000 restricted stock units vest ratably 2010 2011 2012 based upon achievement certain performance targets fiscal years 2009 2010 2011 established december 31 2008 company also granted 35000 restricted stock units fourth quarter 2008 vest 30 november 16 2009 10 november 15 2010 60 november 15 2011 additionally fourth quarter 2008 company granted 4000 restricted stock units vest november 16 2009 years ended december 31 2007 2006 company awarded restricted stock units employees company 161500 32000 respectively 2003 stock incentive plan 105000 restricted stock units granted 2007 scheduled vest one year anniversary date grant 56500 restricted stock units granted 2007 scheduled vest ratably first second anniversaries date grant restricted stock units granted 2006 12000 scheduled vest ratably first four anniversaries date grant 20000 scheduled vest upon completion company’s audited financial statements year ended december 31 2006 february 29 2008 restricted stock units subject full partial vesting event employee’s employment terminated without cause vest fully event employee’s death issuance vested shares related restricted stock units subject certain restrictions provided 2003 stock incentive plan compliant section 409a internal revenue code pursuant restricted stock unit agreements company executives time delivery stock underlying restricted stock units may sold executive reasons set forth agreements executive’s request company obligated purchase sufficient shares stock satisfy executive’s minimum tax withholding obligations 2008 2007 company issued 87625 310719 common shares respectively vested restricted stock units 35186 129816 shares respectively repurchased company shares issued pursuant restricted stock units 2006 additionally 2008 connection delivery 40875 shares pursuant vested restricted stock units 87625 shares described company repurchased 17077 shares fund estimated income tax obligations exceeded company’s minimum tax withholding obligations accordingly company recorded compensation charge 09 year ended december 31 2008 accordance provisions sfas 123r amounts recorded years ended december 31 2007 2006 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information company records stockbased compensation expense fair value restricted stock units awarded grant date ratably vesting period company recognized noncash stockbased compensation expense amounting 113 65 24 years ended december 31 2008 2007 2006 respectively respect restricted stock units awarded effect decreasing net income 103 per basic common share 092 per diluted common share year ended december 31 2008 060 per basic common share 053 per diluted common share year ended december 31 2007 022 per basic common share 020 per diluted common share year ended december 31 2006 following schedule summarizes activity company’s “restricted stock units” periods presented table excludes restricted stock units granted mr laperch president chief executive officer company may vest additional 7000 restricted stock units 2010 2011 2012 based upon achievement certain performance targets established december 31 2008 2009 2010 2011 december 31 2008 company 205 unearned stockbased compensation expense associated vesting restricted stock unit awards expected recognized 2009 2011 excluding 21000 restricted stock units granted mr laperch described note 14 expense income net expense income net consists following 1 represents reversal certain transaction tax liabilities resulting primarily expiration statute limitations 2 represents reversal certain transaction tax liabilities resulting primarily settlements certain taxing authorities 3 represents reversal certain tax liabilities resulting either favorable ruling jurisdiction determining company subject certain transaction related taxes accrued prior years determination company respect certain jurisdictions taxes accrued prior years apply company’s operations note 15 commitments contingencies company commitments various noncancelable operating leases office equipment space equipment rentals rightofway contracts building access franchise fees network capacity contracts terms expiring 2026 company various sublet arrangements third parties estimated future payments net receipts respect contractual obligations follows abovenet inc subsidiaries notes consolidated financial statements millions except share per share information expenses incurred described obligations years ended december 31 2008 2007 2006 continuing operations 303 305 333 respectively net sublease receipts 24 19 20 years ended december 31 2008 2007 2006 respectively rental expense reflected also net amortization deferred fair value rent liability represents difference present value contractual obligations leases place fresh start date fair market value obligations company recorded 15 16 42 years ended december 31 2008 2007 2006 respectively reductions rent expense continuing operations december 31 2008 2007 deferred fair value rent liability 29 40 respectively 12 15 respectively included accrued expenses 17 25 respectively included longterm liabilities related consolidated balance sheets december 31 2008 company committed capital 174 customer buildouts infrastructure additionally early january 2009 company announced plans open austin texas fifteenth domestic metro market significant portion austin texas metro market built prior 2003 company committed approximately 36 capital expenditures complete metro network buildout acquire long haul fiber equipment connect austin network company’s networks dallas houston employment contract termination march 4 2008 employment contract michael doris company’s former senior vice president chief financial officer modified terminated pursuant modification company paid mr doris upon termination 03 ii salary bonuses earned yet paid iii accrued unused paid time days iv health welfare benefits eighteen 18 months executed delivered consulting agreement mr doris consulting agreement provided exchange mr doris’ provision consulting services company period nine months mr doris paid annual salary 03 pro rated per week nine months ii bonus 005 “2006 filing bonus” upon filing sec form 10k respect company’s fiscal year ended december 31 2006 b bonus 005 “2007 filing bonus” upon filing sec form 10k respect company’s fiscal year ended december 31 2007 addition mr doris’ stock unit agreement dated august 7 2007 amended provide shares underlying 10000 restricted stock units became vested upon termination without cause delivered mr doris january 5 2009 ii company repurchase market price number shares required meet company’s estimate mr doris’ federal state income taxes due respect delivery restricted stock units aggregate value benefits delivered mr doris including value restricted stock units vested accordance terms 16 12 recognized selling general administrative expenses 2008 additionally company recorded additional noncash stockbased compensation expense 07 relating modification options purchase common shares connection modification termination mr doris’ employment agreement employment contracts company maintains employment agreements key executives agreements include among things certain change control severance provisions september 2008 company entered new employment agreements certain senior officers “executive officers” employment agreements term ends november 16 2011 automatic extensions additional oneyear period unless cancelled executive company writing least 120 days prior end applicable term contracts provides base rate compensation may increase cannot decrease term contract additionally contract provides incentive cash bonus targets executive officers generally entitled benefits offered company’s executives employment contracts provides payment severance provision certain benefits connection certain termination events employment contracts also include confidentiality noncompete assignment intellectual property covenants executive officers october 2008 company entered employment agreement mr joseph p ciavarella mr ciavarella agreed become company’s senior vice president chief financial officer employment agreement substantially general terms september 2008 employment agreements described internal revenue service september 2008 company notified internal revenue service “irs” reclassifying certain individuals classified company independent contractors employees accordingly assessing certain payroll taxes penalties totaling 03 company disputed position citing relief provided irc section 530 irc section 3509 january 13 2009 irs made settlement offer company considering new york city franchise agreement result certain ongoing litigation third party department information technology telecommunications city new york “doitt” informed company temporarily suspended discussions regarding renewals telecommunications franchises city new york result company’s understanding doitt renewed recently expired franchise agreement including company’s franchise agreement expired december 20 2008 prior expiration company’s franchise agreement company sought received written confirmation doitt company’s franchise agreement provides basis company continue operate city new york pending conclusion renewal discussions company intends continue operate expired franchise agreement pending renewal company believes number operators city new york operating similar basis based company’s discussions doitt written confirmation company received company believe doitt intends take adverse actions respect operation telecommunications providers result expired franchise agreements attempted would face number legal obstacles nevertheless attempt doitt limit company’s operations result expired franchise agreement could material adverse effect company’s business financial condition results operations abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 16 litigation company subject various legal proceedings claims arise normal course business company evaluates among things degree probability unfavorable outcome reasonably estimates amount potential loss plan reorganization essentially claims company’s us subsidiaries arose prior confirmation plan reorganization august 21 2003 discharged accordance plan reorganization summary treatment claims bankruptcy proceeding provided note 1 global voice networks limited “gvn” abovenet communications uk limited company’s uk operating subsidiary “acuk” party duct purchase fiber lease agreement “duct purchase agreement” eu networks fiber uk ltd formerly gvn dispute parties arose regarding extent network duct sold fiber leased gvn pursuant duct purchase agreement result dispute 2006 gvn filed claim acuk high court justice london seeking ownership disputed portion network duct right lease certain fiber associated damages december 2007 court ruled favor gvn respect disputed duct fiber early february 2008 acuk delivered disputed duct fiber gvn additionally original ruling company also required construct balance disputed duct fiber deliver gvn pursuant schedule ordered court additional portions disputed duct fiber constructed subsequently delivered portions scheduled delivery company also certain repair maintenance obligations must perform respect duct gvn also seeking enforce option requiring acuk construct 180 200 chambers gvn along network june 2008 company paid 30 damages pursuant liability trial additionally company reimbursed gvn 18 legal fees additionally company’s legal fees aggregated 24 company incurred obligated costs totaling 27 build additional network early august 2008 company reached settlement agreement company paid gvn 06 agreed provide additional construction duct estimated cost 12 provide gvn limited additional access acuk’s network gvn acuk provided mutual releases claims including acuk’s repair obligation chamber construction obligations discussed recorded loss litigation 117 december 31 2007 08 paid 2007 109 included accrued expenses consolidated balance sheet december 31 2007 85 paid 2008 12 included accrued expenses december 31 2008 obligation denominated british pounds therefore amounts affected currency fluctuations sbc telecom inc “sbc” company party fiber lease agreement sbc subsidiary att entered may 2000 company believed sbc obligated agreement lease 40000 fiber miles reducible 30000 certain circumstances term 20 years price set forth agreement subject adjustment based upon number fiber miles leased higher volume fiber miles leased lower price per fiber mile sbc disagreed interpretation agreement 2003 issue litigated bankruptcy court november 2003 bankruptcy court agreed company’s interpretation agreement decision sbc appeal subsequently sbc also alleged company breach obligations agreement therefore company unable assume agreement upon emergence bankruptcy company disagreed sbc’s position however december 2005 bankruptcy court agreed sbc 2006 company appealed certain aspects decision district court southern district new york district court denied company’s appeal march 2007 company filed notice appeal second circuit court appeals seeking relief respect bankruptcy court’s determination company default agreement sbc term agreement sbc paid company higher rate per fiber mile reflect reduced volume services sbc believes obligated take accordance understanding fiber lease agreement however financial statement purposes company billed recorded revenue based lower amount per fiber mile fiber miles accepted sbc 23 year ended december 31 2008 20 years ended december 31 2007 2006 respectively july 2008 company sbc entered “stipulation release agreement” new service agreement executed period july 10 2008 december 31 2010 new service agreement sbc agreed continue purchase existing services current rate services sbc fixed minimum payment commitment declines contract term sbc may cancel service time subject notice provisions subject payment commitment payment commitment may satisfied existing services sbc may order new services additionally may 2000 fiber lease agreement sbc terminated company sbc released claims related agreement difference amount paid sbc amount recognized company revenue aggregated 35 july 10 2008 32 december 31 2007 recorded termination revenue three months ended september 30 2008 telekenex may 2008 telekenex inc “telekenex” customer filed complaint company san francisco county superior court alleging company failed deliver telekenex fiber optic capacity certain ten year contract telekenex company telekenex asserted complaint entitled fiber optic capacity unspecified damages september 29 2008 company signed settlement telekenex pursuant company agreed pay 035 provide telekenex additional fiber access order resolve dispute amount paid october 2008 pursuant settlement agreement parties released claims related dispute telekenex dismissed complaint december 2008 company recovered entire amount insurance policy sec investigation sec initiated formal investigation mfn prebankruptcy emergence predecessor company june 2002 december 15 2006 company received “wells” notice sec staff connection investigation indicating sec staff considering recommending sec bring civil injunctive action company alleging company violated various provisions federal securities laws response wells notice company provided sec written submission setting forth reasons company believed civil injunctive action authorized sec march 19 2007 company received notice sec staff stating investigation mfn terminated enforcement action recommended sec notice provided company guidelines final paragraph securities act release 5310 states among things “such notice must way construed indicating party exonerated action may ultimately result staff’s investigation particular matter communication means staff completed investigation time enforcement action recommended sec” abovenet inc subsidiaries notes consolidated financial statements millions except share per share information southeastern pennsylvania transportation authority “septa” october 2008 septa filed claim philadelphia county court common pleas company trespass regard portions company’s network allegedly residing septa property pennsylvania septa seeks unspecified damages trespass andor determination company’s network must removed septa’s property company responded claim also filed motion bankruptcy court seeking determination claim barred based discharge claims injunction contained plan reorganization company believes meritorious defenses septa’s claims note 17 related party transactions member company’s board directors also cochairman chief executive officer cofounder telecommunications company sold services andor material normal course business telecommunications company amount 03 2008 2007 01 2006 amounts outstanding december 31 2008 2007 activity parties conducted independent arms length transactions consistent similar terms circumstances customers vendors accounts two parties settled accordance invoice terms note 18 segment reporting sfas 131 “disclosures segments enterprise related information” defines operating segments components enterprise separate financial information available evaluated regularly company’s chief operating decision maker deciding assess performance allocate resources company operates business one operating segment geographic information revenue based location entity providing service longlived assets based physical location assets following table presents revenue longlived asset information geographic areas abovenet inc subsidiaries notes consolidated financial statements millions except share per share information note 19 quarterly financial data unaudited following tables present unaudited quarterly results years ended december 31 2008 2007 fluctuations revenue reported period impacted termination revenue recognized quarter follows 1 included selling general administrative expenses three months ended march 31 2008 noncash compensation expense 07 associated modification certain stock option agreement noncash compensation 05 associated acceleration vesting options granted mr doris 07 severance related expenses associated modification termination employment agreement see note 15 “employment contract termination” 2 included selling general administrative expenses three months ended june 30 2008 noncash compensation expense 08 associated repurchase shares excess minimum tax withholding requirements 3 includes charge lease termination 07 4 includes reversal certain rightofway obligations reduced pursuant negotiated settlement totaling 05 5 included selling general administrative expenses three months ended september 30 2008 impairment charge 23 respect abandonment information technology platform 6 depreciation expense decreased three months ended december 31 2008 compared three months ended september 30 2008 certain assets principally inventory became fully depreciated three months ended september 30 2008 abovenet inc subsidiaries notes consolidated financial statements millions except share per share information includes provision equipment impairment 22 fluctuations revenue reported period impacted termination revenue recognized quarter follows item 9 item 8 financial statements supplementary data response item incorporated reference pages s1 herein item 9 item 15 exhibits financial statement schedules 1 financial statements list financial statements company included report please see index consolidated financial statements appearing beginning item 8 financial statements supplementary data 2 financial statement schedules following financial statement schedule filed part annual report form 10k report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audits referred report dated february 28 2008 except notes 2 15 16 may 9 2008 relating consolidated financial statements abovenet inc contained item 8 form 10k also included audit financial statement schedule listed accompanying index financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein bdo seidman llp new york ny may 9 2008 schedule ii valuation qualifying accounts abovenet inc subsidiaries schedule ii valuation qualifying accounts millions schedules omitted applicable required information disclosed consolidated financial statements including notes thereto 3 exhibits exhibit description exhibit 31 amended restated certificate incorporation filed secretary state delaware august 29 2003 effective august 29 2003 incorporated herein reference form 8a filed securities exchange commission september 8 2003 32 amended restated bylaws adopted september 8 2003 incorporated herein reference form 8a filed securities exchange commission september 8 2003 33 certificate designation series junior participating preferred stock incorporated herein reference form 8k filed securities exchange commission august 4 2006 41 form specimen common stock certificate 42 standstill agreement dated august 2003 metromedia fiber network inc john w kluge trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees stuart subotnick 43 warrant agreement dated december 3 2003 among registrant american stock transfer trust company warrant agent form five year warrant certificate attached thereto incorporated herein reference form 8a filed securities exchange commission january 29 2004 44 warrant agreement dated december 3 2003 among registrant american stock transfer trust company warrant agent form seven year warrant certificate attached thereto incorporated herein reference form 8a filed securities exchange commission january 29 2004 45 registration rights agreement dated march 1 2004 among abovenet inc fiber llc franklin mutual advisers llc trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees 46 rights agreement dated august 3 2006 abovenet inc american stock transfer trust company including form right certificate incorporated herein reference form 8k filed securities exchange commission august 4 2006 101 agreement lease dated december 30 1994 hudson telegraph associates lp landlord f garofalo electric co inc national fiber network inc tenant letter dated july 1 2005 regarding transfer property ownership hudson telegraph associates lp hudson owner llc 102 agreement lease dated april 23 1999 111 eighth avenue llc landlord metromedia fiber network services inc tenant including amendments dated october 18 2000 march 13 2003 march 1 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 103 agreement lease dated october 1 1999 newport office center co landlord metromedia fiber network services inc tenant related rightofentry license agreement facilities management license agreement incorporated herein reference form 8k filed securities exchange commission may 13 2008 104 amended restated franchise agreement dated february 28 2000 city new york metromedia fiber network nyc inc stipulation agreement order among reorganized debtors new york city department information technology telecommunications concerning franchise agreement effective january 1 2004 approved united states bankruptcy court july 12 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 105 fiber lease agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 october 8 2007 106 collocation maintenance agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 107 incentive stock option stock unit grant plan 108 employment agreement made august 29 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc william g laperch including amendments dated january 1 2004 december 30 2005 109 employment agreement made august 31 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc robert j sokota including amendment dated december 30 2005 1010 employment agreement made august 31 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc michael doris including amendments dated december 30 2005 march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1011 stock option agreement dated september 10 2003 abovenet inc william g laperch 1012 stock option agreement dated september 10 2003 abovenet inc robert j sokota 1013 stock option agreement dated september 10 2003 abovenet inc michael doris including amendment dated march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1014 stock unit agreement dated september 10 2003 abovenet inc william g laperch including amendments dated december 30 2005 december 30 2006 1015 stock unit agreement dated september 10 2003 abovenet inc robert j sokota including amendments dated december 30 2005 december 30 2006 1016 stock unit agreement dated september 10 2003 abovenet inc michael doris including amendments dated december 30 2005 december 30 2006 1017 employment agreement dated september 12 2003 abovenet inc rajiv datta including amendment dated december 30 2005 1018 employment agreement dated september 12 2003 abovenet inc douglas jendras including amendment dated december 30 2005 1019 stock option agreement dated september 12 2003 abovenet inc rajiv datta 1020 stock option agreement dated september 12 2003 abovenet inc douglas jendras 1021 stock unit agreement dated september 12 2003 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 1022 stock unit agreement dated september 12 2003 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 1023 stock unit agreement dated december 19 2003 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 1024 stock option agreement dated may 13 2004 abovenet inc rajiv datta 1025 stock option agreement dated may 13 2004 abovenet inc douglas jendras 1026 stock unit agreement dated may 13 2004 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 1027 stock unit agreement dated may 13 2004 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 1028 employment agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 august 27 2007 1029 stock option agreement dated june 1 2004 abovenet inc john jacquay 1030 stock unit agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 december 30 2006 1031 stock option agreement dated december 19 2005 abovenet inc john jacquay 1032 stock option agreement dated december 19 2005 abovenet inc rajiv datta 1033 stock option agreement dated december 19 2005 abovenet inc douglas jendras 1034 asset purchase agreement dated september 27 2006 abovenet communications inc digital llc incorporated reference form 8k filed securities exchange commission october 4 2006 1035 stock unit agreement dated august 7 2007 abovenet inc william laperch 1036 stock unit agreement dated august 7 2007 abovenet inc robert sokota 1037 stock unit agreement dated august 7 2007 abovenet inc michael doris including amendment dated march 4 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1038 stock unit agreement dated august 7 2007 abovenet inc john jacquay 1039 stock unit agreement dated august 7 2007 abovenet inc rajiv datta 1040 stock unit agreement dated august 7 2007 abovenet inc douglas jendras 1041 credit guaranty agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 8k filed securities exchange commission march 5 2008 1042 security pledge agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc societe generale administrative agent incorporated reference form 8k filed securities exchange commission march 5 2008 1043 separation employment general release agreement dated march 4 2008 abovenet communications inc michael doris incorporated herein reference form 8k filed securities exchange commission march 10 2008 1044 consulting agreement dated march 4 2008 abovenet communications inc michael doris incorporated herein reference form 8k filed securities exchange commission march 10 2008 161 letter kpmg llp securities exchange commission dated august 18 2006 incorporated reference form 8k dated august 17 2006 filed securities exchange commission august 23 2006 211 subsidiaries 311 certification chief executive officer registrant pursuant rule 13a14a securities exchange act 1934 312 certification acting chief financial officer registrant pursuant rule 13a14a securities exchange act 1934 321 certification chief executive officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification acting chief financial officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 exhibit represents management contract compensatory plan arrangement confidential treatment required certain portions exhibit signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized abovenet inc date may 13 2008 william g laperch william g laperch president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date may 13 2008 william g laperch william g laperch president chief executive officer director principal executive officer date may 13 2008 joseph p ciavarella joseph p ciavarella acting chief financial officer principal financial accounting officer date may 13 2008 jeffrey brodsky jeffrey brodsky director date may 13 2008 michael j embler michael j embler director date may 13 2008 richard postma richard postma director date may 13 2008 richard shorten jr richard shorten jr director date may 13 2008 stuart subotnick stuart subotnick director exhibit list exhibit description exhibit 41 form specimen common stock certificate 42 standstill agreement dated august 2003 metromedia fiber network inc john w kluge trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees stuart subotnick 45 registration rights agreement dated march 1 2004 among abovenet inc fiber llc franklin mutual advisers llc trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees 101 agreement lease dated december 30 1994 hudson telegraph associates lp landlord f garofalo electric co inc national fiber network inc tenant letter dated july 1 2005 regarding transfer property ownership hudson telegraph associates lp hudson owner llc 105 fiber lease agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 october 8 2007 106 collocation maintenance agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 107 incentive stock option stock unit grant plan 108 employment agreement made august 29 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc william g laperch including amendments dated january 1 2004 december 30 2005 109 employment agreement made august 31 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc robert j sokota including amendment dated december 30 2005 1011 stock option agreement dated september 10 2003 abovenet inc william g laperch 1012 stock option agreement dated september 10 2003 abovenet inc robert j sokota 1014 stock unit agreement dated september 10 2003 abovenet inc william g laperch including amendments dated december 30 2005 december 30 2006 1015 stock unit agreement dated september 10 2003 abovenet inc robert j sokota including amendments dated december 30 2005 december 30 2006 1016 stock unit agreement dated september 10 2003 abovenet inc michael doris including amendments dated december 30 2005 december 30 2006 1017 employment agreement dated september 12 2003 abovenet inc rajiv datta including amendment dated december 30 2005 1018 employment agreement dated september 12 2003 abovenet inc douglas jendras including amendment dated december 30 2005 1019 stock option agreement dated september 12 2003 abovenet inc rajiv datta 1020 stock option agreement dated september 12 2003 abovenet inc douglas jendras 1021 stock unit agreement dated september 12 2003 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 1022 stock unit agreement dated september 12 2003 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 1023 stock unit agreement dated december 19 2003 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 1024 stock option agreement dated may 13 2004 abovenet inc rajiv datta 1025 stock option agreement dated may 13 2004 abovenet inc douglas jendras 1026 stock unit agreement dated may 13 2004 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 1027 stock unit agreement dated may 13 2004 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 1028 employment agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 august 27 2007 1029 stock option agreement dated june 1 2004 abovenet inc john jacquay 1030 stock unit agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 december 30 2006 1031 stock option agreement dated december 19 2005 abovenet inc john jacquay 1032 stock option agreement dated december 19 2005 abovenet inc rajiv datta 1033 stock option agreement dated december 19 2005 abovenet inc douglas jendras 1035 stock unit agreement dated august 7 2007 abovenet inc william laperch 1036 stock unit agreement dated august 7 2007 abovenet inc robert sokota 1038 stock unit agreement dated august 7 2007 abovenet inc john jacquay 1039 stock unit agreement dated august 7 2007 abovenet inc rajiv datta 1040 stock unit agreement dated august 7 2007 abovenet inc douglas jendras 211 subsidiaries 311 certification chief executive officer registrant pursuant rule 13a14a securities exchange act 1934 312 certification acting chief financial officer registrant pursuant rule 13a14a securities exchange act 1934 321 certification chief executive officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification acting chief financial officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 exhibit represents management contract compensatory plan arrangement confidential treatment required certain portions exhibit item 15 exhibits financial statement schedules following documents filed part annual report form 10k 1 financial statements list financial statements company included annual report form 10k please see index consolidated financial statements appearing beginning item 8 “financial statements supplementary data” 2 financial statement schedules following financial statement schedule filed part annual report form 10k report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audits referred report dated february 28 2011 relating consolidated financial statements abovenet inc contained item 8 form 10k also included audit accompanying financial statement schedule ii valuation qualifying accounts financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein bdo usa llp new york ny february 28 2011 schedule ii valuation qualifying accounts abovenet inc subsidiaries schedule ii valuation qualifying accounts millions 1 represents recovery items specifically reserved 05 writeoff uncollectible accounts totaling 02 2 represents benefit 73 realized connection release portion valuation allowances previously established uk additionally valuation allowance decreased 10 due reduction effective tax rates uk partially offset 06 attributable foreign currency translation 3 represents writeoff uncollectible accounts 4 represents writeoff certain deferred tax assets totaling 4692 company able utilize plus release valuation allowances totaling 1830 company believes able utilize 5 represents change net deferred tax assets gross deferred tax assets less gross deferred tax liabilities year balance sheet date net deferred tax assets full valuation allowance schedules omitted applicable required information disclosed consolidated financial statements including notes thereto 3 exhibits information required item set forth exhibit index follows signature page annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date february 28 2011 william g laperch william g laperch president chief executive officer director principal executive officer date february 28 2011 joseph p ciavarella joseph p ciavarella senior vice president chief financial officer principal financial accounting officer date february 28 2011 jeffrey brodsky jeffrey brodsky director date february 28 2011 michael j embler michael j embler director date february 28 2011 richard postma richard postma director date february 28 2011 richard shorten jr richard shorten jr director date february 28 2011 stuart subotnick stuart subotnick director exhibit index exhibit description exhibit 31 restated certificate incorporation abovenet inc filed secretary state delaware august 3 2010 incorporated herein reference form 10q filed securities exchange commission august 9 2010 32 amended restated bylaws adopted september 8 2003 incorporated herein reference form 8a filed securities exchange commission september 8 2003 41 form specimen common stock certificate incorporated herein reference form 10k filed securities exchange commission may 13 2008 42 registration rights agreement dated march 1 2004 among abovenet inc fiber llc franklin mutual advisers llc trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees incorporated herein reference form 10k filed securities exchange commission may 13 2008 43 amended restated rights agreement dated august 3 2009 abovenet inc american stock transfer trust company llc incorporated herein reference form 8k filed securities exchange commission august 3 2009 44 form right certificate incorporated herein reference form 8k filed securities exchange commission august 3 2009 45 amendment amended restated rights agreement signed january 27 2010 abovenet inc american stock transfer trust company llc incorporated herein reference form 8k filed securities exchange commission january 28 2010 101 agreement lease dated december 30 1994 hudson telegraph associates lp landlord f garofalo electric co inc national fiber network inc tenant letter dated july 1 2005 regarding transfer property ownership hudson telegraph associates lp hudson owner llc incorporated herein reference form 10k filed securities exchange commission may 13 2008 102 agreement lease dated april 23 1999 111 eighth avenue llc landlord metromedia fiber network services inc tenant including amendments dated october 18 2000 march 13 2003 march 1 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 103 agreement lease dated october 1 1999 newport office center co landlord metromedia fiber network services inc tenant related rightofentry license agreement facilities management license agreement incorporated herein reference form 8k filed securities exchange commission may 13 2008 104 amended restated franchise agreement dated february 28 2000 city new york metromedia fiber network nyc inc stipulation agreement order among reorganized debtors new york city department information technology telecommunications concerning franchise agreement effective january 1 2004 approved united states bankruptcy court july 12 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 105 fiber lease agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 october 8 2007 incorporated herein reference form 10k filed securities exchange commission may 13 2008 106 collocation maintenance agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 incorporated herein reference form 10k filed securities exchange commission may 13 2008 107 2003 incentive stock option stock unit grant plan incorporated herein reference form 10k filed securities exchange commission may 13 2008 108 credit guaranty agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 8k filed securities exchange commission march 5 2008 109 security pledge agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc societe generale administrative agent incorporated herein reference form 8k filed securities exchange commission march 5 2008 1010 waiver amendment 1 credit guaranty agreement dated september 22 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 10k filed securities exchange commission september 30 2008 1011 joinder agreement dated october 1 2008 suntrust bank new lender societe generale administrative agent lenders credit agreement incorporated herein reference form 10k filed securities exchange commission september 30 2008 1012 amendment 2 dated june 29 2009 credit guaranty agreement among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent dated february 29 2008 incorporated herein reference form 8k filed securities exchange commission july 2 2009 1013 amendment 3 dated march 4 2010 credit guaranty agreement among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent dated february 29 2008 incorporated herein reference form 8k filed securities exchange commission may 10 2010 1014 waiver 2 credit guaranty agreement dated november 18 2010 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent 1015 abovenet inc 2008 equity incentive plan incorporated herein reference form 8k filed securities exchange commission september 5 2008 1016 employment agreement effective september 2 2008 abovenet inc william laperch incorporated herein reference form 8k filed securities exchange commission september 11 2008 1017 employment agreement effective september 2 2008 abovenet inc robert sokota incorporated herein reference form 8k filed securities exchange commission september 11 2008 1018 employment agreement effective september 2 2008 abovenet inc john jacquay incorporated herein reference form 8k filed securities exchange commission september 11 2008 1019 employment agreement effective september 2 2008 abovenet inc rajiv datta incorporated herein reference form 8k filed securities exchange commission september 11 2008 1020 employment agreement effective september 2 2008 abovenet inc douglas jendras incorporated herein reference form 8k filed securities exchange commission september 11 2008 1021 stock unit agreement dated september 8 2008 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission september 30 2008 1022 stock unit agreement dated september 8 2008 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission september 30 2008 1023 stock unit agreement dated september 8 2008 abovenet inc robert sokota incorporated herein reference form 10k filed securities exchange commission september 30 2008 1024 stock unit agreement dated september 8 2008 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission september 30 2008 1025 stock unit agreement dated september 8 2008 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission september 30 2008 1026 stock unit agreement dated september 8 2008 abovenet inc doug jendras incorporated herein reference form 10k filed securities exchange commission september 30 2008 1027 stock unit agreement dated september 8 2008 abovenet inc jeffrey brodsky incorporated herein reference form 10k filed securities exchange commission september 30 2008 1028 stock unit agreement dated september 8 2008 abovenet inc michael embler incorporated herein reference form 10k filed securities exchange commission september 30 2008 1029 stock unit agreement dated september 8 2008 abovenet inc richard postma incorporated herein reference form 10k filed securities exchange commission september 30 2008 1030 stock unit agreement dated september 8 2008 abovenet inc richard shorten jr incorporated herein reference form 10k filed securities exchange commission september 30 2008 1031 stock unit agreement dated september 8 2008 abovenet inc stuart subotnick incorporated herein reference form 10k filed securities exchange commission september 30 2008 1032 stock option agreement dated september 8 2008 abovenet inc jeffrey brodsky incorporated herein reference form 10k filed securities exchange commission september 30 2008 1033 stock option agreement dated september 8 2008 abovenet inc michael embler incorporated herein reference form 10k filed securities exchange commission september 30 2008 1034 stock option agreement dated september 8 2008 abovenet inc richard shorten jr incorporated herein reference form 10k filed securities exchange commission september 30 2008 1035 stock option agreement dated september 8 2008 abovenet inc stuart subotnick incorporated herein reference form 10k filed securities exchange commission september 30 2008 1036 employment agreement dated october 27 2008 abovenet inc joseph p ciavarella incorporated herein reference form 8k filed securities exchange commission october 29 2008 1037 stock unit agreement dated october 27 2008 abovenet inc joseph ciavarella incorporated herein reference form 8k filed securities exchange commission october 29 2008 1038 stock purchase agreement dated october 28 2008 abovenet inc william g laperch incorporated herein reference form 8k filed securities exchange commission october 31 2008 1039 stock purchase agreement dated october 28 2008 abovenet inc robert j sokota incorporated herein reference form 8k filed securities exchange commission october 31 2008 1040 stock purchase agreement dated october 28 2008 abovenet inc rajiv datta incorporated herein reference form 8k filed securities exchange commission october 31 2008 1041 stock purchase agreement dated october 28 2008 abovenet inc douglas jendras incorporated herein reference form 8k filed securities exchange commission october 31 2008 1042 summary 2009 bonus plan dated february 12 2009 incorporated herein reference form 10k filed securities exchange commission march 16 2009 1043 stock unit agreement dated december 3 2009 abovenet inc jeffrey brodsky 1044 stock unit agreement dated december 3 2009 abovenet inc michael embler 1045 stock unit agreement dated december 3 2009 abovenet inc richard postma 1046 stock unit agreement dated december 3 2009 abovenet inc richard shorten jr 1047 stock unit agreement dated december 3 2009 abovenet inc stuart subotnick 1048 summary 2010 bonus plan dated march 1 2010 incorporated herein reference form 8k filed securities exchange commission march 5 2010 1049 abovenet inc amended restated 2010 employee stock purchase plan incorporated herein reference form 10q filed securities exchange commission november 8 2010 1050 form common stock award agreement dated december 20 2010 1051 form stock unit agreement dated december 20 2010 1052 stock unit agreement dated december 20 2010 abovenet inc jeffrey brodsky 1053 stock unit agreement dated december 20 2010 abovenet inc michael embler 1054 stock unit agreement dated december 20 2010 abovenet inc richard postma 1055 stock unit agreement dated december 20 2010 abovenet inc richard shorten jr 1056 stock unit agreement dated december 20 2010 abovenet inc stuart subotnick 1057 first amendment employment agreement effective january 25 2011 william g laperch abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1058 first amendment employment agreement effective january 25 2011 rajiv datta abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1059 first amendment employment agreement effective january 25 2011 joseph p ciavarella abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1060 first amendment employment agreement effective january 25 2011 robert sokota abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1061 first amendment employment agreement effective january 25 2011 john jacquay abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1062 first amendment employment agreement effective january 25 2011 douglas jendras abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1063 form stock unit agreement january 25 2011 grants incorporated herein reference form 8k filed securities exchange commission january 28 2011 1064 revolving credit agreement dated january 28 2011 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto suntrust bank administrative agent incorporated herein reference form 8k filed securities exchange commission february 2 2011 1065 guaranty security agreement dated january 28 2011 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc grantors party thereto suntrust bank administrative agent incorporated herein reference form 8k filed securities exchange commission february 2 2011 1066 summary 2011 bonus plan dated february 28 2011 211 subsidiaries 231 consent bdo usa llp 311 certification chief executive officer registrant pursuant rule 13a14a securities exchange act 1934 312 certification chief financial officer registrant pursuant rule 13a14a securities exchange act 1934 321 certification chief executive officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 exhibit represents management contract compensatory plan arrangement confidential treatment granted certain portions exhibit item 15 exhibits financial statement schedules following documents filed part annual report form 10k 1 financial statements list financial statements company included annual report form 10k please see index consolidated financial statements appearing beginning item 8 “financial statements supplementary data” 2 financial statement schedules following financial statement schedule filed part annual report form 10k report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audits referred report dated february 29 2012 relating consolidated financial statements abovenet inc contained item 8 form 10k also included audit accompanying financial statement schedule ii valuation qualifying accounts financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein bdo usa llp new york ny february 29 2012 schedule ii valuation qualifying accounts abovenet inc subsidiaries schedule ii valuation qualifying accounts millions 1 represents writeoff uncollectible accounts 2 represents benefit 91 realized connection release portion valuation allowances previously established uk comprised 92 tax benefit recognized partially offset 01 due foreign currency translation 3 represents recovery items specifically reserved 05 writeoff uncollectible accounts totaling 02 4 represents benefit 73 realized connection release portion valuation allowances previously established uk additionally valuation allowance decreased 10 due reduction effective tax rates uk partially offset 06 attributable foreign currency translation 5 represents writeoff certain deferred tax assets totaling 4692 company able utilize plus release valuation allowances totaling 1830 company believes able utilize schedules omitted applicable required information disclosed consolidated financial statements including notes thereto 3 exhibits information required item set forth exhibit index follows signature page annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized abovenet inc date february 29 2012 william g laperch william g laperch president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date february 29 2012 william g laperch william g laperch president chief executive officer director principal executive officer date february 29 2012 joseph p ciavarella joseph p ciavarella senior vice president chief financial officer principal financial accounting officer date february 29 2012 jeffrey brodsky jeffrey brodsky director date february 29 2012 michael j embler michael j embler director date february 29 2012 richard postma richard postma director date february 29 2012 richard shorten jr richard shorten jr director date february 29 2012 stuart subotnick stuart subotnick director exhibit index exhibit description exhibit 31 restated certificate incorporation abovenet inc filed secretary state delaware august 3 2010 incorporated herein reference form 10q filed securities exchange commission august 9 2010 32 amended restated bylaws adopted december 1 2011 incorporated herein reference form 8k filed securities exchange commission december 7 2011 41 form specimen common stock certificate incorporated herein reference form 10k filed securities exchange commission may 13 2008 42 registration rights agreement dated march 1 2004 among abovenet inc fiber llc franklin mutual advisers llc trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees incorporated herein reference form 10k filed securities exchange commission may 13 2008 43 amended restated rights agreement dated august 3 2009 abovenet inc american stock transfer trust company llc incorporated herein reference form 8k filed securities exchange commission august 3 2009 44 form right certificate incorporated herein reference form 8k filed securities exchange commission august 3 2009 45 amendment amended restated rights agreement signed january 27 2010 abovenet inc american stock transfer trust company llc incorporated herein reference form 8k filed securities exchange commission january 28 2010 101 agreement lease dated december 30 1994 hudson telegraph associates lp landlord f garofalo electric co inc national fiber network inc tenant letter dated july 1 2005 regarding transfer property ownership hudson telegraph associates lp hudson owner llc incorporated herein reference form 10k filed securities exchange commission may 13 2008 102 agreement lease dated april 23 1999 111 eighth avenue llc landlord metromedia fiber network services inc tenant including amendments dated october 18 2000 march 13 2003 march 1 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 103 agreement lease dated october 1 1999 newport office center co landlord metromedia fiber network services inc tenant related rightofentry license agreement facilities management license agreement incorporated herein reference form 8k filed securities exchange commission may 13 2008 104 amended restated franchise agreement dated february 28 2000 city new york metromedia fiber network nyc inc stipulation agreement order among reorganized debtors new york city department information technology telecommunications concerning franchise agreement effective january 1 2004 approved united states bankruptcy court july 12 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 105 fiber lease agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 october 8 2007 incorporated herein reference form 10k filed securities exchange commission may 13 2008 106 collocation maintenance agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 incorporated herein reference form 10k filed securities exchange commission may 13 2008 107 2003 incentive stock option stock unit grant plan incorporated herein reference form 10k filed securities exchange commission may 13 2008 108 credit guaranty agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 8k filed securities exchange commission march 5 2008 109 security pledge agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc societe generale administrative agent incorporated herein reference form 8k filed securities exchange commission march 5 2008 1010 waiver amendment 1 credit guaranty agreement dated september 22 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 10k filed securities exchange commission september 30 2008 1011 joinder agreement dated october 1 2008 suntrust bank new lender societe generale administrative agent lenders credit agreement incorporated herein reference form 10k filed securities exchange commission september 30 2008 1012 amendment 2 dated june 29 2009 credit guaranty agreement among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent dated february 29 2008 incorporated herein reference form 8k filed securities exchange commission july 2 2009 1013 amendment 3 dated march 4 2010 credit guaranty agreement among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent dated february 29 2008 incorporated herein reference form 8k filed securities exchange commission may 10 2010 1014 waiver 2 credit guaranty agreement dated november 18 2010 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 10k filed securities exchange commission march 1 2011 1015 abovenet inc 2008 equity incentive plan incorporated herein reference form 8k filed securities exchange commission september 5 2008 1016 employment agreement effective september 2 2008 abovenet inc william laperch incorporated herein reference form 8k filed securities exchange commission september 11 2008 1017 employment agreement effective september 2 2008 abovenet inc robert sokota incorporated herein reference form 8k filed securities exchange commission september 11 2008 1047 summary 2010 bonus plan dated march 1 2010 incorporated herein reference form 8k filed securities exchange commission march 5 2010 1048 abovenet inc amended restated 2010 employee stock purchase plan incorporated herein reference form 10q filed securities exchange commission november 8 2010 1049 form common stock award agreement dated december 20 2010 incorporated herein reference form 10k filed securities exchange commission march 1 2011 1050 form stock unit agreement dated december 20 2010 incorporated herein reference form 10k filed securities exchange commission march 1 2011 1051 stock unit agreement dated december 20 2010 abovenet inc jeffrey brodsky incorporated herein reference form 10k filed securities exchange commission march 1 2011 1052 stock unit agreement dated december 20 2010 abovenet inc michael embler incorporated herein reference form 10k filed securities exchange commission march 1 2011 1053 stock unit agreement dated december 20 2010 abovenet inc richard postma incorporated herein reference form 10k filed securities exchange commission march 1 2011 1054 stock unit agreement dated december 20 2010 abovenet inc richard shorten jr incorporated herein reference form 10k filed securities exchange commission march 1 2011 1055 stock unit agreement dated december 20 2010 abovenet inc stuart subotnick incorporated herein reference form 10k filed securities exchange commission march 1 2011 1056 first amendment employment agreement effective january 25 2011 william g laperch abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1057 first amendment employment agreement effective january 25 2011 rajiv datta abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1058 first amendment employment agreement effective january 25 2011 joseph p ciavarella abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1059 first amendment employment agreement effective january 25 2011 robert sokota abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1060 first amendment employment agreement effective january 25 2011 john jacquay abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1061 first amendment employment agreement effective january 25 2011 douglas jendras abovenet inc incorporated herein reference form 8k filed securities exchange commission january 28 2011 1062 form stock unit agreement january 25 2011 grants incorporated herein reference form 8k filed securities exchange commission january 28 2011 1063 revolving credit agreement dated january 28 2011 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto suntrust bank administrative agent incorporated herein reference form 8k filed securities exchange commission february 2 2011 1064 guaranty security agreement dated january 28 2011 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc grantors party thereto suntrust bank administrative agent incorporated herein reference form 8k filed securities exchange commission february 2 2011 1065 summary 2011 bonus plan dated february 28 2011 incorporated herein reference form 10k filed securities exchange commission march 1 2011 1066 first amendment dated march 28 2011 revolving credit agreement dated january 28 2011 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto suntrust bank administrative agent incorporated herein reference form 10q filed securities exchange commission may 9 2011 1067 abovenet inc 2011 equity incentive plan incorporated herein reference form 8k filed securities exchange commission june 27 2011 1068 summary april 27 2011 amendment employment agreement john jacquay abovenet inc incorporated herein reference form 10q filed securities exchange commission august 9 2011 1069 fourth amendment lease dated june 24 2011 one city block llc landlord abovenet communications inc tenant incorporated herein reference form 10q filed securities exchange commission august 9 2011 1070 employment agreement effective july 25 2011 abovenet inc nicholas ridolfi incorporated herein reference form 10q filed securities exchange commission november 8 2011 1071 second amendment employment agreement effective november 30 2011 william g laperch abovenet inc incorporated herein reference form 8k filed securities exchange commission december 6 2011 1072 second amendment employment agreement effective november 30 2011 rajiv datta abovenet inc incorporated herein reference form 8k filed securities exchange commission december 6 2011 1073 second amendment employment agreement effective november 30 2011 joseph p ciavarella abovenet inc incorporated herein reference form 8k filed securities exchange commission december 6 2011 1074 second amendment employment agreement effective november 30 2011 robert sokota abovenet inc incorporated herein reference form 8k filed securities exchange commission december 6 2011 1075 restricted stock unit agreement dated december 1 2011 abovenet inc jeffrey brodsky 1076 restricted stock unit agreement dated december 1 2011 abovenet inc michael embler 1077 restricted stock unit agreement dated december 1 2011 abovenet inc richard postma 1078 restricted stock unit agreement dated december 1 2011 abovenet inc richard shorten jr 1079 restricted stock unit agreement dated december 1 2011 abovenet inc stuart subotnick 1080 form restricted stock unit agreement grants executive officers 2011 equity incentive plan 1081 summary 2012 bonus plan dated february 24 2012 1082 lease modification extension agreement dated september 14 2009 60 hudson owner llc successor hudson telegraph associates lp formerly known hudson telegraph associates landlord abovenet communications inc successor f garofalo electric co inc national fiber network inc tenant 211 subsidiaries 231 consent bdo usa llp 311 certification chief executive officer registrant pursuant rule 13a14a securities exchange act 1934 312 certification chief financial officer registrant pursuant rule 13a14a securities exchange act 1934 321 certification chief executive officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 exhibit represents management contract compensatory plan arrangement confidential treatment granted certain portions exhibit item 15 exhibits financial statement schedules 1 financial statements list financial statements company included report please see index consolidated financial statements appearing beginning item 8 financial statements supplementary data 2 financial statement schedules following financial statement schedule filed part annual report form 10k report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audits referred report dated september 29 2008 relating consolidated financial statements abovenet inc contained item 8 form 10k also included audit financial statement schedule listed accompanying index financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein bdo seidman llp new york ny september 29 2008 schedule ii valuation qualifying accounts abovenet inc subsidiaries schedule ii valuation qualifying accounts millions schedules omitted applicable required information disclosed consolidated financial statements including notes thereto 3 exhibits exhibit description exhibit 31 amended restated certificate incorporation filed secretary state delaware august 29 2003 effective august 29 2003 incorporated herein reference form 8a filed securities exchange commission september 8 2003 32 amended restated bylaws adopted september 8 2003 incorporated herein reference form 8a filed securities exchange commission september 8 2003 33 certificate designation series junior participating preferred stock incorporated herein reference form 8k filed securities exchange commission august 4 2006 41 form specimen common stock certificate incorporated herein reference form 10k filed securities exchange commission may 13 2008 42 standstill agreement dated august 2003 metromedia fiber network inc john w kluge trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees stuart subotnick incorporated herein reference form 10k filed securities exchange commission may 13 2008 43 warrant agreement dated december 3 2003 among registrant american stock transfer trust company warrant agent form five year warrant certificate attached thereto incorporated herein reference form 8a filed securities exchange commission january 29 2004 44 warrant agreement dated december 3 2003 among registrant american stock transfer trust company warrant agent form seven year warrant certificate attached thereto incorporated herein reference form 8a filed securities exchange commission january 29 2004 45 registration rights agreement dated march 1 2004 among abovenet inc fiber llc franklin mutual advisers llc trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees incorporated herein reference form 10k filed securities exchange commission may 13 2008 46 rights agreement dated august 3 2006 abovenet inc american stock transfer trust company including form right certificate incorporated herein reference form 8k filed securities exchange commission august 4 2006 47 amendment rights agreement dated august 7 2008 abovenet inc american stock transfer trust company incorporated herein reference form 8k filed securities exchange commission august 12 2008 48 standstill agreement dated august 7 2008 among abovenet inc jgd management corp hfr ed select fund iv master trust lyxoryork fund limited permal york limited york capital management lp york credit opportunities fund lp york credit opportunities unit trust york enhanced strategies fund llc york global value partners lp york investment limited york long enhanced fund lp york select lp york select unit trust certain accounts managed jgd management corp hold securities abovenet inc incorporated herein reference form 8k filed securities exchange commission august 12 2008 49 amendment 1 standstill agreement dated april 25 2008 among abovenet inc john w kluge certain fourteenth restatement trust agreement dated may 30 1984 john w kluge grantor john w kluge jp morgan chase bank na new york original trustees dated april 4 2008 stuart subotnick jwk enterprises llc 101 agreement lease dated december 30 1994 hudson telegraph associates lp landlord f garofalo electric co inc national fiber network inc tenant letter dated july 1 2005 regarding transfer property ownership hudson telegraph associates lp hudson owner llc incorporated herein reference form 10k filed securities exchange commission may 13 2008 102 agreement lease dated april 23 1999 111 eighth avenue llc landlord metromedia fiber network services inc tenant including amendments dated october 18 2000 march 13 2003 march 1 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 103 agreement lease dated october 1 1999 newport office center co landlord metromedia fiber network services inc tenant related rightofentry license agreement facilities management license agreement incorporated herein reference form 8k filed securities exchange commission may 13 2008 104 amended restated franchise agreement dated february 28 2000 city new york metromedia fiber network nyc inc stipulation agreement order among reorganized debtors new york city department information technology telecommunications concerning franchise agreement effective january 1 2004 approved united states bankruptcy court july 12 incorporated herein reference form 8k filed securities exchange commission may 13 2008 105 fiber lease agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 october 8 2007 incorporated herein reference form 10k filed securities exchange commission may 13 2008 106 collocation maintenance agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 incorporated herein reference form 10k filed securities exchange commission may 13 2008 107 incentive stock option stock unit grant plan incorporated herein reference form 10k filed securities exchange commission may 13 2008 108 employment agreement made august 29 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc william g laperch including amendments dated january 1 2004 december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 109 employment agreement made august 31 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc robert j sokota including amendment dated december 30 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1010 employment agreement made august 31 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc michael doris including amendments dated december 30 2005 march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1011 stock option agreement dated september 10 2003 abovenet inc william g laperch incorporated herein reference form 10k filed securities exchange commission may 13 2008 1012 stock option agreement dated september 10 2003 abovenet inc robert j sokota incorporated herein reference form 10k filed securities exchange commission may 13 2008 1013 stock option agreement dated september 10 2003 abovenet inc michael doris including amendment dated march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1014 stock unit agreement dated september 10 2003 abovenet inc william g laperch including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1015 stock unit agreement dated september 10 2003 abovenet inc robert j sokota including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1016 stock unit agreement dated september 10 2003 abovenet inc michael doris including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1017 employment agreement dated september 12 2003 abovenet inc rajiv datta including amendment dated december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1018 employment agreement dated september 12 2003 abovenet inc douglas jendras including amendment dated december 30 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1019 stock option agreement dated september 12 2003 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1020 stock option agreement dated september 12 2003 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1021 stock unit agreement dated september 12 2003 abovenet inc rajiv datta including amendments dated december 30 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1022 stock unit agreement dated september 12 2003 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1023 stock unit agreement dated december 19 2003 abovenet inc rajiv datta including amendments dated december 30 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1024 stock option agreement dated may 13 2004 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1025 stock option agreement dated may 13 2004 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1026 stock unit agreement dated may 13 2004 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1027 stock unit agreement dated may 13 2004 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1028 employment agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 august 27 2007 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1029 stock option agreement dated june 1 2004 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1030 stock unit agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1031 stock option agreement dated december 19 2005 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1032 stock option agreement dated december 19 2005 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1033 stock option agreement dated december 19 2005 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1034 asset purchase agreement dated september 27 2006 abovenet communications inc digital llc incorporated reference form 8k filed securities exchange commission october 4 2006 1035 stock unit agreement dated august 7 2007 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission may 13 2008 1036 stock unit agreement dated august 7 2007 abovenet inc robert sokota incorporated herein reference form 10k filed securities exchange commission may 13 2008 1037 stock unit agreement dated august 7 2007 abovenet inc michael doris including amendment dated march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1038 stock unit agreement dated august 7 2007 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1039 stock unit agreement dated august 7 2007 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1040 stock unit agreement dated august 7 2007 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1041 credit guaranty agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 8k filed securities exchange commission march 5 2008 1042 security pledge agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc societe generale administrative agent incorporated reference form 8k filed securities exchange commission march 5 2008 1043 separation employment general release agreement dated march 4 2008 abovenet communications inc michael doris incorporated herein reference form 8k filed securities exchange commission march 10 2008 1044 consulting agreement dated march 4 2008 abovenet communications inc michael doris incorporated herein reference form 8k filed securities exchange commission march 10 2008 1045 abovenet inc 2008 equity incentive plan incorporated herein reference form 8k filed securities exchange commission september 5 2008 1046 employment agreement effective september 2 2008 abovenet inc william laperch incorporated herein reference form 8k filed securities exchange commission september 11 2008 1047 employment agreement effective september 2 2008 abovenet inc robert sokota incorporated herein reference form 8k filed securities exchange commission september 11 2008 1048 employment agreement effective september 2 2008 abovenet inc john jacquay incorporated herein reference form 8k filed securities exchange commission september 11 2008 1049 employment agreement effective september 2 2008 abovenet inc rajiv datta incorporated herein reference form 8k filed securities exchange commission september 11 2008 1050 employment agreement effective september 2 2008 abovenet inc douglas jendras incorporated herein reference form 8k filed securities exchange commission september 11 2008 1051 stock unit agreement dated september 8 2008 abovenet inc william laperch 1052 stock unit agreement dated september 8 2008 abovenet inc william laperch 1053 stock unit agreement dated september 8 2008 abovenet inc robert sokota 1054 stock unit agreement dated september 8 2008 abovenet inc john jacquay 1055 stock unit agreement dated september 8 2008 abovenet inc rajiv datta 1056 stock unit agreement dated september 8 2008 abovenet inc doug jendras 1057 stock unit agreement dated september 8 2008 abovenet inc jeffrey brodsky 1058 stock unit agreement dated september 8 2008 abovenet inc michael embler 1059 stock unit agreement dated september 8 2008 abovenet inc richard postma 1060 stock unit agreement dated september 8 2008 abovenet inc richard shorten jr 1061 stock unit agreement dated september 8 2008 abovenet inc stuart subotnick 1062 stock option agreement dated september 8 2008 abovenet inc jeffrey brodsky 1063 stock option agreement dated september 8 2008 abovenet inc michael embler 1064 stock option agreement dated september 8 2008 abovenet inc richard postma 1065 stock option agreement dated september 8 2008 abovenet inc richard shorten jr 1066 stock option agreement dated september 8 2008 abovenet inc stuart subotnick 1067 waiver amendment 1 credit guaranty agreement dated september 22 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent 1068 joinder agreement dated october 1 2008 suntrust bank new lender societe generale administrative agent lenders credit agreement 161 letter kpmg llp securities exchange commission dated august 18 2006 incorporated reference form 8k dated august 17 2006 filed securities exchange commission august 23 2006 211 subsidiaries 311 certification chief executive officer registrant pursuant rule 13a14a securities exchange act 1934 312 certification acting chief financial officer registrant pursuant rule 13a14a securities exchange act 1934 321 certification chief executive officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification acting chief financial officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 exhibit represents management contract compensatory plan arrangement confidential treatment granted certain portions exhibit signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized abovenet inc date september 29 2008 william g laperch william g laperch president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date september 29 2008 william g laperch william g laperch president chief executive officer director principal executive officer date september 29 2008 joseph p ciavarella joseph p ciavarella acting chief financial officer principal financial accounting officer date september 29 2008 jeffrey brodsky jeffrey brodsky director date september 29 2008 michael j embler michael j embler director date september 29 2008 richard postma richard postma director date september 29 2008 richard shorten jr richard shorten jr director date september 29 2008 stuart subotnick stuart subotnick director exhibit list exhibit description exhibit 49 amendment 1 standstill agreement dated april 25 2008 among abovenet inc john w kluge certain fourteenth restatement trust agreement dated may 30 1984 john w kluge grantor john w kluge jp morgan chase bank na new york original trustees dated april 4 2008 stuart subotnick jwk enterprises llc 1051 stock unit agreement dated september 8 2008 abovenet inc william laperch 1052 stock unit agreement dated september 8 2008 abovenet inc william laperch 1053 stock unit agreement dated september 8 2008 abovenet inc robert sokota 1054 stock unit agreement dated september 8 2008 abovenet inc john jacquay 1055 stock unit agreement dated september 8 2008 abovenet inc rajiv datta 1056 stock unit agreement dated september 8 2008 abovenet inc doug jendras 1057 stock unit agreement dated september 8 2008 abovenet inc jeffrey brodsky 1058 stock unit agreement dated september 8 2008 abovenet inc michael embler 1059 stock unit agreement dated september 8 2008 abovenet inc richard postma 1060 stock unit agreement dated september 8 2008 abovenet inc richard shorten jr 1061 stock unit agreement dated september 8 2008 abovenet inc stuart subotnick 1062 stock option agreement dated september 8 2008 abovenet inc jeffrey brodsky 1063 stock option agreement dated september 8 2008 abovenet inc michael embler 1064 stock option agreement dated september 8 2008 abovenet inc richard postma 1065 stock option agreement dated september 8 2008 abovenet inc richard shorten jr 1066 stock option agreement dated september 8 2008 abovenet inc stuart subotnick 1067 waiver amendment 1 credit guaranty agreement dated september 22 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent 1068 joinder agreement dated october 1 2008 suntrust bank new lender societe generale administrative agent lenders credit agreement 211 subsidiaries 311 certification chief executive officer registrant pursuant rule 13a14a securities exchange act 1934 312 certification acting chief financial officer registrant pursuant rule 13a14a securities exchange act 1934 321 certification chief executive officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification acting chief financial officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 exhibit represents management contract compensatory plan arrangement item 15 exhibits financial statement schedules following documents filed part annual report form 10k 1 financial statements list financial statements company included annual report form 10k please see index consolidated financial statements appearing beginning item 8 “financial statements supplementary data” 2 financial statement schedules following financial statement schedule filed part annual report form 10k report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audits referred report dated march 16 2010 relating consolidated financial statements abovenet inc contained item 8 form 10k also included audit financial statement schedule ii valuation qualifying accounts listed accompanying index financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein bdo seidman llp new york ny march 16 schedule ii valuation qualifying accounts abovenet inc subsidiaries schedule ii valuation qualifying accounts millions schedules omitted applicable required information disclosed consolidated financial statements including notes thereto 3 exhibits information required item set forth exhibit index follows signature page annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized abovenet inc date march 16 2010 william g laperch william g laperch president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date march 16 2010 william g laperch william g laperch president chief executive officer director principal executive officer date march 16 2010 joseph p ciavarella joseph p ciavarella senior vice president chief financial officer principal financial accounting officer date march 16 2010 jeffrey brodsky jeffrey brodsky director date march 16 2010 michael j embler michael j embler director date march 16 2010 richard postma richard postma director date march 16 2010 richard shorten jr richard shorten jr director date march 16 2010 stuart subotnick stuart subotnick director exhibit index exhibit description exhibit 31 amended restated certificate incorporation filed secretary state delaware august 29 2003 effective august 29 2003 incorporated herein reference form 8a filed securities exchange commission september 8 2003 32 amended restated bylaws adopted september 8 2003 incorporated herein reference form 8a filed securities exchange commission september 8 2003 33 certificate designation series junior participating preferred stock incorporated herein reference form 8k filed securities exchange commission august 4 2006 41 form specimen common stock certificate incorporated herein reference form 10k filed securities exchange commission may 13 2008 42 standstill agreement dated august 2003 metromedia fiber network inc john w kluge trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees stuart subotnick incorporated herein reference form 10k filed securities exchange commission may 13 2008 43 warrant agreement dated december 3 2003 among registrant american stock transfer trust company warrant agent form five year warrant certificate attached thereto incorporated herein reference form 8a filed securities exchange commission january 29 2004 44 warrant agreement dated december 3 2003 among registrant american stock transfer trust company warrant agent form seven year warrant certificate attached thereto incorporated herein reference form 8a filed securities exchange commission january 29 2004 45 registration rights agreement dated march 1 2004 among abovenet inc fiber llc franklin mutual advisers llc trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees incorporated herein reference form 10k filed securities exchange commission may 13 2008 46 rights agreement dated august 3 2006 abovenet inc american stock transfer trust company including form right certificate incorporated herein reference form 8k filed securities exchange commission august 4 2006 47 amendment rights agreement dated august 7 2008 abovenet inc american stock transfer trust company incorporated herein reference form 8k filed securities exchange commission august 12 2008 48 standstill agreement dated august 7 2008 among abovenet inc jgd management corp hfr ed select fund iv master trust lyxoryork fund limited permal york limited york capital management lp york credit opportunities fund lp york credit opportunities unit trust york enhanced strategies fund llc york global value partners lp york investment limited york long enhanced fund lp york select lp york select unit trust certain accounts managed jgd management corp hold securities abovenet inc incorporated herein reference form 8k filed securities exchange commission august 12 2008 49 amendment 1 standstill agreement dated april 25 2008 among abovenet inc john w kluge certain fourteenth restatement trust agreement dated may 30 1984 john w kluge grantor john w kluge jp morgan chase bank na new york original trustees dated april 4 2008 stuart subotnick jwk enterprises llc incorporated herein reference form 10k filed securities exchange commission september 30 2008 410 amended restated rights agreement dated august 3 2009 abovenet inc american stock transfer trust company llc incorporated herein reference form 8k filed securities exchange commission august 3 2009 411 form right certificate incorporated herein reference form 8k filed securities exchange commission august 3 2009 412 amendment amended restated rights agreement signed january 27 2010 abovenet inc american stock transfer trust company llc incorporated herein reference form 8k filed securities exchange commission january 28 2010 101 agreement lease dated december 30 1994 hudson telegraph associates lp landlord f garofalo electric co inc national fiber network inc tenant letter dated july 1 2005 regarding transfer property ownership hudson telegraph associates lp hudson owner llc incorporated herein reference form 10k filed securities exchange commission may 13 2008 102 agreement lease dated april 23 1999 111 eighth avenue llc landlord metromedia fiber network services inc tenant including amendments dated october 18 2000 march 13 2003 march 1 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 103 agreement lease dated october 1 1999 newport office center co landlord metromedia fiber network services inc tenant related rightofentry license agreement facilities management license agreement incorporated herein reference form 8k filed securities exchange commission may 13 2008 104 amended restated franchise agreement dated february 28 2000 city new york metromedia fiber network nyc inc stipulation agreement order among reorganized debtors new york city department information technology telecommunications concerning franchise agreement effective january 1 2004 approved united states bankruptcy court july 12 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 105 fiber lease agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 october 8 2007 incorporated herein reference form 10k filed securities exchange commission may 13 2008 106 collocation maintenance agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 incorporated herein reference form 10k filed securities exchange commission may 13 2008 107 incentive stock option stock unit grant plan incorporated herein reference form 10k filed securities exchange commission may 13 2008 108 employment agreement made august 29 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc william g laperch including amendments dated january 1 2004 december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 109 employment agreement made august 31 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc robert j sokota including amendment dated december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1010 employment agreement made august 31 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc michael doris including amendments dated december 30 2005 march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1011 stock option agreement dated september 10 2003 abovenet inc william g laperch incorporated herein reference form 10k filed securities exchange commission may 13 2008 1012 stock option agreement dated september 10 2003 abovenet inc robert j sokota incorporated herein reference form 10k filed securities exchange commission may 13 2008 1013 stock option agreement dated september 10 2003 abovenet inc michael doris including amendment dated march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1014 stock unit agreement dated september 10 2003 abovenet inc william g laperch including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1015 stock unit agreement dated september 10 2003 abovenet inc robert j sokota including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1016 stock unit agreement dated september 10 2003 abovenet inc michael doris including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1017 employment agreement dated september 12 2003 abovenet inc rajiv datta including amendment dated december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1018 employment agreement dated september 12 2003 abovenet inc douglas jendras including amendment dated december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1019 stock option agreement dated september 12 2003 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1020 stock option agreement dated september 12 2003 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1021 stock unit agreement dated september 12 2003 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1022 stock unit agreement dated september 12 2003 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1023 stock unit agreement dated december 19 2003 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1024 stock option agreement dated may 13 2004 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1025 stock option agreement dated may 13 2004 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1026 stock unit agreement dated may 13 2004 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1027 stock unit agreement dated may 13 2004 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1028 employment agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 august 27 2007 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1029 stock option agreement dated june 1 2004 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1030 stock unit agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1031 stock option agreement dated december 19 2005 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1032 stock option agreement dated december 19 2005 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1033 stock option agreement dated december 19 2005 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1034 asset purchase agreement dated september 27 2006 abovenet communications inc digital llc incorporated reference form 8k filed securities exchange commission october 4 2006 1035 stock unit agreement dated august 7 2007 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission may 13 2008 1036 stock unit agreement dated august 7 2007 abovenet inc robert sokota incorporated herein reference form 10k filed securities exchange commission may 13 2008 1037 stock unit agreement dated august 7 2007 abovenet inc michael doris including amendment dated march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1038 stock unit agreement dated august 7 2007 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1039 stock unit agreement dated august 7 2007 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1040 stock unit agreement dated august 7 2007 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1041 credit guaranty agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 8k filed securities exchange commission march 5 2008 1042 security pledge agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc societe generale administrative agent incorporated herein reference form 8k filed securities exchange commission march 5 2008 1043 separation employment general release agreement dated march 4 2008 abovenet communications inc michael doris incorporated herein reference form 8k filed securities exchange commission march 10 2008 1044 consulting agreement dated march 4 2008 abovenet communications inc michael doris incorporated herein reference form 8k filed securities exchange commission march 10 2008 1045 abovenet inc 2008 equity incentive plan incorporated herein reference form 8k filed securities exchange commission september 5 2008 1046 employment agreement effective september 2 2008 abovenet inc william laperch incorporated herein reference form 8k filed securities exchange commission september 11 2008 1047 employment agreement effective september 2 2008 abovenet inc robert sokota incorporated herein reference form 8k filed securities exchange commission september 11 2008 1048 employment agreement effective september 2 2008 abovenet inc john jacquay incorporated herein reference form 8k filed securities exchange commission september 11 2008 1049 employment agreement effective september 2 2008 abovenet inc rajiv datta incorporated herein reference form 8k filed securities exchange commission september 11 2008 1050 employment agreement effective september 2 2008 abovenet inc douglas jendras incorporated herein reference form 8k filed securities exchange commission september 11 2008 1051 stock unit agreement dated september 8 2008 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission september 30 2008 1052 stock unit agreement dated september 8 2008 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission september 30 2008 1053 stock unit agreement dated september 8 2008 abovenet inc robert sokota incorporated herein reference form 10k filed securities exchange commission september 30 2008 1054 stock unit agreement dated september 8 2008 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission september 30 2008 1055 stock unit agreement dated september 8 2008 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission september 30 2008 1056 stock unit agreement dated september 8 2008 abovenet inc doug jendras incorporated herein reference form 10k filed securities exchange commission september 30 2008 1057 stock unit agreement dated september 8 2008 abovenet inc jeffrey brodsky incorporated herein reference form 10k filed securities exchange commission september 30 2008 1058 stock unit agreement dated september 8 2008 abovenet inc michael embler incorporated herein reference form 10k filed securities exchange commission september 30 2008 1059 stock unit agreement dated september 8 2008 abovenet inc richard postma incorporated herein reference form 10k filed securities exchange commission september 30 2008 1060 stock unit agreement dated september 8 2008 abovenet inc richard shorten jr incorporated herein reference form 10k filed securities exchange commission september 30 2008 1061 stock unit agreement dated september 8 2008 abovenet inc stuart subotnick incorporated herein reference form 10k filed securities exchange commission september 30 2008 1062 stock option agreement dated september 8 2008 abovenet inc jeffrey brodsky incorporated herein reference form 10k filed securities exchange commission september 30 2008 1063 stock option agreement dated september 8 2008 abovenet inc michael embler incorporated herein reference form 10k filed securities exchange commission september 30 2008 1064 stock option agreement dated september 8 2008 abovenet inc richard postma incorporated herein reference form 10k filed securities exchange commission september 30 2008 1065 stock option agreement dated september 8 2008 abovenet inc richard shorten jr incorporated herein reference form 10k filed securities exchange commission september 30 2008 1066 stock option agreement dated september 8 2008 abovenet inc stuart subotnick incorporated herein reference form 10k filed securities exchange commission september 30 2008 1067 waiver amendment 1 credit guaranty agreement dated september 22 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 10k filed securities exchange commission september 30 2008 1068 joinder agreement dated october 1 2008 suntrust bank new lender societe generale administrative agent lenders credit agreement incorporated herein reference form 10k filed securities exchange commission september 30 2008 1069 employment agreement dated october 27 2008 abovenet inc joseph p ciavarella incorporated herein reference form 8k filed securities exchange commission october 29 2008 1070 consulting agreement dated february 15 2007 abovenet communications inc joseph ciavarella incorporated herein reference form 8k filed securities exchange commission october 29 2008 1071 stock unit agreement dated october 27 2008 abovenet inc joseph ciavarella incorporated herein reference form 8k filed securities exchange commission october 29 2008 1072 stock purchase agreement dated october 28 2008 abovenet inc william g laperch incorporated herein reference form 8k filed securities exchange commission october 31 2008 1073 stock purchase agreement dated october 28 2008 abovenet inc robert j sokota incorporated herein reference form 8k filed securities exchange commission october 31 2008 1074 stock purchase agreement dated october 28 2008 abovenet inc rajiv datta incorporated herein reference form 8k filed securities exchange commission october 31 2008 1075 stock purchase agreement dated october 28 2008 abovenet inc douglas jendras incorporated herein reference form 8k filed securities exchange commission october 31 2008 1076 summary 2009 bonus plan dated february 12 2009 incorporated herein reference form 10k filed securities exchange commission march 16 2009 1077 amendment 2 dated june 29 2009 credit guaranty agreement among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent dated february 29 2008 incorporated herein reference form 8k filed securities exchange commission july 2 2009 1078 summary 2010 bonus plan dated march 1 2010 incorporated herein reference form 8k filed securities exchange commission march 5 2010 161 letter kpmg llp securities exchange commission dated august 18 2006 incorporated herein reference form 8k filed securities exchange commission august 23 2006 211 subsidiaries 231 consent bdo seidman llp 311 certification chief executive officer registrant pursuant rule 13a14a securities exchange act 1934 312 certification acting chief financial officer registrant pursuant rule 13a14a securities exchange act 1934 321 certification chief executive officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification acting chief financial officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 exhibit represents management contract compensatory plan arrangement confidential treatment granted certain portions exhibit item 15 exhibits financial statement schedules 1 financial statements list financial statements company included report please see index consolidated financial statements appearing beginning item 8 financial statements supplementary data 2 financial statement schedules following financial statement schedule filed part annual report form 10k report independent registered public accounting firm board directors shareholders abovenet inc white plains new york audits referred report dated march 13 2009 relating consolidated financial statements abovenet inc contained item 8 form 10k also included audit financial statement schedule ii valuation qualifying accounts financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein bdo seidman llp new york ny march 13 schedule ii valuation qualifying accounts abovenet inc subsidiaries schedule ii valuation qualifying accounts millions schedules omitted applicable required information disclosed consolidated financial statements including notes thereto 3 exhibits exhibit description exhibit 31 amended restated certificate incorporation filed secretary state delaware august 29 2003 effective august 29 2003 incorporated herein reference form 8a filed securities exchange commission september 8 2003 32 amended restated bylaws adopted september 8 2003 incorporated herein reference form 8a filed securities exchange commission september 8 2003 33 certificate designation series junior participating preferred stock incorporated herein reference form 8k filed securities exchange commission august 4 2006 41 form specimen common stock certificate incorporated herein reference form 10k filed securities exchange commission may 13 2008 42 standstill agreement dated august 2003 metromedia fiber network inc john w kluge trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees stuart subotnick incorporated herein reference form 10k filed securities exchange commission may 13 2008 43 warrant agreement dated december 3 2003 among registrant american stock transfer trust company warrant agent form five year warrant certificate attached thereto incorporated herein reference form 8a filed securities exchange commission january 29 2004 44 warrant agreement dated december 3 2003 among registrant american stock transfer trust company warrant agent form seven year warrant certificate attached thereto incorporated herein reference form 8a filed securities exchange commission january 29 2004 45 registration rights agreement dated march 1 2004 among abovenet inc fiber llc franklin mutual advisers llc trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees incorporated herein reference form 10k filed securities exchange commission may 13 2008 46 rights agreement dated august 3 2006 abovenet inc american stock transfer trust company including form right certificate incorporated herein reference form 8k filed securities exchange commission august 4 2006 47 amendment rights agreement dated august 7 2008 abovenet inc american stock transfer trust company incorporated herein reference form 8k filed securities exchange commission august 12 2008 48 standstill agreement dated august 7 2008 among abovenet inc jgd management corp hfr ed select fund iv master trust lyxoryork fund limited permal york limited york capital management lp york credit opportunities fund lp york credit opportunities unit trust york enhanced strategies fund llc york global value partners lp york investment limited york long enhanced fund lp york select lp york select unit trust certain accounts managed jgd management corp hold securities abovenet inc incorporated herein reference form 8k filed securities exchange commission august 12 2008 49 amendment 1 standstill agreement dated april 25 2008 among abovenet inc john w kluge certain fourteenth restatement trust agreement dated may 30 1984 john w kluge grantor john w kluge jp morgan chase bank na new york original trustees dated april 4 2008 stuart subotnick jwk enterprises llc incorporated herein reference form 10k filed securities exchange commission september 30 2008 101 agreement lease dated december 30 1994 hudson telegraph associates lp landlord f garofalo electric co inc national fiber network inc tenant letter dated july 1 2005 regarding transfer property ownership hudson telegraph associates lp hudson owner llc incorporated herein reference form 10k filed securities exchange commission may 13 2008 102 agreement lease dated april 23 1999 111 eighth avenue llc landlord metromedia fiber network services inc tenant including amendments dated october 18 2000 march 13 2003 march 1 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 103 agreement lease dated october 1 1999 newport office center co landlord metromedia fiber network services inc tenant related rightofentry license agreement facilities management license agreement incorporated herein reference form 8k filed securities exchange commission may 13 2008 104 amended restated franchise agreement dated february 28 2000 city new york metromedia fiber network nyc inc stipulation agreement order among reorganized debtors new york city department information technology telecommunications concerning franchise agreement effective january 1 2004 approved united states bankruptcy court july 12 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 105 fiber lease agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 october 8 2007 incorporated herein reference form 10k filed securities exchange commission may 13 2008 106 collocation maintenance agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 incorporated herein reference form 10k filed securities exchange commission may 13 2008 107 2003 incentive stock option stock unit grant plan incorporated herein reference form 10k filed securities exchange commission may 13 2008 108 employment agreement made august 29 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc william g laperch including amendments dated january 1 2004 december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 109 employment agreement made august 31 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc robert j sokota including amendment dated december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1010 employment agreement made august 31 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc michael doris including amendments dated december 30 2005 march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1011 stock option agreement dated september 10 2003 abovenet inc william g laperch incorporated herein reference form 10k filed securities exchange commission may 13 2008 1012 stock option agreement dated september 10 2003 abovenet inc robert j sokota incorporated herein reference form 10k filed securities exchange commission may 13 2008 1013 stock option agreement dated september 10 2003 abovenet inc michael doris including amendment dated march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1014 stock unit agreement dated september 10 2003 abovenet inc william g laperch including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1015 stock unit agreement dated september 10 2003 abovenet inc robert j sokota including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1016 stock unit agreement dated september 10 2003 abovenet inc michael doris including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1017 employment agreement dated september 12 2003 abovenet inc rajiv datta including amendment dated december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1018 employment agreement dated september 12 2003 abovenet inc douglas jendras including amendment dated december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1019 stock option agreement dated september 12 2003 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1020 stock option agreement dated september 12 2003 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1021 stock unit agreement dated september 12 2003 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1022 stock unit agreement dated september 12 2003 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1023 stock unit agreement dated december 19 2003 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1024 stock option agreement dated may 13 2004 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1025 stock option agreement dated may 13 2004 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1026 stock unit agreement dated may 13 2004 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1027 stock unit agreement dated may 13 2004 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1028 employment agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 august 27 2007 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1029 stock option agreement dated june 1 2004 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1030 stock unit agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1031 stock option agreement dated december 19 2005 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1032 stock option agreement dated december 19 2005 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1033 stock option agreement dated december 19 2005 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1034 asset purchase agreement dated september 27 2006 abovenet communications inc digital llc incorporated reference form 8k filed securities exchange commission october 4 2006 1035 stock unit agreement dated august 7 2007 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission may 13 2008 1036 stock unit agreement dated august 7 2007 abovenet inc robert sokota incorporated herein reference form 10k filed securities exchange commission may 13 2008 1037 stock unit agreement dated august 7 2007 abovenet inc michael doris including amendment dated march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1038 stock unit agreement dated august 7 2007 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1039 stock unit agreement dated august 7 2007 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1040 stock unit agreement dated august 7 2007 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1041 credit guaranty agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 8k filed securities exchange commission march 5 2008 1042 security pledge agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc societe generale administrative agent incorporated reference form 8k filed securities exchange commission march 5 2008 1043 separation employment general release agreement dated march 4 2008 abovenet communications inc michael doris incorporated herein reference form 8k filed securities exchange commission march 10 2008 1044 consulting agreement dated march 4 2008 abovenet communications inc michael doris incorporated herein reference form 8k filed securities exchange commission march 10 2008 1045 abovenet inc 2008 equity incentive plan incorporated herein reference form 8k filed securities exchange commission september 5 2008 1046 employment agreement effective september 2 2008 abovenet inc william laperch incorporated herein reference form 8k filed securities exchange commission september 11 2008 1047 employment agreement effective september 2 2008 abovenet inc robert sokota incorporated herein reference form 8k filed securities exchange commission september 11 2008 1048 employment agreement effective september 2 2008 abovenet inc john jacquay incorporated herein reference form 8k filed securities exchange commission september 11 2008 1049 employment agreement effective september 2 2008 abovenet inc rajiv datta incorporated herein reference form 8k filed securities exchange commission september 11 2008 1050 employment agreement effective september 2 2008 abovenet inc douglas jendras incorporated herein reference form 8k filed securities exchange commission september 11 2008 1051 stock unit agreement dated september 8 2008 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission september 30 2008 1052 stock unit agreement dated september 8 2008 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission september 30 2008 1053 stock unit agreement dated september 8 2008 abovenet inc robert sokota incorporated herein reference form 10k filed securities exchange commission september 30 2008 1054 stock unit agreement dated september 8 2008 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission september 30 2008 1055 stock unit agreement dated september 8 2008 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission september 30 2008 1056 stock unit agreement dated september 8 2008 abovenet inc doug jendras incorporated herein reference form 10k filed securities exchange commission september 30 2008 1057 stock unit agreement dated september 8 2008 abovenet inc jeffrey brodsky incorporated herein reference form 10k filed securities exchange commission september 30 2008 1058 stock unit agreement dated september 8 2008 abovenet inc michael embler incorporated herein reference form 10k filed securities exchange commission september 30 2008 1059 stock unit agreement dated september 8 2008 abovenet inc richard postma incorporated herein reference form 10k filed securities exchange commission september 30 2008 1060 stock unit agreement dated september 8 2008 abovenet inc richard shorten jr incorporated herein reference form 10k filed securities exchange commission september 30 2008 1061 stock unit agreement dated september 8 2008 abovenet inc stuart subotnick incorporated herein reference form 10k filed securities exchange commission september 30 2008 1062 stock option agreement dated september 8 2008 abovenet inc jeffrey brodsky incorporated herein reference form 10k filed securities exchange commission september 30 2008 1063 stock option agreement dated september 8 2008 abovenet inc michael embler incorporated herein reference form 10k filed securities exchange commission september 30 2008 1064 stock option agreement dated september 8 2008 abovenet inc richard postma incorporated herein reference form 10k filed securities exchange commission september 30 2008 1065 stock option agreement dated september 8 2008 abovenet inc richard shorten jr incorporated herein reference form 10k filed securities exchange commission september 30 2008 1066 stock option agreement dated september 8 2008 abovenet inc stuart subotnick incorporated herein reference form 10k filed securities exchange commission september 30 2008 1067 waiver amendment 1 credit guaranty agreement dated september 22 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 10k filed securities exchange commission september 30 2008 1068 joinder agreement dated october 1 2008 suntrust bank new lender societe generale administrative agent lenders credit agreement incorporated herein reference form 10k filed securities exchange commission september 30 2008 1069 employment agreement dated october 27 2008 abovenet inc joseph p ciavarella incorporated herein reference form 8k filed securities exchange commission october 29 2008 1070 consulting agreement dated february 15 2007 abovenet communications inc joseph ciavarella incorporated herein reference form 8k filed securities exchange commission october 29 2008 1071 stock unit agreement dated october 27 2008 abovenet inc joseph ciavarella incorporated herein reference form 8k filed securities exchange commission october 29 2008 1072 stock purchase agreement dated october 28 2008 abovenet inc william g laperch incorporated herein reference form 8k filed securities exchange commission october 31 2008 1073 stock purchase agreement dated october 28 2008 abovenet inc robert j sokota incorporated herein reference form 8k filed securities exchange commission october 31 2008 1074 stock purchase agreement dated october 28 2008 abovenet inc rajiv datta incorporated herein reference form 8k filed securities exchange commission october 31 2008 1075 stock purchase agreement dated october 28 2008 abovenet inc douglas jendras incorporated herein reference form 8k filed securities exchange commission october 31 2008 1076 summary 2009 bonus plan dated february 12 2009 161 letter kpmg llp securities exchange commission dated august 18 2006 incorporated reference form 8k dated august 17 2006 filed securities exchange commission august 23 2006 211 subsidiaries 311 certification chief executive officer registrant pursuant rule 13a14a securities exchange act 1934 312 certification acting chief financial officer registrant pursuant rule 13a14a securities exchange act 1934 321 certification chief executive officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification acting chief financial officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 exhibit represents management contract compensatory plan arrangement confidential treatment granted certain portions exhibit signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized abovenet inc date march 13 william g laperch william g laperch president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated date march 13 william g laperch william g laperch president chief executive officer director principal executive officer date march 13 joseph p ciavarella joseph p ciavarella senior vice president chief financial officer principal financial accounting officer date march 13 jeffrey brodsky jeffrey brodsky director date march 13 michael j embler michael j embler director date march 13 richard postma richard postma director date march 13 richard shorten jr richard shorten jr director date march 13 stuart subotnick stuart subotnick director exhibit index exhibit description exhibit 31 amended restated certificate incorporation filed secretary state delaware august 29 2003 effective august 29 2003 incorporated herein reference form 8a filed securities exchange commission september 8 2003 32 amended restated bylaws adopted september 8 2003 incorporated herein reference form 8a filed securities exchange commission september 8 2003 33 certificate designation series junior participating preferred stock incorporated herein reference form 8k filed securities exchange commission august 4 2006 41 form specimen common stock certificate incorporated herein reference form 10k filed securities exchange commission may 13 2008 42 standstill agreement dated august 2003 metromedia fiber network inc john w kluge trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees stuart subotnick incorporated herein reference form 10k filed securities exchange commission may 13 2008 43 warrant agreement dated december 3 2003 among registrant american stock transfer trust company warrant agent form five year warrant certificate attached thereto incorporated herein reference form 8a filed securities exchange commission january 29 2004 44 warrant agreement dated december 3 2003 among registrant american stock transfer trust company warrant agent form seven year warrant certificate attached thereto incorporated herein reference form 8a filed securities exchange commission january 29 2004 45 registration rights agreement dated march 1 2004 among abovenet inc fiber llc franklin mutual advisers llc trust established pursuant certain trust agreement dated may 30 1984 amended restated supplemented john w kluge grantor stuart subotnick john w kluge chase manhattan bank trustees incorporated herein reference form 10k filed securities exchange commission may 13 2008 46 rights agreement dated august 3 2006 abovenet inc american stock transfer trust company including form right certificate incorporated herein reference form 8k filed securities exchange commission august 4 2006 47 amendment rights agreement dated august 7 2008 abovenet inc american stock transfer trust company incorporated herein reference form 8k filed securities exchange commission august 12 2008 48 standstill agreement dated august 7 2008 among abovenet inc jgd management corp hfr ed select fund iv master trust lyxoryork fund limited permal york limited york capital management lp york credit opportunities fund lp york credit opportunities unit trust york enhanced strategies fund llc york global value partners lp york investment limited york long enhanced fund lp york select lp york select unit trust certain accounts managed jgd management corp hold securities abovenet inc incorporated herein reference form 8k filed securities exchange commission august 12 2008 49 amendment 1 standstill agreement dated april 25 2008 among abovenet inc john w kluge certain fourteenth restatement trust agreement dated may 30 1984 john w kluge grantor john w kluge jp morgan chase bank na new york original trustees dated april 4 2008 stuart subotnick jwk enterprises llc incorporated herein reference form 10k filed securities exchange commission september 30 2008 101 agreement lease dated december 30 1994 hudson telegraph associates lp landlord f garofalo electric co inc national fiber network inc tenant letter dated july 1 2005 regarding transfer property ownership hudson telegraph associates lp hudson owner llc incorporated herein reference form 10k filed securities exchange commission may 13 2008 102 agreement lease dated april 23 1999 111 eighth avenue llc landlord metromedia fiber network services inc tenant including amendments dated october 18 2000 march 13 2003 march 1 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 103 agreement lease dated october 1 1999 newport office center co landlord metromedia fiber network services inc tenant related rightofentry license agreement facilities management license agreement incorporated herein reference form 8k filed securities exchange commission may 13 2008 104 amended restated franchise agreement dated february 28 2000 city new york metromedia fiber network nyc inc stipulation agreement order among reorganized debtors new york city department information technology telecommunications concerning franchise agreement effective january 1 2004 approved united states bankruptcy court july 12 2004 incorporated herein reference form 8k filed securities exchange commission may 13 2008 105 fiber lease agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 october 8 2007 incorporated herein reference form 10k filed securities exchange commission may 13 2008 106 collocation maintenance agreement dated april 26 2002 williams communications llc metromedia fiber national network inc including amendments dated october 10 2002 february 14 2003 incorporated herein reference form 10k filed securities exchange commission may 13 2008 107 2003 incentive stock option stock unit grant plan incorporated herein reference form 10k filed securities exchange commission may 13 2008 108 employment agreement made august 29 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc william g laperch including amendments dated january 1 2004 december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 109 employment agreement made august 31 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc robert j sokota including amendment dated december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1010 employment agreement made august 31 2003 effective date second amended plan reorganization metromedia fiber network inc dated july 1 2003 abovenet inc michael doris including amendments dated december 30 2005 march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1011 stock option agreement dated september 10 2003 abovenet inc william g laperch incorporated herein reference form 10k filed securities exchange commission may 13 2008 1012 stock option agreement dated september 10 2003 abovenet inc robert j sokota incorporated herein reference form 10k filed securities exchange commission may 13 2008 1013 stock option agreement dated september 10 2003 abovenet inc michael doris including amendment dated march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1014 stock unit agreement dated september 10 2003 abovenet inc william g laperch including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1015 stock unit agreement dated september 10 2003 abovenet inc robert j sokota including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1016 stock unit agreement dated september 10 2003 abovenet inc michael doris including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1017 employment agreement dated september 12 2003 abovenet inc rajiv datta including amendment dated december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1018 employment agreement dated september 12 2003 abovenet inc douglas jendras including amendment dated december 30 2005 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1019 stock option agreement dated september 12 2003 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1020 stock option agreement dated september 12 2003 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1021 stock unit agreement dated september 12 2003 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1022 stock unit agreement dated september 12 2003 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1023 stock unit agreement dated december 19 2003 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1024 stock option agreement dated may 13 2004 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1025 stock option agreement dated may 13 2004 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1026 stock unit agreement dated may 13 2004 abovenet inc rajiv datta including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1027 stock unit agreement dated may 13 2004 abovenet inc douglas jendras including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1028 employment agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 august 27 2007 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1029 stock option agreement dated june 1 2004 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1030 stock unit agreement dated june 1 2004 abovenet inc john jacquay including amendments dated december 30 2005 december 30 2006 incorporated herein reference form 10k filed securities exchange commission may 13 2008 1031 stock option agreement dated december 19 2005 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1032 stock option agreement dated december 19 2005 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1033 stock option agreement dated december 19 2005 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1034 asset purchase agreement dated september 27 2006 abovenet communications inc digital llc incorporated reference form 8k filed securities exchange commission october 4 2006 1035 stock unit agreement dated august 7 2007 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission may 13 2008 1036 stock unit agreement dated august 7 2007 abovenet inc robert sokota incorporated herein reference form 10k filed securities exchange commission may 13 2008 1037 stock unit agreement dated august 7 2007 abovenet inc michael doris including amendment dated march 4 2008 incorporated herein reference form 8k filed securities exchange commission march 10 2008 1038 stock unit agreement dated august 7 2007 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission may 13 2008 1039 stock unit agreement dated august 7 2007 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission may 13 2008 1040 stock unit agreement dated august 7 2007 abovenet inc douglas jendras incorporated herein reference form 10k filed securities exchange commission may 13 2008 1041 credit guaranty agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 8k filed securities exchange commission march 5 2008 1042 security pledge agreement dated february 29 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc societe generale administrative agent incorporated reference form 8k filed securities exchange commission march 5 2008 1043 separation employment general release agreement dated march 4 2008 abovenet communications inc michael doris incorporated herein reference form 8k filed securities exchange commission march 10 2008 1044 consulting agreement dated march 4 2008 abovenet communications inc michael doris incorporated herein reference form 8k filed securities exchange commission march 10 2008 1045 abovenet inc 2008 equity incentive plan incorporated herein reference form 8k filed securities exchange commission september 5 2008 1046 employment agreement effective september 2 2008 abovenet inc william laperch incorporated herein reference form 8k filed securities exchange commission september 11 2008 1047 employment agreement effective september 2 2008 abovenet inc robert sokota incorporated herein reference form 8k filed securities exchange commission september 11 2008 1048 employment agreement effective september 2 2008 abovenet inc john jacquay incorporated herein reference form 8k filed securities exchange commission september 11 2008 1049 employment agreement effective september 2 2008 abovenet inc rajiv datta incorporated herein reference form 8k filed securities exchange commission september 11 2008 1050 employment agreement effective september 2 2008 abovenet inc douglas jendras incorporated herein reference form 8k filed securities exchange commission september 11 2008 1051 stock unit agreement dated september 8 2008 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission september 30 2008 1052 stock unit agreement dated september 8 2008 abovenet inc william laperch incorporated herein reference form 10k filed securities exchange commission september 30 2008 1053 stock unit agreement dated september 8 2008 abovenet inc robert sokota incorporated herein reference form 10k filed securities exchange commission september 30 2008 1054 stock unit agreement dated september 8 2008 abovenet inc john jacquay incorporated herein reference form 10k filed securities exchange commission september 30 2008 1055 stock unit agreement dated september 8 2008 abovenet inc rajiv datta incorporated herein reference form 10k filed securities exchange commission september 30 2008 1056 stock unit agreement dated september 8 2008 abovenet inc doug jendras incorporated herein reference form 10k filed securities exchange commission september 30 2008 1057 stock unit agreement dated september 8 2008 abovenet inc jeffrey brodsky incorporated herein reference form 10k filed securities exchange commission september 30 2008 1058 stock unit agreement dated september 8 2008 abovenet inc michael embler incorporated herein reference form 10k filed securities exchange commission september 30 2008 1059 stock unit agreement dated september 8 2008 abovenet inc richard postma incorporated herein reference form 10k filed securities exchange commission september 30 2008 1060 stock unit agreement dated september 8 2008 abovenet inc richard shorten jr incorporated herein reference form 10k filed securities exchange commission september 30 2008 1061 stock unit agreement dated september 8 2008 abovenet inc stuart subotnick incorporated herein reference form 10k filed securities exchange commission september 30 2008 1062 stock option agreement dated september 8 2008 abovenet inc jeffrey brodsky incorporated herein reference form 10k filed securities exchange commission september 30 2008 1063 stock option agreement dated september 8 2008 abovenet inc michael embler incorporated herein reference form 10k filed securities exchange commission september 30 2008 1064 stock option agreement dated september 8 2008 abovenet inc richard postma incorporated herein reference form 10k filed securities exchange commission september 30 2008 1065 stock option agreement dated september 8 2008 abovenet inc richard shorten jr incorporated herein reference form 10k filed securities exchange commission september 30 2008 1066 stock option agreement dated september 8 2008 abovenet inc stuart subotnick incorporated herein reference form 10k filed securities exchange commission september 30 2008 1067 waiver amendment 1 credit guaranty agreement dated september 22 2008 among abovenet inc abovenet communications inc abovenet utah llc abovenet va llc abovenet international inc lenders party thereto societe generale administrative agent cit lending services corporation documentation agent incorporated herein reference form 10k filed securities exchange commission september 30 2008 1068 joinder agreement dated october 1 2008 suntrust bank new lender societe generale administrative agent lenders credit agreement incorporated herein reference form 10k filed securities exchange commission september 30 2008 1069 employment agreement dated october 27 2008 abovenet inc joseph p ciavarella incorporated herein reference form 8k filed securities exchange commission october 29 2008 1070 consulting agreement dated february 15 2007 abovenet communications inc joseph ciavarella incorporated herein reference form 8k filed securities exchange commission october 29 2008 1071 stock unit agreement dated october 27 2008 abovenet inc joseph ciavarella incorporated herein reference form 8k filed securities exchange commission october 29 2008 1072 stock purchase agreement dated october 28 2008 abovenet inc william g laperch incorporated herein reference form 8k filed securities exchange commission october 31 2008 1073 stock purchase agreement dated october 28 2008 abovenet inc robert j sokota incorporated herein reference form 8k filed securities exchange commission october 31 2008 1074 stock purchase agreement dated october 28 2008 abovenet inc rajiv datta incorporated herein reference form 8k filed securities exchange commission october 31 2008 1075 stock purchase agreement dated october 28 2008 abovenet inc douglas jendras incorporated herein reference form 8k filed securities exchange commission october 31 2008 1076 summary 2009 bonus plan dated february 12 2009 161 letter kpmg llp securities exchange commission dated august 18 2006 incorporated reference form 8k dated august 17 2006 filed securities exchange commission august 23 2006 211 subsidiaries 311 certification chief executive officer registrant pursuant rule 13a14a securities exchange act 1934 312 certification acting chief financial officer registrant pursuant rule 13a14a securities exchange act 1934 321 certification chief executive officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification acting chief financial officer registrant pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 exhibit represents management contract compensatory plan arrangement confidential treatment granted certain portions exhibit