Form 10-Q
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-Q
(Mark
One)
|
[X] |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For
the quarterly period ended September 30, 2005
OR
|
[
] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For
the transition period from
to _____
Commission
file number 000 - 26728
Talk
America Holdings, Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
of incorporation) |
23-2827736
(I.R.S.
Employer Identification No.) |
|
6805
Route 202, New Hope, Pennsylvania
(Address
of principal executive offices) |
18938
(Zip
Code) |
(215)
862-1500
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
X
No___
Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).
Yes
X
No___
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes__No_X_
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
30,300,871
shares of Common Stock, par value of $0.01 per share, were issued and
outstanding as of November 7, 2005.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
Index
| |
Page |
| |
|
|
PART
I - FINANCIAL INFORMATION |
|
| |
|
|
Item
1. Financial Statements |
|
| |
|
|
Consolidated
Statements of Operations - Three and Nine Months Ended September 30, 2005
and 2004 (unaudited) |
1 |
| |
|
|
Consolidated
Balance Sheets - September 30, 2005 and December 31, 2004
(unaudited) |
2 |
| |
|
|
Consolidated
Statements of Stockholders' Equity - Nine Months Ended September 30, 2005
(unaudited) |
3 |
| |
|
|
Consolidated
Statements of Cash Flows - Nine Months Ended September 30, 2005 and 2004
(unaudited) |
4 |
| |
|
|
Notes
to Consolidated Financial Statements (unaudited) |
5 |
| |
|
|
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Item
3. Quantitative and Qualitative Disclosures About
Market Risk |
12
33 |
| |
|
|
Item
4. Controls and Procedures |
34 |
| |
|
|
PART
II - OTHER INFORMATION |
37 |
| |
|
|
Item
6. Exhibits |
37 |
| |
|
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except for per share data)
(Unaudited)
| |
|
Three
Months Ended
September
30, |
|
Nine
Months Ended
September
30, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
120,645 |
|
$ |
120,929 |
|
$ |
348,149 |
|
$ |
345,761 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network and line costs, excluding depreciation and amortization (see
below) |
|
|
64,413 |
|
|
58,260 |
|
|
181,090 |
|
|
164,500 |
|
|
General
and administrative expenses |
|
|
23,496 |
|
|
17,925 |
|
|
59,946 |
|
|
52,544 |
|
|
Provision
for doubtful accounts |
|
|
4,515 |
|
|
5,728 |
|
|
14,909 |
|
|
14,054 |
|
|
Sales
and marketing expenses |
|
|
7,294 |
|
|
19,318 |
|
|
21,335 |
|
|
55,806 |
|
|
Depreciation
and amortization |
|
|
11,618 |
|
|
5,442 |
|
|
30,734 |
|
|
15,895 |
|
|
Total
costs and expenses |
|
|
111,336 |
|
|
106,673 |
|
|
308,014 |
|
|
302,799 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
|
9,309 |
|
|
14,256 |
|
|
40,135 |
|
|
42,962 |
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
199 |
|
|
61 |
|
|
873 |
|
|
204 |
|
|
Interest
expense |
|
|
(114 |
) |
|
561 |
|
|
(164 |
) |
|
(698 |
) |
|
Other
expense, net |
|
|
(5 |
) |
|
-- |
|
|
(361 |
) |
|
-- |
|
|
Income
before provision for income taxes |
|
|
9,389 |
|
|
14,878 |
|
|
40,483 |
|
|
42,468 |
|
|
Provision
for income taxes |
|
|
4,172 |
|
|
5,867 |
|
|
16,428 |
|
|
16,747 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$ |
5,217 |
|
$ |
9,011 |
|
$ |
24,055 |
|
$ |
25,721 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share - Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share |
|
$ |
0.18 |
|
$ |
0.33 |
|
$ |
0.86 |
|
$ |
0.96 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding |
|
|
29,808 |
|
|
26,974 |
|
|
28,122 |
|
|
26,799 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share - Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share |
|
$ |
0.17 |
|
$ |
0.32 |
|
$ |
0.84 |
|
$ |
0.92 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares outstanding |
|
|
30,357 |
|
|
27,737 |
|
|
28,796 |
|
|
27,854 |
|
See
accompanying notes to consolidated financial statements.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except for share and per share data)
(Unaudited)
| |
|
September
30,
2005 |
|
December
31,
2004 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
42,318 |
|
$ |
47,492 |
|
|
Accounts receivable, trade (net of allowance for uncollectible accounts of
$14,835 and $17,508 at September 30, 2005 and
December 31, 2004, respectively) |
|
|
45,240 |
|
|
48,873 |
|
|
Deferred
income taxes |
|
|
20,207 |
|
|
34,815 |
|
|
Prepaid
expenses and other current assets |
|
|
8,010 |
|
|
6,888 |
|
|
Total
current assets |
|
|
115,775 |
|
|
138,068 |
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
|
95,234 |
|
|
65,823 |
|
|
Goodwill |
|
|
39,492 |
|
|
13,013 |
|
|
Intangibles,
net |
|
|
4,997 |
|
|
1,966 |
|
|
Deferred
income taxes |
|
|
21,893 |
|
|
14,291 |
|
|
Capitalized
software and other assets |
|
|
9,234 |
|
|
8,567 |
|
|
Total
assets |
|
$ |
286,625 |
|
$ |
241,728 |
|
| |
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses |
|
$ |
42,535 |
|
$ |
38,843 |
|
|
Sales,
use and excise taxes |
|
|
7,142 |
|
|
11,179 |
|
|
Deferred
revenue
|
|
|
15,294 |
|
|
15,321 |
|
|
Current
portion of long-term debt |
|
|
4,207 |
|
|
2,529 |
|
|
Accrued
compensation |
|
|
8,321 |
|
|
6,690 |
|
|
Other
current liabilities |
|
|
11,691 |
|
|
10,022 |
|
|
Total
current liabilities |
|
|
89,190 |
|
|
84,584 |
|
| |
|
|
|
|
|
|
|
|
Long-term
debt |
|
|
1,714 |
|
|
1,717 |
|
| |
|
|
|
|
|
|
|
|
Deferred
income taxes |
|
|
4,589 |
|
|
13,906 |
|
| |
|
|
|
|
|
|
|
| Other
liabilities |
|
|
1,650 |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
Commitments
and contingencies |
|
|
-- |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
Stockholders'
equity: |
|
|
|
|
|
|
|
|
Preferred
stock - $.01 par value, 5,000,000 shares authorized; no shares outstanding
|
|
|
-- |
|
|
-- |
|
|
Common
stock - $.01 par value, 100,000,000 shares authorized; 30,299,778 and
27,037,096 shares issued and outstanding at
September 30,
2005 and December 31, 2004, respectively |
|
|
316 |
|
|
284 |
|
|
Additional paid-in capital |
|
|
380,283 |
|
|
356,409 |
|
|
Accumulated deficit |
|
|
(186,117 |
) |
|
(210,172 |
) |
|
Treasury stock - $.01 par value, 1,315,789 shares at September 30, 2005
and December 31, 2004 , respectively |
|
|
(5,000 |
) |
|
(5,000 |
) |
|
Total
stockholders' equity |
|
|
189,482 |
|
|
141,521 |
|
|
Total
liabilities and stockholders’ equity |
|
$ |
286,625 |
|
$ |
241,728 |
|
See
accompanying notes to consolidated financial statements.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(In
thousands)
(Unaudited)
| |
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
| |
|
Common
Stock |
|
Paid-In |
|
Accumulated |
|
Treasury
Stock |
|
|
|
| |
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Shares |
|
Amount |
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004 |
|
|
28,353 |
|
$ |
284 |
|
$ |
356,409 |
|
$ |
(210,172 |
) |
|
1,316 |
|
$ |
(5,000 |
) |
$ |
141,521 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
|
|
|
|
|
|
24,055 |
|
|
|
|
|
|
|
|
24,055 |
|
|
Income
tax benefit related to exercise of common stock options |
|
|
|
|
|
|
|
|
3,256 |
|
|
|
|
|
|
|
|
|
|
|
3,256 |
|
|
Exercise
of common stock options and warrants |
|
|
1,463 |
|
|
14 |
|
|
4,674 |
|
|
|
|
|
|
|
|
|
|
|
4,688 |
|
|
Common
stock issued in connection with the acquisition of LDMI |
|
|
1,800 |
|
|
18 |
|
|
15,944 |
|
|
|
|
|
|
|
|
|
|
|
15,962 |
|
|
Balance,
September 30, 2005 |
|
|
31,616 |
|
$ |
316 |
|
$ |
380,283 |
|
$ |
(186,117 |
) |
|
1,316 |
|
$ |
(5,000 |
) |
$ |
189,482 |
|
See
accompanying notes to consolidated financial statements.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
| |
|
Nine
Months Ended
September
30, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
24,055 |
|
$ |
25,721 |
|
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Provision
for doubtful accounts |
|
|
14,909 |
|
|
14,054 |
|
|
Depreciation
and amortization |
|
|
30,734 |
|
|
15,895 |
|
|
Deferred
income taxes |
|
|
13,341 |
|
|
14,257 |
|
|
Other
non-cash charges and (credits) |
|
|
359 |
|
|
(947 |
) |
|
Changes
in assets and liabilities, net of effect of acquisition: |
|
|
|
|
|
|
|
|
Accounts
receivable, trade |
|
|
726 |
|
|
(22,609 |
) |
|
Prepaid
expenses and other current assets |
|
|
1,745 |
|
|
(1,979 |
) |
|
Other
assets |
|
|
80 |
|
|
(17 |
) |
|
Accounts
payable and accrued expenses |
|
|
(19,835 |
) |
|
7,238 |
|
|
Sales,
use and excise taxes |
|
|
(4,553 |
) |
|
(977 |
) |
|
Deferred
revenue |
|
|
(3,156 |
) |
|
4,715 |
|
|
Accrued
compensation |
|
|
(1,563 |
) |
|
(5,217 |
) |
|
Other
liabilities |
|
|
(162 |
) |
|
(
653 |
) |
|
Net
cash provided by operating activities |
|
|
56,680 |
|
|
49,481 |
|
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds
from sale of fixed assets |
|
|
63 |
|
|
-- |
|
|
Acquisition
of LDMI, net of cash acquired (See note 5) |
|
|
(26,850 |
) |
|
-- |
|
|
Capital
expenditures |
|
|
(35,220 |
) |
|
(8,053 |
) |
|
Capitalized
software development costs |
|
|
(2,946 |
) |
|
(2,673 |
) |
|
Net
cash used in investing activities |
|
|
(64,953 |
) |
|
(10,726 |
) |
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
Payments
of borrowings |
|
|
-- |
|
|
(44,258 |
) |
|
Payments
of capital lease obligations |
|
|
(1,586 |
) |
|
(949 |
) |
|
Proceeds
from exercise of options and warrants |
|
|
4,685 |
|
|
564 |
|
|
Net
cash provided by (used in) financing activities |
|
|
3,099 |
|
|
(44,643 |
) |
| |
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents |
|
|
(5,174 |
) |
|
(5,888 |
) |
|
Cash
and cash equivalents, beginning of period |
|
|
47,492 |
|
|
35,242 |
|
|
Cash
and cash equivalents, end of period |
|
|
42,318 |
|
|
29,354 |
|
| |
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1. ACCOUNTING POLICIES
(a)
Basis of Financial Statements Presentation
The
consolidated financial statements include the accounts of Talk America Holdings,
Inc. and its wholly-owned subsidiaries (collectively, "Talk America," "we,"
"our" and "us"). All intercompany balances and transactions have been
eliminated.
The
consolidated financial statements and related notes thereto as of September 30,
2005 and for the three and nine months ended September 30, 2005 and September
30, 2004 are unaudited, but in the opinion of management include all adjustments
necessary for a fair statement of the results for the periods presented. The
consolidated balance sheet information for December 31, 2004 was derived from
the audited financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2004 filed March 16, 2005, as amended by our Form
10-K/A filed March 30, 2005 (as so amended, “our 2004 Form 10-K”). These interim
financial statements should be read in conjunction with our 2004 Form 10-K. The
interim results are not necessarily indicative of the results for any future
periods. Certain prior year amounts have been reclassified for comparative
purposes.
(b)
Risks and Uncertainties
Future
results of operations involve a number of risks and uncertainties. Factors that
could affect future operating results and cash flows and cause actual results to
vary materially from historical results include, but are not limited
to:
-
We have
not previously developed, deployed or operated a local network of our own or
of this scale and there can be no assurance that we shall be able
to successfully do so and thereafter profitably provide local telephone
services through such a network. In addition, we are dependent upon a variety
of vendors for the provision of equipment necessary for the construction,
deployment and migration of customers to our local network, and failure of
these vendors to deliver the equipment in a timely manner may result in delays
in the deployment, and ultimately, the migration of customers to our
network.
-
The non-completion of the recently announced
acquisition of Network Telephone and the inability to integrate effectively
and as anticipated the business of either LDMI or NTC (upon the completion of
the acquisition).
-
Changes
in or adverse judicial or administrative interpretations and rulings or
legislative action relating to governmental policy, regulation, pricing and
enforcement including, but not limited to: (i) changes that affect the
continued availability of the unbundled network element platform for existing
customers until March 11, 2006, (ii) thereafter, the cost of certain elements
of the unbundled network element platform of the local exchange carriers
network, and (iii) thereafter the cost of certain unbundled network element
platform elements utilized with our network.
-
Dependence
on the availability and functionality of the networks of the incumbent local
exchange carriers as they relate to the unbundled network element
platform.
-
Increased
competition in voice and data services, including, but not limited to, in the
state of Michigan.
Negative
developments in these areas could have a material adverse effect on our
business, financial condition and results of operations.
(c)
Recent Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payments” (“SFAS No. 123R”). SFAS No. 123R requires the recognition of the cost
of employee services received in exchange for an award of equity instruments in
the financial statements and measurement based on the grant-date fair value of
the award. It requires the cost to be recognized over the period during which an
employee is required to provide service in exchange for the award. Additionally,
compensation expense will be recognized over the remaining employee service
period for the outstanding portion of any awards for which compensation expense
had not been previously recognized or disclosed under SFAS No. 123, “Accounting
for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123R replaces
SFAS No. 123, and supersedes Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”), and its related
interpretations. We are currently assessing the implications of the
transition methods allowed and have not determined whether the adoption of FAS
123R will result in amounts similar to current pro forma disclosures under FAS
123. We expect the adoption to have an adverse impact on future consolidated
statements of operations.
On April
15, 2005, the Securities and Exchange Commission posted Final Rule Number
33-8568, “Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance
Date for Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based
Payment,” which
is effective as of April 21, 2005. Under the Commission’s amendment, we are
required to file financial statements that comply with SFAS No. 123R in our
Quarterly Report on Form 10-Q for the first quarter of fiscal 2006.
NOTE
2. COMMITMENTS AND CONTINGENCIES
We are
party to a number of legal actions, purported class actions and proceedings
arising from our provision, marketing and billing of telecommunications
services, as well as certain other legal actions and regulatory matters arising
in the ordinary course of business.
Since our
inception, we have purchased various telecommunication services from AT&T
pursuant to contract tariffs and master carrier agreements. In December 2003, we
entered into a new four-year master carrier agreement with AT&T, which
restructured certain of the terms and conditions of our prior master carrier
agreements with AT&T. The agreement provides us with a variety of services,
including transmission facilities to connect our network switches as well as
services for international calls, local traffic, international calling cards,
overflow traffic and operator assisted calls. The agreement also provides that,
subject to certain terms and conditions, we will purchase these services
exclusively from AT&T during the term of the agreement, provided, however,
that we are not obligated to purchase exclusively in certain cases, including if
such purchases would result in a breach of any contract with another carrier
that was in place when we entered into the AT&T agreement, or if vendor
diversity is required. Certain of our network service agreements, including the
AT&T agreement, contain certain minimum usage commitments. Our AT&T
agreement establishes pricing and provides for annual minimum revenue
commitments based upon usage as follows: 2005 - $32 million, 2006 - $32 million
and 2007 - $32 million and obligates us to pay 65 percent of the revenue
shortfall, if any. Another separate contract with a different vendor establishes
pricing and provides for annual minimum payments for 2005 of $1.0 million.
Despite the anticipated reduction in our local bundled customer base, we
anticipate that we will not be required to make any shortfall payments under
these contracts for the 2005 commitment period. However, with respect to the
2006 and 2007 commitment periods, we will need to restructure these obligations
or experience significant growth in network minutes as a result of acquisitions
or entering into wholesale arrangements to avoid payments pursuant to the
minimum commitments. We continue to actively monitor this matter; however, to
the extent that we do not experience such significant growth or enter into such
wholesale arrangements as will enable us to meet these minimum usage
commitments, and we are unable successfully to restructure these obligations, we
will be required to make these shortfall payments and our costs of purchasing
the services under these agreements will increase.
We have a
contract with our invoice printing company that establishes pricing and provides
for annual minimum payments as follows: 2005 - $1.2 million, 2006 - $1.2
million, 2007 - $1.2 million, and 2008 - $1.3 million. We also agreed to renew
the maintenance agreement associated with a vendor financing agreement we
entered into in May 2004 with a software supplier for an additional two years at
a cost of $1.1 million, which is funded on the anniversary dates of the
agreement.
NOTE
3. STOCK-BASED COMPENSATION
We
account for our stock option awards under the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, including FASB Interpretation No. 44
"Accounting for Certain Transactions Including Stock Compensation," an
interpretation of APB Opinion No. 25. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at grant date or other measurement date over the amount an employee must pay to
acquire the stock. We make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied as
required by SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS
148, “Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
123.” The
following disclosure complies with the adoption of this statement and includes
pro forma net income as if the fair value based method of accounting had been
applied (in thousands except for per share data):
| |
|
Three
Months Ended
September
30, |
|
Nine
Months Ended
September
30, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Net
income as reported |
|
$ |
5,217 |
|
$ |
9,011 |
|
$ |
24,055 |
|
$ |
25,721 |
|
|
Add:
Stock-based employee compensation expense included in reported net
income
|
|
|
3 |
|
|
-- |
|
|
3 |
|
|
5 |
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all options |
|
|
1,019 |
|
|
1,424 |
|
|
2,085 |
|
|
4,299 |
|
|
Pro
forma net income |
|
|
4,201 |
|
$ |
7,587 |
|
$ |
21,973 |
|
$ |
21,427 |
|
| |
|
Three
Months Ended
September
30, |
|
Nine
Months Ended
September
30, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Basic
earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
$ |
0.18 |
|
$ |
0.33 |
|
$ |
0.86 |
|
$ |
0.96 |
|
|
Pro
forma |
|
$ |
0.14 |
|
$ |
0.28 |
|
$ |
0.78 |
|
$ |
0.80 |
|
|
Diluted
earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
$ |
0.17 |
|
$ |
0.32 |
|
$ |
0.84 |
|
$ |
0.92 |
|
|
Pro
forma |
|
$ |
0.14 |
|
$ |
0.28 |
|
$ |
0.76 |
|
$ |
0.78 |
|
For
purposes of pro forma disclosures under SFAS 123, the estimated fair value of
the options is assumed to be amortized to expense over the options' vesting
period. The fair value of the options granted has been estimated at the various
dates of the grants using the Black-Scholes option-pricing model with the
following assumptions:
· Fair
market value based on our closing common stock price on the date the option is
granted;
· Risk-free
interest rate based on the weighted averaged 5 year U.S. treasury note strip
rates;
| |
· |
Volatility
based on the historical stock price over the expected term (5
years); |
| |
· |
No
expected dividend yield based on future dividend payment
plans. |
NOTE
4. PER SHARE DATA
Basic
earnings per common share for a fiscal period is calculated by dividing net
income by the weighted average number of common shares outstanding during the
fiscal period. Diluted earnings per common share is calculated by adjusting the
weighted average number of common shares outstanding and the net income during
the fiscal period for the assumed conversion of all potentially dilutive stock
options, warrants and convertible bonds (and assuming that the proceeds
hypothetically received from the exercise of dilutive stock options are used to
repurchase our common stock at the average share price during the fiscal
period). For the diluted earnings calculation, we also adjust the net income by
the interest expense on the convertible bonds assumed to be converted. Income
per share is computed as follows (in thousands except per share
data):
| |
|
Three
Months Ended
September
30, |
|
Nine
Months Ended
September
30, |
|
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income used to compute basic and fully diluted earnings per
share |
|
$ |
5,217 |
|
$ |
9,011 |
|
$ |
24,055 |
|
$ |
25,721 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding used to compute basic
earnings
per
share |
|
|
29,808 |
|
|
26,974 |
|
|
28,122 |
|
|
26,799 |
|
|
Additional
common shares to be issued assuming exercise of stock options
and
warrants (net of shares assumed reacquired) and conversion
of convertible
bonds * |
|
|
549 |
|
|
763 |
|
|
674 |
|
|
1,055 |
|
|
Average
shares of common and common equivalent stock outstanding used
to
compute diluted earnings per share |
|
|
30,357 |
|
|
27,737 |
|
|
28,796 |
|
|
27,854 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share - Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share |
|
$ |
0.18 |
|
$ |
0.33 |
|
$ |
0.86 |
|
$ |
0.96 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding |
|
|
29,808 |
|
|
26,974 |
|
|
28,122 |
|
|
26,799 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share - Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share |
|
$ |
0.17 |
|
$ |
0.32 |
|
$ |
0.84 |
|
$ |
0.92 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares outstanding |
|
|
30,357 |
|
|
27,737 |
|
|
28,796 |
|
|
27,854 |
|
* The
diluted share basis for the three and nine months ended September 30, 2004
excludes 9 shares associated with certain convertible bonds due to their
antidilutive effect. The diluted share basis for the three months ended
September 30, 2005 and 2004 excludes 2,572 and 3,400 shares, respectively, and
for the nine months ended September 30, 2005 and 2004 excludes 2,556 and 2,933
shares, respectively, associated with the options and warrants due to their
antidilutive effect.
NOTE
5. ACQUISITION OF LDMI TELECOMMUNICATIONS, INC.
On May
23, 2005, we entered into an Agreement and Plan of Merger (the “LDMI Acquisition
Agreement”) with LDMI Telecommunications, Inc., providing for our acquisition of
LDMI. LDMI was privately held and is a facilities-based competitive local
exchange carrier serving business and residential customers primarily in
Michigan and Ohio. Under the terms of the LDMI Acquisition Agreement, LDMI
became a wholly owned subsidiary on July 13, 2005, and, in exchange for all of
the stock of LDMI, we paid $24.0 million in cash and issued 1.8 million shares
of our common stock. The acquisition of LDMI significantly accelerated our entry
into the medium-sized business market with its established sales force and
product portfolio. Results of LDMI are included beginning on July 14, 2005. The
aggregate purchase price was $42.8 million, including the 1.8 million shares of
our common stock with a market value of $16.0 million, $0.8 million payment of
transaction costs and the repayment of LDMI debt.
The
following unaudited pro forma information presents a summary of the consolidated
results of our operations as if the LDMI acquisition had occurred on January 1,
2004:
|
Thousands
of dollars,
except
per share data |
|
For the Three
Months Ended
September
30, |
|
For the Nine
Months
Ended
September 30, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Revenues |
|
$ |
124,531 |
|
$ |
151,497 |
|
$ |
352,010 |
|
$ |
437,493 |
|
|
Net
Income |
|
$ |
4,951 |
|
$ |
8,314 |
|
$ |
23,349 |
|
$ |
22,620 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.16 |
|
$ |
0.29 |
|
$ |
0.79 |
|
$ |
0.79 |
|
|
Diluted |
|
$ |
0.16 |
|
$ |
0.28 |
|
$ |
0.78 |
|
$ |
0.76 |
|
|
Weighted
Average Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
30,062
|
|
|
28,774
|
|
|
29,401
|
|
|
28,599
|
|
|
Diluted |
|
|
30,612
|
|
|
29,537
|
|
|
30,075
|
|
|
29,654
|
|
The pro
forma consolidated results of operations include adjustments to give effect to
amortization of intangibles, depreciation of equipment, interest expense and
income, income taxes, transaction fees and shares of common stock issued. These
unaudited pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of the results of operations that actually would
have occurred had the acquisition had been made at the beginning of the periods
presented or the future results of the combined operations.
The
purchase price allocations used in the preparation of these financial statements
are preliminary due to the continuing analyses relating to the determination of
the fair values of the assets acquired and liabilities assumed. Any changes to
the fair value of net assets acquired, based on information as of the
acquisition date, will result in an adjustment to the fair value of the assets
acquired and liabilities assumed and a corresponding adjustment to goodwill. We
do not expect the finalization of these matters to have a material effect on the
allocation. The excess of the purchase price paid over the fair value of net
assets acquired was allocated to goodwill.
NOTE
6. SUBSEQUENT EVENT.
On
October 18, 2005, we entered into an Agreement and Plan of Merger (the “NTC
Acquisition Agreement”) with Network Telephone Corporation, providing for our
acquisition of NTC. NTC is a privately held, facilities-based competitive local
exchange carrier serving
business customers primarily in the southeast United States. Under the
terms of the NTC Acquisition Agreement, at closing, NTC will become a wholly
owned subsidiary and we will,
in
exchange for all of the stock of NTC, pay cash of $23 million less certain
expenses and transaction fees. The NTC
Acquisition Agreement and the NTC transaction have been approved by both the
board of directors and the stockholders of NTC and the closing is subject, among
other conditions, to the receipt of certain regulatory approvals, which both
companies expect to receive. We expect the transaction will close in January
2006.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
You
should read the following discussion in conjunction with our Consolidated
Financial Statements included elsewhere in this Form 10-Q and in our 2004 Form
10-K and any subsequent filings.
Cautionary
Note Concerning Forward-Looking Statements
Certain
of the statements contained herein may be considered "forward-looking
statements" for purposes of the securities laws. From time to time, oral or
written forward-looking statements may also be included in other materials
released to the public. These forward-looking statements are intended to provide
our management’s current expectations or plans for our future operating and
financial performance, based on our current expectations and assumptions
currently believed to be valid. For these statements, we claim protection of the
safe harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements can be
identified by the use of forward-looking words or phrases, including, but not
limited to, "believes," "estimates," "expects," "expected," "anticipates,"
"anticipated," "plans," "strategy," "target," "prospects," “forecast,”
“guidance” and other words of similar meaning in connection with a discussion of
future operating or financial performance. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to have been
correct.
All
forward-looking statements involve risks and uncertainties that may cause our
actual results to differ materially from those expressed or implied in the
forward-looking statements. In addition to those factors discussed in this Form
10-Q, you should see our other reports on Forms 10-K, 10-Q and 8-K subsequently
filed with the Securities and Exchange Commission from time to time for
information identifying factors that may cause actual results to differ
materially from those expressed or implied in the forward-looking
statements.
OVERVIEW
We are a
leading competitive communications services provider offering local and long
distance phone services, data services and internet services to residential and
small- and medium-sized business customers. We are focused on markets where we
have deployed or will deploy our own networking assets, currently Michigan, Ohio
and Georgia. In addition, we have built a large, profitable base of bundled
phone service customers using the wholesale operating platforms of the Regional
Bell Operating Companies, and are migrating a portion of those customers to our
own networking platform.
On July
13, 2005, we completed the acquisition of LDMI Telecommunications, Inc.
("LDMI"), a privately held, facilities-based competitive local exchange carrier
serving business and residential customers primarily in Michigan and Ohio. In
exchange for all of the stock of LDMI, we paid $24 million in cash and issued
1.8 million shares of common stock. The acquisition of LDMI significantly
accelerated our entry into the medium-sized business market with their
established sales force and product portfolio. Results of LDMI are included
beginning on July 14, 2005. In addition, on October 19, 2005, we announced the
planned acquisition of Network Telephone Corporation ("NTC"), a privately held,
facilities based competitive local exchange carrier serving business customers
primarily in eight states in the Southeast U.S. region, or BellSouth territory.
This acquisition is subject to regulatory approvals, which we expect to receive.
We expect that the transaction will close in January 2006. In order to be
successful, we must be able to successfully integrate the operations of LDMI
and, upon consummation of the acquisition of NTC, those of NTC. The integration
efforts could divert management's attention from daily operations of the
combined companies.
With the
acquisition of LDMI and the inclusion of LDMI in our results, we will report in
this and in future reports period end voice and data line equivalents. Voice
line equivalents include individual telephone lines plus an equivalent line
calculation for networked T-1s based on the T-1's circuit bandwidth. Data line
equivalents include individual dial-up srvices and DSL, T-1 and other data
services based on their circuit bandwidth.
In February
2005, the Federal Communications Commission (FCC) issued final rules that
effectively eliminated the requirement that incumbent local exchange companies,
such as the Regional Bell Operating Companies, allow us to purchase the unbunled
network elements that comprise the unbundled network element platform, or UNE-P,
at Total Element Long Run Incremental Costs (TELRIC) rates, and established a
12-month transition plan for implementation. Beginning on March 11, 2005, we are
no longer able to purchase the unbundled network element platform at TELRIC
rates (or TELRIC rates plus $1 per line per month) to provide service to new
customers and beginning March 11, 2006, the limitation will extend to all
customers. During the 12-month transition period, the platform rates that we are
charged to serve embedded customers have been increased by $1 per line per
month. Although the FCC's decision to eliminate TELRIC-based access to the
network element platform currently is on appeal before the D.C. Circuit, it is
likely that at the end of the 12-month transition period, we will need to
service customers that are not on our own networking platform through
resale of the ILECs' retail services or through a negotiated wholesale
agreement, either of which likely will result in significantly higher costs to
us than servicing customers through the unbundled network
platform.
On
October 3, 2005, we signed a commercial agreement with the incumbent local
exchange carrier subsidiaries of SBC Communications Inc., our largest network
supplier. The terms of the agreement enable us to continue offering high quality
telecommunications services to our customers who were served on SBC’s unbundled
network element platform. These customers will experience a seamless transition
to the platform provided under the commercial agreement. This new agreement
enables us to serve customers, such as multi-location business customers, that
are outside our local network footprint and gives us flexibility to continue to
move customers onto our own local network. Entering into this agreement now
removes uncertainty regarding the cost of providing services to our off-net
customers in SBC territory after March 11, 2006. While we are presently in
discussions with BellSouth and Verizon regarding wholesale or commercial
agreements, to date, we have not entered into any with them, nor can there be
any assurance that any such agreements will be entered into.
As a
result of (a) significant changes to the FCC rules that previously required the
incumbent local exchange companies to provide us access to the unbundled network
platform at TELRIC rates, and (b) increases in TELRIC rates for network
elements adopted by various state public utility commissions, the rates that we
are charged by the incumbent local exchange companies to provide our services
increased significantly in 2004 and 2005 and will continue to increase over
time. These cost increases have and will continue to lead us to increase our
product pricing, which we believe inhibits our ability to add new customers and
to retain existing customers. Therefore, we have reduced our efforts to increase
subscriber growth in markets other than those areas where we currently have or
plan to deploy network facilities, which has significantly reduced our sales and
marketing expenditures from past periods. In addition to the increases discussed
above as a result of these regulatory actions, we plan to further increase our
product pricing for our customers located in those areas where we do not
currently have or plan to deploy network facilities. While these price increases
may increase our current revenues from such customers, it will adversely affect
our ability to retain such customers on our service and negatively affect our
revenues over time.
An
integral element of our business strategy is to develop our own local networking
capacity. Local networking enhances our operating flexibility and provides us
with an alternative to the wholesale operating platforms of the incumbent local
exchange companies. Beginning in 2003, we deployed networking assets in Michigan
and, as of September 30, 2005, we had approximately 192,000 voice line
equivalents on our network. We are continuing the expansion of our network by
colocating our networking equipment in the incumbent local exchange companies’
end offices to provide service over our own network to a larger existing
customer base in Detroit and Grand Rapids, Michigan as well as Atlanta, Georgia.
We expect to have between 275,000 and 285,000 voice line equivalents on our
network by December 31, 2005. We have, and continue to improve, the automation
of the business processes required to provide local network-based
services. We are utilizing next generation networking equipment for the
build-out of our network in Grand Rapids and certain other areas in Michigan, as
well as in the Atlanta market. However, we have not previously developed,
deployed or operated a local network of our own or of this scale and there can
be no assurance that we shall be able successfully to do so and thereafter
profitably provide local telephone services through such a network. In addition,
we are dependent upon a variety of vendors for the provision of equipment
necessary for the construction, deployment and migration of customers to our
local network, and failure of these vendors to deliver the equipment in a timely
manner may result in delays in the deployment, and ultimately, the migration of
customers to our network.
Our
business strategy is to serve small and medium-sized businesses, in addition to
residential consumers in those areas where we plan to deploy network facilities.
Expansion into this business market will increase our addressable market in such
areas and will permit us to leverage our investment in our network facilities
due to the complementary telecommunication traffic or usage patterns of these
business customers and our residential customers. We continue to explore
acquisitions that will expand our marketing footprint.
RESULTS
OF OPERATIONS
The
following table sets forth for the periods indicated certain of our financial
data as a percentage of revenue:
| |
|
Three
Months Ended
September
30, |
|
Nine
Months Ended
September
30, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Revenue
|
|
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
Costs
and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
and line costs |
|
|
53.4 |
|
|
48.2 |
|
|
52.0 |
|
|
47.6 |
|
|
General and administrative expenses |
|
|
19.5 |
|
|
14.8 |
|
|
17.2 |
|
|
15.2 |
|
|
Provision
for doubtful accounts |
|
|
3.7 |
|
|
4.7 |
|
|
4.3 |
|
|
4.1 |
|
|
Sales
and marketing expenses |
|
|
6.0 |
|
|
16.0 |
|
|
6.1 |
|
|
16.2 |
|
|
Depreciation
and amortization |
|
|
9.7 |
|
|
4.5 |
|
|
8.9 |
|
|
4.6 |
|
|
Total
costs and expenses |
|
|
92.3 |
|
|
88.2 |
|
|
88.5 |
|
|
87.7 |
|
|
Operating
income |
|
|
7.7 |
|
|
11.8 |
|
|
11.5 |
|
|
12.3 |
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
0.2 |
|
|
0.1 |
|
|
0.2 |
|
|
0.1 |
|
|
Interest
expense |
|
|
(0.1 |
) |
|
0.5 |
|
|
-- |
|
|
(0.2 |
) |
|
Other,
net |
|
|
-- |
|
|
-- |
|
|
(0.1 |
) |
|
-- |
|
|
Income
before income taxes |
|
|
7.8 |
|
|
12.4 |
|
|
11.6 |
|
|
12.2 |
|
|
Provision
for income taxes |
|
|
3.5 |
|
|
4.9 |
|
|
4.7 |
|
|
4.8 |
|
|
Net
income |
|
|
4.3 |
% |
|
7.5 |
% |
|
6.9 |
% |
|
7.4 |
% |
The following
table sets forth for certain items of our financial data for the periods
indicated the percentage increase or (decrease) in such item from the prior year
comparable fiscal period:
| |
|
Three
Months Ended September 30, |
|
Nine
Months Ended September 30, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Revenue
|
|
|
(0.2 |
)% |
|
20.7 |
% |
|
0.7 |
% |
|
22.5 |
% |
|
Costs
and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
and line costs |
|
|
10.6 |
|
|
26.6 |
|
|
10.1 |
|
|
23.5 |
|
|
General and administrative expenses |
|
|
31.1 |
|
|
25.9 |
|
|
14.1 |
|
|
32.5 |
|
|
Provision
for doubtful accounts |
|
|
(21.2 |
) |
|
66.3 |
|
|
6.1 |
|
|
64.2 |
|
|
Sales
and marketing expenses |
|
|
(62.2 |
) |
|
36.6 |
|
|
(61.8 |
) |
|
58.8 |
|
|
Depreciation
and amortization |
|
|
158.7 |
|
|
22.3 |
|
|
138.6 |
|
|
21.0 |
|
|
Total
costs and expenses |
|
|
4.4 |
|
|
29.6 |
|
|
1.7 |
|
|
31.8 |
|
|
Operating
income |
|
|
(34.7 |
) |
|
(20.2 |
) |
|
(6.6 |
) |
|
(18.3 |
) |
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
226.2 |
|
|
45.2 |
|
|
327.9 |
|
|
(39.5 |
) |
|
Interest
expense |
|
|
(120.3 |
) |
|
(136.0 |
) |
|
(76.5 |
) |
|
(88.5 |
) |
|
Other,
net |
|
|
100.0 |
|
|
(100.0 |
) |
|
100.0 |
|
|
(100.0 |
) |
|
Income
before income taxes |
|
|
(36.9 |
) |
|
(9.0 |
) |
|
(4.7 |
) |
|
(13.9 |
) |
|
Provision
for income taxes |
|
|
(28.9 |
) |
|
115.5 |
|
|
(1.9 |
) |
|
167.3 |
|
|
Net
income |
|
|
(42.1 |
)% |
|
(83.3 |
)% |
|
(16.1 |
)% |
|
(65.3 |
)% |
THIRD
QUARTER 2005 COMPARED TO THIRD QUARTER 2004
Revenue. Revenue
for the third quarter 2005 was unchanged from the third quarter 2004 as the
acquisition of LDMI in the third quarter 2005 and the inclusion of its results
offset the decline in our revenues from our existing customer base. During 2004
and 2005, we increased certain fees and rates related to our long distance and
bundled products and such changes in rates have adversely impacted customer
turnover. Total revenues are expected to decline in the fourth quarter as our
base of customers declines.
The
decrease in revenue from customers that are not served by our own networking
facilities, or off-net, to $79.9 million for the third quarter 2005 from $105.0
million for the third quarter 2004 was due to fewer average lines in 2005 as
compared to 2004, partially offset by an increase in average monthly revenue per
customer and the acquisition of LDMI. Our off-net lines have declined during
this period as we migrate off-net lines to our own network and, in areas where
we are not building network, as customers leave our service for that of other
carriers, offset by the acquisition of LDMI. As of September 30, 2005, our
off-net lines had decreased to 388,000 from 673,000 as of Septmber 30,
2004. A significant increase in the costs we pay for network services from
the incumbent local telephone carriers has caused us to dramatically limit the
marketing of new customers in markets where we do not currently have network
facilities and, as a result of this, together with continued migrations to our
network, we expect the decline in off-net revenues to continue in the future.
The
increase in revenue from customers that are served by our own networking
facilities, or on-net, to $23.9 million for the third quarter 2005 from $0.6
million for the third quarter 2004 was due to greater average lines in 2005 as
compared to 2004 and the acquisition of LDMI. Our on-net voice and data
equivalent lines have increased during this period due to the acquisition of
LDMI and as we migrate lines to our own network and continue to sell new
customers. As of September 30, 2005, our voice equivalent lines on-net had
increased to 192,000 from 10,000 as of September 30, 2004 and our data line
equivalents increased to 65,000 from 11,000 during the same period.
Long
distance only and other revenue increased for the third quarter 2005 to $16.9
million from $15.4 million for the third quarter 2004. The acquisition of LDMI
more than offset a decline in revenues from our existing long distance
base. Our decision in 2000 to invest in building a bundled customer base,
together with customer turnover, contributed to the decline in long distance
customers and revenue, although the effect on revenue of the decline in
customers was offset partially by an increase in average monthly revenue per
customer due to price increases. We expect long distance customers and revenues
to decline in the future.
Network
and Line Costs. Network
and line costs as a percentage of revenue increased in the third quarter 2005
from 2004 due to inefficient network utilization relating to the advanced build
out of our Michigan network facilities and the under utilization of our Ohio
network facilities, line migration costs and increased unbundled network element
platform costs. These cost increases more than offset the impact that fewer
average bundled lines and long distance customers had on network and line costs
and, together with the acquisition of LDMI, resulted in an increase in network
and line costs for the third quarter 2005 from the third quarter 2004. To date,
we have been able to increase our prices to offset per line increases in network
and line cost, but these increases will increase customer turnover. Network and
line costs exclude depreciation and amortization of $6.3 million for the third
quarter 2005 and $1.2 million for the third quarter 2004.
We accrue
expenses for network costs that we believe we have incurred pursuant to our
interconnection or commercial agreements with a particular supplier or tariffs
but for which we have not yet been billed. This primarily occurs due to errors
and omissions in billing on the part of our principal suppliers, the Regional
Bell Operating Companies. Accrued expenses are eliminated upon the earlier of
actual billing (including billing for charges appropriately recorded in prior
periods but not invoiced, or “backbilling”) by the Regional Bell Operating
Companies or the expiration of the time period for which we are liable for the
charges. In addition, we accrue for network expense not yet billed in a
jurisdiction if we believe there is a prospect that regulatory or other legal
changes in the jurisdiction will retroactively increase the rates we have
charged. In Georgia, an appeals court overturned a rate reduction by the state
public utility commission and ordered the commission to recalculate the rates
charged to us. This issue is currently being considered by the state commission
on remand from the court. We believe that the rates charged to us will be in
excess of those previously allowed by the commission and have accrued
accordingly.
We seek
to structure and price our products in order to maintain network and line costs
as a percentage of revenue at certain targeted levels. While the control of the
structure and pricing of our products assists us in mitigating risks of
increases in network and line costs, the telecommunications industry is highly
competitive and there can be no assurances that we will be able to effectively
market these higher priced products (see "Liquidity and Capital Resources -
Other Matters," below).
We expect
the actions we will take, as a result of the recent regulatory changes, to focus
customer growth in areas where we have our own local network, currently
Michigan, Ohio and Georgia and increase prices on our services, will cause the
number of off-net lines to decline in the future and reduce network and line
costs, although the amount of the reduction may be offset in part by the
increased costs we may be required to pay. Changes in the pricing of our service
plans could also cause network and line costs as a percentage of revenue to
change in the future. See our discussion under "Other Matters,"
below.
General
and Administrative Expenses. General
and administrative expenses increased in the third quarter 2005 from the third
quarter 2004. This increase was primarily attributable to the LDMI acquisition
and to an increase in the number of information technology and network employees
needed to support our local networking initiatives, partially offset by a
reduction in the number of employees that support our base of off-net customers.
As a result, general and administrative expense as a percentage of revenue
increased from the third quarter 2004 to the third quarter 2005.
Provision
for Doubtful Accounts. The
provision for doubtful accounts decreased in the third quarter 2005 from the
third quarter 2004. The decrease was primarily due to a decrease in the average
number of customers and a decrease in bad debt expense as a percentage of
revenues.
Sales
and Marketing Expenses. Sales
and marketing expenses decreased significantly in the third quarter 2005 from
the third quarter 2004. The decreases are attributable to the decrease of sales
and marketing activity related to our bundled product, including decreased
headcount and reduced direct mail and media expenses due to our reduced efforts
to increase subscriber growth in markets other than those areas where we
currently have or plan to deploy network facilities. Included in sales and
marketing expenses are advertising expenses of $0.6 million for the third
quarter 2005 and $2.9 million for the third quarter 2004. We expect sales and
marketing expenses to increase through the remainder of 2005 as we expand our
marketing efforts commensurate with the growth of our networking
footprint.
Depreciation
and Amortization.
Depreciation and amortization increased in the third quarter 2005 from the third
quarter 2004 primarily due to increased depreciation related to the reduction in
the remaining useful lives of our long distance switches and depreciation and
amortization related to the LDMI acquisition. We expect depreciation and
amortization will remain at these levels for the balance of 2005.
YEAR
TO DATE 2005 COMPARED TO YEAR TO DATE 2004
Revenue. Revenue
for the year to date 2005 increased slightly from the year to date 2004 as the
acquisition of LDMI in the third quarter 2005 more than offset the decline in
our revenues from our existing customer base. During 2004 and 2005, we increased
certain fees and rates related to our long distance and bundled products and
such changes in rates will adversely impact customer turnover.
The
decrease in off-net revenue to $272.9 million for the year to date 2005 from
$296.3 million for the year to date 2004 was due to fewer average lines in 2005
as compared to 2004, partially offset by an increase in average monthly revenue
per customer and the acquisition of LDMI. Our off-net lines have declined during
this period as we migrate off-net lines to our own network and, in areas where
we are not building network, customers leave our service for that of other
carriers.
The
increase in on-net revenue to $35.0 million for the year to date 2005 from $0.6
million for the year to date 2004 was due to greater average lines in 2005 as
compared to 2004 and the acquisition of LDMI. Our on-net voice and data
equivalent lines have increased during this period as we migrate lines to our
own network and continue to sell new customers.
Long
distance only and other revenue decreased for the year to date 2005 to $40.2
million from $48.8 million for the year to date 2004 due to the continued
decline in long distance customers as partially offset by the acquisition of
LDMI. Our decision in 2000 to invest in building a bundled customer base,
together with customer turnover, contributed to the decline in long distance
customers and revenue, although the effect on revenue of the decline in
customers was offset partially by an increase in average monthly revenue per
customer due to price increases. We expect this decline in long distance
customers and revenues to continue.
Network
and Line Costs. Network
and line costs as a percentage of revenue increased for the year to date 2005
from the year to date 2004 due to inefficient network utilization relating to
the advanced build out of our Michigan network facilities and the under
utilization of our Ohio network facilities, line migration costs and increased
unbundled network element platform costs. These cost increases more than offset
the impact that fewer average bundled lines and long distance customers had on
network and line costs and, together with the acquisition of LDMI, resulted in
an increase in network and line costs for the year to date 2005 from the year to
date 2004. To date, we have been able to increase our prices to offset per line
increases in network and line cost, but these increases will increase customer
turnover.
During
the year to date 2005, we recorded liabilities for network and line costs
related to retroactive cost increases pending the resolution of a rate
proceeding in the state of Georgia and other matters. The increase in these
liabilities was partially offset by a reduction in
accruals for network and line costs due to the
expiration of the period during which we could be backbilled for certain
charges.
General
and Administrative Expenses. General
and administrative expenses increased for the year to date 2005 from the year to
date 2004 primarily due to an increase in the number of information technology
and network employees to support our local networking initiatives and the
acquisition of LDMI, partially offset by a reduction in the number of employees
to support our base of off-net customers.
Provision
for Doubtful Accounts. The
provision for doubtful accounts increased for the year to date 2005 from the
year to date 2004. The increase was due to an increase in the total revenue
during the period and a slight increase in bad debt expense as a percentage of
revenues.
Sales
and Marketing Expenses. The
significant decrease in sales and marketing expenses for the year to date 2005
from the year to date 2004 is attributable to the decrease of sales and
marketing activity related to our bundled product, including decreased headcount
and reduced direct mail and media expenses due to our reduced efforts to
increase subscriber growth in markets other than those areas where we currently
have or plan to deploy network facilities. Included in sales and marketing
expenses are advertising expenses of $2.8 million for the year to date 2005 and
$8.0 million for the year to date 2004. We expect sales and marketing expenses
to increase through the remainder of 2005 as we expand our marketing efforts
commensurate with the growth of our networking footprint.
Depreciation
and Amortization. The
increase in depreciation and amortization for the year to date 2005 from the
year to date 2004 is primarily attributable to the increase in depreciation
related to the reduction in the remaining useful lives of our long distance
switches and the depreciation and amortization related to the LDMI acquisition.
Interest
Expense. The
decrease in interest expense for the year to date 2005 from the year to date
2004 is primarily attributable to the decrease in outstanding debt balances.
LIQUIDITY
AND CAPITAL RESOURCES
Our
management assesses our liquidity in terms of our ability to generate cash to
fund our operations, our capital expenditures and our debt service obligations.
For the years to date 2005 and 2004, our operating activities provided net cash
flow of $56.7 million and $49.5 million, respectively. In the year to date 2005,
all of the net cash flow from operating activities was used to fund capital
expenditures and capitalized software development costs and the acquisition of
LDMI. In the year to date 2004, the net cash flow from operating activities was
used primarily to reduce our outstanding debt obligations. As of September 30,
2005, we had $42.3 million in cash and cash equivalents and long-term debt and
capital lease obligations (including current maturities) of $5.9 million,
compared to $47.5 million and $4.2 million, respectively, at December 31,
2004.
Net cash
provided by (used in):
|
|
|
Year
to Date
(in thousands) |
|
Percent
Change |
|
|
|
|
2005 |
|
|
2004 |
|
|
2005
vs. 2004 |
|
|
Operating
activities |
|
$ |
56,680 |
|
$ |
49,481 |
|
|
14.5 |
% |
|
Investing
activities |
|
$ |
(64,953 |
) |
$ |
(10,726 |
) |
|
505.6 |
% |
|
Financing
activities |
|
$ |
3,099 |
|
$ |
(44,643 |
) |
|
(106.9 |
%) |
Cash
Provided By Operating Activities. Cash
generated by operations increased by $7.2 million from the year to date 2004 to
the year to date 2005. The increase was driven by higher cash flow before
changes in working capital offset by higher investment in working capital. The
increase in cash flow before changes in working capital was primarily driven by
significant reductions in sales and marketing expense, offset by higher network
and line costs. The application of NOL carryforwards has limited our current
payment of income taxes to cash taxes for alternative minimum taxes and certain
state income taxes. We expect that Talk America’s NOLs will be substantially
utilized during 2006. The use of NOLs acquired in the LDMI acquisition will be
limited, with the benefit spread through 2018.
Net
Cash Used in Investing Activities. Capital
expenditures increased by $27.2 million during the year to date 2005 as compared
to the year to date 2004 and capitalized software increased by $0.2 million. In
the year to date 2005, approximately $31.9 million of our $35.2 million in
capital expenditures consisted of costs related to our deployment of networking
assets (local switch and colocation equipment) in Michigan.
We expect
to spend between $53 and $58 million in capital expenditures and capitalized
software in 2005, primarily for the build out of the Michigan and Atlanta
networking facilities. We have not previously developed and deployed a local
network of our own or of this scale and there can be no assurance that we
will not encounter unanticipated costs in acquiring the assets necessary for
such networking capability and its operation or in deploying the new network. In
addition, to the extent we identify other markets to deploy networking
facilities, our capital expenditures will increase accordingly. In the year to
date 2005, capitalized software development costs totaled $2.9 million as
compared with $2.7 million for the year to date 2004.
The
acquisition of LDMI on July 13, 2005, required the payment of $24 million in
cash and the issuance of 1.8 million shares of our common stock for the purchase
of all of the equity of LDMI and the repayment of $4.7 million in debt. To the
extent that we are successful in identifying and completing additional
acquisitions of customers, networking assets or businesses, net cash used in
investing activities may increase.
In connection with the acquisition of NTC, which is expected to close in January
2006, in
exchange for all of the stock of NTC, we will pay cash of $23 million less
certain expenses and transaction fees.
Net
Cash Provided by (Used in) Financing Activities. Net cash
provided by financing activities during the year to date 2005 was $3.1 million,
primarily attributable to proceeds from the exercise of stock options. Net cash
used in financing activities during the year to date 2004 was $44.6 million,
primarily attributable to the repayment of outstanding debt. On September 1,
2004, we announced that our Board of Directors had authorized a share buyback
program for us to purchase up to $50 million of our outstanding shares. The
shares may be purchased from time to time, in the open market and/or private
transactions. Through September 30, 2005, we had not purchased any shares under
this program.
In recent
years we have been meeting our ongoing cash requirements (including for the
conduct of our operations, acquisitions and capital expenditures) from our cash
on-hand and from cash generated from operations. However, our continued growth
may require that we seek alternative sources of funding. While we believe that
we would have access to new capital in the public or private markets, there can
be no assurance as to the timing, amounts, terms or conditions of any such new
capital or whether it could be obtained on terms acceptable to us. Based on our
current projections for operations, we believe that our cash on-hand and our
cash flow from operations will be sufficient to fund our currently contemplated
capital expenditures, our debt service obligations and the expenses of
conducting our operations for at least the next twelve months. However, there
can be no assurance that we will be able to realize our projected cash flows
from operations, which is subject to the risks and uncertainties discussed in
this report, or that we will not be required to consider capital expenditures in
excess of those currently contemplated, as discussed in this
report.
Our
provision of telecommunications services is subject to government
regulation. Before
2005, our local telecommunications services were provided almost exclusively
through the use of unbundled network elements purchased from incumbent local
exchange companies that were made available to us pursuant to FCC rules. It has
been primarily the availability of cost-based rates for these unbundled
network elements that has enabled us to price our local telecommunications
services competitively.
In February
2005, the FCC, issued final rules that effectively eliminated the requirement
that incumbent local exchange companies allow us to purchase the network
elements that comprise the unbundled network element platform, or UNE-P, at
TELRIC rates and established a 12-month transition plan for
implementation:
| · |
Beginning
on March 11, 2005, we are no longer able to purchase the unbundled
network element platform at TELRIC rates to provide service to new
customers, but may continue to purchase the platform under the FCC's
12-month transition plan for our existing customers. The practical result
is that unless we enter into a wholesale agreement with the regional ILEC,
such as we have with the ILEC subsidiaries of SBC, we currently are unable
to add new customers in any area where we do not have our own local
network. |
| · |
During
the 12-month transition period beginning on March 11, 2005, the
TELRIC rates that we were charged for the unbundled network element
platform increased by $1 per line per month. Beginning on March 11, 2006,
we will no longer be able to purchase the unbundled network element
platform at transition plan rates to provide service to our pre-existing
customers. As a result, we likely will need to service customers that are
not on our own networking platform through resale of the ILECs' retail
services or through negotiated wholesale agreements, which
will impose significantly higher costs on us than servicing customers
using the unbundled network element platform at cost-based (i.e. TELRIC)
rates. |
In
February 2005, the FCC also issued new rules affecting our access to the
local loops and the dedicated transport facilities that we purchase from the
ILECs and that are necessary for the operation of our own network facilities.
The FCC adopted a twelve-month transition plan for competitive
local exchange companies, such as we are, to
transition away from the use of DS1 and DS3 loops and dedicated transport where
there is no impairment, as defined in the FCC’s final rules, and an
eighteen-month transition plan to transition away from dark fiber. The
transition plans apply only to our customer base as it existed on March 11,
2005, and do not permit competitive
local exchange companies, including us, to add
new dedicated transport unbundled
network elements during
the term of the transition plan.
The
determination of whether a particular network element is either impaired or
unimpaired in a particular market, as defined in the FCC’s final rules, has a
significant effect on markets where we already have networking facilities and on
our plans for entering a new market. It is difficult to predict which geographic
areas will become unimpaired for network elements because the ILECs are using
non-public information to determine the thresholds for availability; while we
may challenge the ILECs’ threshold assumptions, we may not be successful in such
challenges. If a market is determined to be unimpaired, we may be unable to
cost-effectively offer service in that market.
The
unavailability to us of cost-based transport elements could substantially impair
our plans to deploy our own network facilities and we could be forced to use
other means to affect our network deployment, including the use of
facilities purchased at higher special access rates or transport services
purchased from other facilities-based competitive local exchange companies. In
either event, our cost of service could rise dramatically and our plans for a
service roll-out using our own network facilities could be delayed substantially
or derailed entirely. This would have a material adverse effect on our business,
prospects, operating margins, results of operations, cash flows and financial
condition.
Furthermore,
we also plan on utilizing enhanced extended links, or EELs, which are a
combination of dedicated interoffice transport and high capacity loops, to
provide T-1 level services to medium-sized businesses. While the FCC did not
explicitly restrict the availability of EELs, the ILECs have taken the position
that EELs are not available in any geographic area where DS1 transport is not
available as a network element at TELRIC rates. A negative determination on
this issue by the FCC or the public utility commission in any state in which we
provide services could negatively affect our entry into new markets, network
rollout and results of operations.
We are
subject to federal, state, local and foreign laws, regulations, and orders
affecting the rates, billing, terms, and conditions of certain of our service
offerings, our costs and other aspects of our operations, including our
relations with other service providers. Regulation varies in each jurisdiction
and may change in response to judicial proceedings, legislative and
administrative proposals, government policies, competition and technological
developments. We cannot predict what impact, if any, such changes or proceedings
may have on our business or results of operations, and we cannot guarantee that
regulatory authorities will not raise material issues regarding our compliance
with applicable regulations. There are
several regulatory factors that could cause our network and line costs as a
percentage of revenue to increase in the future, including without
limitation:
| · |
As
a result of significant changes to the FCC rules that required the
incumbent local exchange companies, such as the Regional Bell Operating
Companies that are our principal suppliers, to provide us unbundled
network elements at TELRIC rates, incumbent local exchange companies'
unbundled network element platforms are effectively not available to
us to serve new customers after March 11, 2005 or for our embedded
customers after March 10, 2006. This determination and others by the FCC,
courts, or state commission(s) that make unbundled local switching and/or
combinations of unbundled network elements effectively unavailable to us
in some or all of our geographic service areas, will require us either to
provide services in these areas through other means, including resale of
the ILECs' retail services, commercial agreements with incumbent local
exchange companies, purchase of special access services, or the
purchase of network elements from the Regional Bell Operating Companies at
"just and reasonable" rates under Section 271 of the Act, in all cases
likely at significantly increased costs, or to provide services over our
own switching facilities, if we are able to deploy them. As a consequence
of these changes, our acquisition of customers from other
companies that provide service using the unbundled network elements
platform must be consummated in a manner whereby the transfer of the
acquired customer is directly provisioned to our own network facilities,
which, due to the limitations on the number of phone lines the incumbent
local exchange company is required to “hot cut” over to our network per
day, may limit or minimize the potential advantages of any such
acquisition. |
| · |
Adverse
changes to the current pricing methodology, TELRIC, mandated by the FCC
for use in establishing the prices charged to us by incumbent local
exchange companies for the use of their unbundled network elements for so
long as we are permitted to continue to use them, and for the use of
transport and other services in connection with our local network. The FCC
has pending a rulemeking proceeding to consider additional changes to its
unbundled network element pricing methodology, including reforms that
would base prices more on the actual network costs incurred by incumbent
local exchange companies than on the hypothetical network costs that would
be incurred when the most efficient technology is used. The
TELRIC methodology still governs our pricing for loops purchased from the
incumbent local exchange companies in connection with our local network.
We cannot predict if the FCC will order changes to the TELRIC
pricing methodology or if Congress will amend the 1996 Act, affecting such
pricing or the availability of unbundled network elements. These
changes could result in material increases in prices charged to us for
unbundled network elements, including those used in our own local network;
and |
| · |
Determinations
by state commissions to increase prices for unbundled network elements in
ongoing state TELRIC pricing dockets.
|
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payments” (“SFAS No. 123R”). SFAS No. 123R requires the recognition of the cost
of employee services received in exchange for an award of equity instruments in
the financial statements and measurement based on the grant-date fair value of
the award. It requires the cost to be recognized over the period during which an
employee is required to provide service in exchange for the award. Additionally,
compensation expense will be recognized over the remaining employee service
period for the outstanding portion of any awards for which compensation expense
had not been previously recognized or disclosed under SFAS No. 123, “Accounting
for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123R replaces
SFAS No. 123, and supersedes Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”), and its related
interpretations. We are currently assessing the implications of the
transition methods allowed and have not determined whether the adoption of FAS
123R will result in amounts similar to current pro-forma disclosures under FAS
123. We expect the adoption to have an adverse impact on future consolidated
statements of operations
On April
15, 2005, the Securities and Exchange Commission posted Final Rule Number
33-8568, “Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance
Date for Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based
Payment,” which
is effective as of April 21, 2005. Under the Commission’s amendment, we are
required to file financial statements that comply with SFAS No. 123R in our
Quarterly Report on Form 10-Q for the first quarter of the first fiscal year
that begins after September 15, 2005, and we are permitted, but not required, to
comply with SFAS No. 123R for periods before the required compliance date. The
requirements will be effective for us beginning with the first quarter of fiscal
2006. We are currently assessing the timing and impact of adopting SFAS No.
123R.
Item
3. Quantitative
and Qualitative Disclosure About Market Risk.
In the
normal course of business, our financial position is subject to a variety of
risks, such as the collectibility of our accounts receivable and the
recoverability of the carrying values of our long-term assets. Our long-term
obligations consist primarily of long term debt with fixed interest rates. We do
not presently enter into any transactions involving derivative financial
instruments for risk management or other purposes.
Our
available cash balances are invested on a short-term basis (generally overnight)
and, accordingly, are not subject to significant risks associated with changes
in interest rates. Substantially all of our cash flows are derived from our
operations within the United States and we are not subject to market risk
associated with changes in foreign exchange rates.
Item
4. Controls
and Procedures.
Disclosure
Controls and Procedures—We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to management,
including our Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), as appropriate, to allow timely decisions regarding required
disclosure.
We
carried out an evaluation under the supervision and with the participation of
our management, including the CEO and CFO, of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act) as of September 30, 2005. Based upon this
evaluation, and due to the material weaknesses in our internal control over
financial reporting discussed below and as reported in our 2004 Form 10-K, our
CEO and the CFO concluded that our disclosure controls and procedures were not
effective as of September 30, 2005.
In light
of the material weaknesses described below, we performed additional analysis and
other procedures to ensure that our consolidated financial statements were
prepared in accordance with generally accepted accounting principles.
Accordingly, our management believes that the financial statements included in
this report on Form 10-Q fairly present in all material respects our financial
condition, results of operations and cash flows for the periods
presented.
Change
in Internal Control over Financial Reporting - We are
responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance with
generally accepted accounting principles.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As of
December 31, 2004, our assessment of the effectiveness of our internal control
over financial reporting identified the following material weaknesses in our
internal control over financial reporting:
1. We did
not maintain effective controls over the application of generally accepted
accounting principles related to the financial reporting process for complex
transactions. Specifically, we did not have personnel who possess sufficient
depth, skills and experience in the accounting for and review of complex
transactions in the financial reporting process to ensure that complex
transactions were accounted for in accordance with generally accepted accounting
principles.
2. We did
not maintain effective controls over sales, use and excise tax liabilities.
Specifically, our reconciliation and review procedures with respect to sales,
use and excise tax liability that we collect and remit did not identify that
certain customer fee revenue had been incorrectly recorded in the sales, use and
excise tax general ledger account.
These
material weaknesses resulted in the restatement of our previously issued
consolidated financial statements for each of the quarters of 2003, the year
ended December 31, 2003, and the first, second and third quarters of 2004 and
certain adjustments to the fourth quarter 2004 financial statements as discussed
in greater detail in our 2004 Form 10-K.
Additionally,
these control deficiencies could result in a material misstatement to annual or
interim financial statements that would not be prevented or
detected.
To
address these material weaknesses, during the first three quarters of 2005 we
took the following remedial actions:
| 1. |
We
engaged outside contractors with technical and accounting related
expertise to assist in the preparation of the income tax provision and
related work papers. We also implemented controls to assure accurate data
is provided to, and that we review and agree with the conclusions of,
outside contractors. |
| 2. |
Outside
contractors with technical accounting capabilities have been and will be
retained to the extent an issue is sufficiently complex and outside the
technical accounting capabilities of our personnel. During the three
quarters ending September 30, 2005, there were no complex issues that
required our retention of outside contractors with technical accounting
capabilities. We have established processes to identify issues that would
require such retention of outside
contractors. |
| |
3. |
We
have redesigned the account reconciliation process for sales, use and
excise tax liabilities. Our Controller performed an in-depth review of the
account reconciliation and our Chief Accounting Officer confirmed the
review process was completed. The reconciliation and review was performed
for each of the first and second quarters. Our objective is to complete
this process on a regular basis each
quarter. |
We
believe that, once fully implemented, these remediation actions will correct the
material weaknesses discussed above, however, management has not yet completed
its assessment of the operational effectiveness of the new
controls.
Except as
discussed above, there were no changes in our internal control over financial
reporting during our most recently completed fiscal quarter that have materially
affected or are reasonably likely to materially affect our internal control over
financial reporting, as defined in Rule 13a-15(f) under the Exchange
Act.
PART
II - OTHER INFORMATION
Item
6. Exhibits
|
31.1 |
Rule
13a-14(a) Certifications of Edward B. Meyercord, III (filed
herewith). |
|
31.2 |
Rule
13a-14(a) Certifications of David G. Zahka (filed
herewith). |
|
32.1 |
Certification
of Edward B. Meyercord, III Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished to
the Commission herewith). |
|
32.2 |
Certification
of David G. Zahka Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished to the
Commission herewith). |
*
Management contract or compensation plan or arrangement.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
TALK
AMERICA HOLDINGS, INC.
|
Date:
November 9, 2005 |
By:
/s/ Edward B. Meyercord, III
Edward
B. Meyercord, III
Chief
Executive Officer |
|
Date:
November 9, 2005 |
By:
/s/ David G. Zahka
David
G. Zahka
Chief
Financial Officer (Principal Financial
Officer) |