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 March 31, 2006
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
or other jurisdiction of incorporation or organization)
|
23-2827736
(I.R.S.
Employer Identification No.)
|
6805
Route 202, New Hope, PA
(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer [ ] Accelerated
filer [ X ] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the 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.
30,427,368
shares of Common Stock, par value of $0.01 per share, were issued and
outstanding as of May 9, 2006.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
Index
|
Page
|
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
Item
1. Financial Statements
|
2
|
|
|
Condensed
Consolidated Statements of Operations - Three Months Ended March
31, 2006
and 2005 (unaudited)
|
2
|
|
|
Condensed
Consolidated Balance Sheets - March 31, 2006 and December 31, 2005
(unaudited)
|
3
|
|
|
Condensed
Consolidated Statements of Cash Flows - Three Months Ended March
31, 2006
and 2005 (unaudited)
|
4
|
|
|
Condensed Consolidated Statements of Stockholders’ Equity - Three Months
Ended
March 31, 2006 (unaudited)
|
5
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
6
|
|
|
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
|
15
|
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
22
|
|
|
Item
4. Controls and Procedures
|
22
|
|
|
PART
II - OTHER INFORMATION
|
23
|
|
|
Item
6. Exhibits
|
23
|
|
|
|
|
|
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except for per share data)
(Unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
120,516
|
|
$
|
119,835
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
Network and line costs (excluding depreciation and
amortization)
|
|
|
61,837
|
|
|
60,996
|
|
General
and administrative expenses
|
|
|
28,584
|
|
|
18,120
|
|
Provision
for doubtful accounts
|
|
|
4,050
|
|
|
5,588
|
|
Sales
and marketing expenses
|
|
|
10,936
|
|
|
10,268
|
|
Depreciation
and amortization
|
|
|
11,235
|
|
|
9,501
|
|
Total
costs and expenses
|
|
|
116,642
|
|
|
104,473
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,874
|
|
|
15,362
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
318
|
|
|
308
|
|
Interest
expense
|
|
|
(227
|
)
|
|
(25
|
)
|
Other
income (expense), net
|
|
|
113
|
|
|
(20
|
)
|
Income
before provision for income taxes
|
|
|
4,078
|
|
|
15,625
|
|
Provision
for income taxes
|
|
|
1,697
|
|
|
6,155
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,381
|
|
$
|
9,470
|
|
|
|
|
|
|
|
|
|
Income
per share - Basic:
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
0.08
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
30,382
|
|
|
27,086
|
|
|
|
|
|
|
|
|
|
Income
per share - Diluted:
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
0.08
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent
shares outstanding
|
|
|
30,743
|
|
|
27,813
|
|
See
accompanying notes to consolidated financial statements.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except for share and per share data)
(Unaudited)
|
|
March
31,
2006
|
|
December
31,
2005
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
23,283
|
|
$
|
46,288
|
|
Restricted
cash
|
|
|
1,925
|
|
|
--
|
|
Accounts
receivable, trade (net of allowance for uncollectible accounts
of $14,618
and $13,838 at March 31, 2006 and December 31, 2005, respectively)
|
|
|
40,358
|
|
|
43,600
|
|
Deferred
income taxes
|
|
|
18,109
|
|
|
18,096
|
|
Prepaid
expenses and other current assets
|
|
|
12,962
|
|
|
10,297
|
|
Total
current assets
|
|
|
96,637
|
|
|
118,281
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
102,898
|
|
|
98,492
|
|
Goodwill
|
|
|
36,479
|
|
|
36,479
|
|
Intangible
assets, net
|
|
|
4,712
|
|
|
4,934
|
|
Deferred
income taxes
|
|
|
33,584
|
|
|
21,033
|
|
Capitalized
software and other assets
|
|
|
10,321
|
|
|
9,470
|
|
|
|
$
|
284,631
|
|
$
|
288,689
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
33,255
|
|
$
|
40,025
|
|
Sales,
use and excise taxes
|
|
|
7,725
|
|
|
7,316
|
|
Deferred
revenue
|
|
|
15,004
|
|
|
13,824
|
|
Current
portion of long-term debt and capitalized lease
obligations
|
|
|
3,609
|
|
|
3,988
|
|
Accrued
compensation
|
|
|
5,020
|
|
|
9,405
|
|
Other
current liabilities
|
|
|
12,840
|
|
|
12,933
|
|
Total
current liabilities
|
|
$
|
77,453
|
|
$
|
87,491
|
|
|
|
|
|
|
|
|
|
Long-term
debt and capitalized lease obligations
|
|
|
1,045
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
4,036
|
|
|
4,853
|
|
|
|
|
|
|
|
|
|
Other
non-current liabilities
|
|
|
5,934
|
|
|
3,269
|
|
|
|
|
|
|
|
|
|
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; 30,417,368
and
30,368,267 shares issued and outstanding at March 31, 2006 and
December
31, 2005, respectively
|
|
|
317
|
|
|
317
|
|
Additional
paid-in capital
|
|
|
382,476
|
|
|
380,481
|
|
Accumulated
deficit
|
|
|
(181,630
|
)
|
|
(184,011
|
)
|
Treasury
stock - at cost, 1,315,789 shares at March 31, 2006 and December
31,
2005
|
|
|
(5,000
|
)
|
|
(5,000
|
)
|
Total
stockholders' equity
|
|
|
196,163
|
|
|
191,787
|
|
|
|
$
|
284,631
|
|
$
|
288,689
|
|
See
accompanying notes to consolidated financial statements.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,381
|
|
$
|
9,470
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Provision
for doubtful accounts
|
|
|
4,050
|
|
|
5,588
|
|
Depreciation
and amortization
|
|
|
11,235
|
|
|
9,501
|
|
Stock-based
compensation
|
|
|
1,608
|
|
|
--
|
|
Other
non cash charges (benefits) - net
|
|
|
(40
|
)
|
|
20
|
|
Deferred
income taxes
|
|
|
1,071
|
|
|
4,484
|
|
Changes
in assets and liabilities, net of businesses acquired:
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
1,370
|
|
|
--
|
|
Accounts
receivable, trade
|
|
|
3,635
|
|
|
202
|
|
Prepaid
expenses and other current assets
|
|
|
(456
|
)
|
|
652
|
|
Other
assets
|
|
|
(158
|
)
|
|
9
|
|
Accounts
payable
|
|
|
(9,707
|
)
|
|
707
|
|
Sales,
use and excise taxes
|
|
|
(228
|
)
|
|
(1,591
|
)
|
Deferred
revenue
|
|
|
(841
|
)
|
|
(1,049
|
)
|
Accrued
compensation
|
|
|
(8,944
|
)
|
|
(5,068
|
)
|
Other
liabilities
|
|
|
(1,724
|
)
|
|
(83
|
)
|
Net
cash provided by operating activities
|
|
|
3,252
|
|
|
22,842
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of NTC, net of cash acquired
|
|
|
(16,485
|
)
|
|
--
|
|
Capital
expenditures
|
|
|
(7,449
|
)
|
|
(12,221
|
)
|
Capitalized
software development costs
|
|
|
(1,278
|
)
|
|
(1,010
|
)
|
Proceeds
from sale of property and equipment
|
|
|
--
|
|
|
42
|
|
Net
cash used in investing activities
|
|
|
(25,212
|
)
|
|
(13,189
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Payments
of capital lease obligations
|
|
|
(1,397
|
)
|
|
(629
|
)
|
Proceeds
from exercise of options
|
|
|
352
|
|
|
667
|
|
Net
cash provided by (used in) financing activities
|
|
|
(1,045
|
)
|
|
38
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(23,005
|
)
|
|
9,691
|
|
Cash
and cash equivalents, beginning of period
|
|
|
46,288
|
|
|
47,492
|
|
Cash
and cash equivalents, end of period
|
|
$
|
23,283
|
|
$
|
57,183
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2005
|
|
|
31,684
|
|
$
|
317
|
|
$
|
380,481
|
|
$
|
(184,011
|
)
|
|
1,316
|
|
$
|
(5,000
|
)
|
$
|
191,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
$
|
2,381
|
|
|
--
|
|
|
--
|
|
$
|
2,381
|
|
In Icome
tax benefit related to exercise of common stock options
|
|
|
--
|
|
|
--
|
|
|
82
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
82
|
|
S Stock-based
compensation
|
|
|
49
|
|
|
--
|
|
$
|
1,913
|
|
|
--
|
|
|
--
|
|
|
--
|
|
$
|
1,913
|
|
Balances,
March 31, 2006
|
|
|
31,733
|
|
$
|
317
|
|
$
|
382,476
|
|
$
|
(181,630
|
)
|
|
1,316
|
|
$
|
(5,000
|
)
|
$
|
196,163
|
|
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
condensed 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
condensed consolidated financial statements and related notes thereto as
of
March 31, 2006 and for the three months ended March 31, 2006 and March 31,
2005
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, 2005 was derived
from
the audited financial statements included in our Annual Report on Form 10-K
for
the year ended December 31, 2005 filed March 16, 2006, as amended by our
Form
10-K/A filed March 28, 2006 (as so amended, our "2005 Form 10-K”). These interim
financial statements should be read in conjunction with our 2005 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:
|
·
|
Increased
price and product competition in commercial and residential voice
and data
services, and overall competition within the telecommunications
industry
|
· |
Our
ability to successfully integrate businesses that we acquire, including
but not limited to Network Telephone
Corporation
|
|
·
|
Dependence
on the availability and functionality of the networks of the incumbent
local exchange carriers
|
Negative
developments in these areas could have a material effect on our business,
financial condition and results of operations.
NOTE
2. COMMITMENTS AND CONTINGENCIES
We
are
party to a number of legal actions and proceedings arising from our provision
and marketing of telecommunications services (including matters involving
do not
call and billing regulations), as well as certain legal actions and regulatory
matters arising in the ordinary course of business. We believe that the ultimate
outcome of the foregoing actions will not result in a liability that would
have
a material adverse effect on our financial condition or results of operations.
We
are
party to various network service agreements, which contain certain minimum
usage
commitments. In December 2003, we entered into a four-year master carrier
agreement 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. Our AT&T agreement establishes pricing and provides
for annual minimum commitments based upon usage as follows: 2006 - $32 million
and 2007 - $32 million and obligates us to pay 65 percent of the revenue
shortfall, if any. In February 2006, we amended the AT&T agreement to
provide that certain services that we purchase or may purchase from AT&T
(and its affiliates) will now count toward the minimum commitment. With this
amendment, we anticipate that we will not be required to make any shortfall
payments under this contract. In addition to the AT&T commitment, we have
other commitments with various other vendors for telecommunication services
as
follows: 2006 - $5.9 million, 2007 - $3.0 million and 2008 and thereafter
- $1.3
million.
In
addition, at March 31, 2006, we had outstanding purchase orders for capital
expenditures of $1.1 million. We have a contract with our invoice printing
company that establishes pricing and provides for annual minimum payments
as
follows: 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 $0.6 million per year, which is funded
on the
anniversary dates.
NOTE
3. STOCK-BASED COMPENSATION
Effective
January 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standards No. 123R, (“SFAS 123R”) “Share-Based
Payment,” which establishes accounting for equity instruments exchanged for
employee services. SFAS 123R revised SFAS No. 123 "Accounting for Stock-Based
Compensation" (SFAS 123) and superseded Accounting Principles Board Opinion
No.
25 ("APB25"), "Accounting for Stock Issued to Employees," and related
interpretations. Under the provisions of SFAS No. 123R, share-based
compensation cost is measured at the grant date, based on the calculated
fair
value of the award, and is recognized as an expense over the employee’s
requisite service period (generally the vesting period of the equity grant).
We
elected to adopt the modified prospective application transition method as
provided by SFAS No. 123R and, accordingly, financial statement
amounts for the prior periods presented in this Form 10-Q have not been
restated to reflect the fair value method of expensing share-based compensation.
The stock-based compensation expense included in our consolidated statements
of
operations for the three months ended March 31, 2006 is $1.6 million. The
full
amount of this expense is reflected in “General and administrative expenses,”
where substantially all of the related payroll costs are classified. The
related
tax benefit recognized during the three months ended March 31, 2006 was $0.6
million. The total compensation cost capitalized during the three months
ended
March 31, 2006 was de
minimus.
The
application of SFAS 123(R) had the following effect on Q1 2006 reported amounts
relative to amounts that would have been reported using the intrinsic value
method under previous accounting (in millions, except per share amounts):
|
|
Using Previous
Accounting
|
|
|
|
SFAS 123(R)
Adjustments
|
|
|
|
As
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
5.5
|
|
|
|
|
$
|
(1.6
|
)
|
|
|
|
$
|
3.9
|
|
|
|
|
Income
before income taxes
|
|
|
5.7
|
|
|
|
|
|
(1.6
|
)
|
|
|
|
|
4.1
|
|
|
|
|
Provision
for income taxes
|
|
|
2.3
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
1.7
|
|
|
|
|
Net
income
|
|
|
3.4
|
|
|
|
|
|
(1.0
|
)
|
|
|
|
|
2.4
|
|
|
|
|
|
|
Income
per share-basic:
|
|
$
|
0.11
|
|
|
|
|
$
|
(0.03
|
)
|
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share-diluted:
|
|
|
0.11
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from operating activities
|
|
$
|
3.3
|
|
|
|
|
$
|
(0.1
|
)
|
|
|
|
$
|
3.2
|
|
|
|
|
Cash
flow from financing activities
|
|
|
(1.1
|
)
|
|
|
|
|
0.1
|
|
|
|
|
|
(1.0
|
)
|
|
|
|
Prior
to
January 1, 2006, we accounted for share-based compensation to employees in
accordance with APB 25. We also followed the disclosure requirements of
SFAS No. 123. The following table illustrates the effects on net
income and earnings per share for the three months ended March 31, 2005 as
if we
had applied the fair value recognition provisions of SFAS 123 to share-based
employee awards (in thousands, except per share data):
|
|
Three
Months Ended
|
|
|
|
|
March 31,
2005
|
|
Net
income as reported
|
|
$
|
9,470
|
|
Add:
Stock-based employee compensation expense included in reported
net income, net of tax effect
|
|
|
--
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all options, net of tax effect
|
|
|
(503
|
)
|
Pro
forma net income
|
|
$
|
8,967
|
|
Basic
earnings per share:
|
|
|
|
|
As
reported
|
|
$
|
0.35
|
|
Pro
forma
|
|
$
|
0.33
|
|
Diluted
earnings per share:
|
|
|
|
|
As
reported
|
|
$
|
0.34
|
|
Pro
forma
|
|
$
|
0.33
|
|
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;
· Expected
option term of 5 years;
· Volatility
based on the historical stock price over a period consistent with the expected
term;
·
Risk-free
interest rate based on the weighted averaged U.S. treasury note strip rates
for
periods equal to the expected option term;
· No
expected dividend yield based on future dividend payment plans.
The
fair
value of the options granted subsequent to the adoption of SFAS 123R has
been
estimated at the various dates of the grants using the Black-Scholes
option-pricing model with the same assumptions, except that an expected option
term of six years has been assumed, which has been determined using the
simplified method.
(b)
Stock-Based
Compensation Plans
Incentive
stock options, non-qualified stock options and other stock based awards may
be
granted by us to employees, directors and consultants under the 2005 Incentive
Plan (“2005 Plan”), 2003 Long Term Incentive Plan (“2003 Plan”), 2000 Long Term
Incentive Plan ("2000 Plan"), 1998 Long Term Incentive Plan ("1998 Plan")
and
otherwise in connection with employment and to employees under the 2001
Non-Officer Long Term Incentive Plan ("2001 Plan"). Generally, the options
vest
over a three-year period and expire ten years from the date of grant. At
March
31, 2006: 592,500, 360,000, 365,548, 541, and 19,055 shares of common stock
were
available under the 2005 Plan, 2003 Plan, 2001 Plan, 2000 Plan, and 1998
Plan,
respectively, for possible future issuances.
Stock
options granted in 2005 have contractual terms of 10 years. The options granted
to employees have an exercise price equal to the fair market value of the
stock
on the grant date. The vast majority of options granted in 2005 vest one-third
each year, beginning on the first anniversary of the date of grant.
Information
with respect to options under our plans is as follows:
|
|
Options
Shares
|
|
Exercise
Price
Range
Per
Share
|
|
Weighted
Average
Exercise
Price
|
Outstanding,
December 31, 2003
|
|
5,437,107
|
|
$0.99-$47.64
|
|
$8.35
|
Granted
|
|
220,833
|
|
$5.14-$10.87
|
|
$6.83
|
Exercised
|
|
(374,144)
|
|
$1.05-$6.81
|
|
$1.75
|
Cancelled
|
|
(401,952)
|
|
$1.32-$29.63
|
|
$12.86
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2004
|
|
4,881,844
|
|
$0.99-$47.64
|
|
$8.41
|
Granted
|
|
1,670,000
|
|
$6.22-$9.57
|
|
$8.52
|
Exercised
|
|
(1,240,706)
|
|
$0.99
- $10.49
|
|
$2.43
|
Cancelled
|
|
(310,334)
|
|
$1.11-$30.38
|
|
$10.28
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2005
|
|
5,000,804
|
|
$1.20-$47.64
|
|
$9.82
|
Granted
|
|
255,000
|
|
$8.84-$8.92
|
|
$8.84
|
Exercised
|
|
(49,101)
|
|
$1.53-$7.88
|
|
$5.26
|
Cancelled
|
|
(138,780)
|
|
$7.68-$15.75
|
|
$9.44
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2006
|
|
5,067,923
|
|
$1.20-$47.64
|
|
$9.82
|
The
following table summarizes the status of stock options outstanding at March
31,
2006:
Range
of
Exercise
Prices
|
|
Number
Outstanding at March 31, 2006
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
Number
Exercisable at March 31, 2006
|
|
Weighted
Average Exercise Price
|
$1.20
to $10.31
|
|
2,803,343
|
|
$
6.96
|
|
7.6
|
|
928,738
|
|
$
3.87
|
$10.32
to $14.35
|
|
1,969,675
|
|
11.62
|
|
6.7
|
|
1,966,209
|
|
11.62
|
$14.36
to $21.00
|
|
133,297
|
|
20.19
|
|
2.9
|
|
133,297
|
|
20.19
|
$21.01
to $30.00
|
|
66,666
|
|
26.65
|
|
2.9
|
|
66,666
|
|
26.65
|
$30.01
to $47.64
|
|
94,942
|
|
30.94
|
|
3.2
|
|
94,942
|
|
30.94
|
$1.20
to $47.64
|
|
5,067,923
|
|
$9.82
|
|
7.0
|
|
3,189,852
|
|
$10.61
|
The
weighted average estimated fair values of the stock options granted during
the
three months ended March 31, 2006 and for the years ended December 31, 2005
and
2004 based on the Black-Scholes option pricing model were $6.64, $6.20, and
$4.99, respectively. The fair value of stock options used to compute pro
forma
net income (loss) and basic and diluted earnings (loss) per share disclosures
is
the estimated fair value at grant date using the Black-Scholes option-pricing
model with the following assumptions:
Assumption
|
|
2006
|
|
2005
|
2004
|
|
Expected
Term
|
|
6
years
|
|
5
years
|
5
years
|
|
Expected
Volatility
|
|
87.40%
|
|
92.16%
|
93.82%
|
|
Expected
Dividend Yield
|
|
--%
|
|
--%
|
--%
|
|
Risk-Free
Interest Rate
|
|
4.32%
|
|
4.10%
|
3.49%
|
|
The
aggregate intrinsic value of outstanding options as of March 31, 2006 was
$4.7 million, of which $4.4 million were vested. The intrinsic value of
options exercised during the three months ended March 31, 2006 was $0.2 million.
For the three months ended March 31, 2006, the cash received from options
exercised and the related tax benefit realized from income tax deductions
was
$0.3 million and $0.1 million, respectively.
The
following table summarizes the status of the Company’s nonvested shares since
January 1, 2006:
|
|
Number of
Shares
|
|
Weighted
Average
Fair Value
|
|
Nonvested
at January 1, 2006
|
|
|
1,763,572
|
|
|
|
|
$
|
6.14
|
|
Granted
|
|
|
255,000
|
|
|
|
|
|
6.64
|
|
Vested
|
|
|
(30,835
|
) |
|
|
|
|
5.58
|
|
Forfeited
|
|
|
(109,666
|
) |
|
|
|
|
6.35
|
|
Nonvested
at March 31, 2006
|
|
|
1,878,071
|
|
|
|
|
$
|
6.21
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
March 31, 2006, there was $6.4 million of total unrecognized compensation
cost
related to nonvested share-based compensation arrangements granted under
the
Company’s stock plans. That cost is expected to be recognized over a
weighted-average period of 1.7 years.
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 and warrants (and assuming that the proceeds hypothetically received
from the exercise of dilutive stock options and warrants are used to repurchase
our common stock at the average share price during the fiscal period). Income
per share is computed as follows (in thousands except per share
data):
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Net
income used to compute both basic and diluted
earnings per share
|
|
$
|
2,381
|
|
$
|
9,470
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding used to compute basic earnings
per
share
|
|
|
30,382
|
|
|
27,086
|
|
Additional
common shares to be issued assuming exercise of stock options and
warrants
(net of shares assumed reacquired) *
|
|
|
361
|
|
|
727
|
|
Average
shares of common and common equivalent stock outstanding used to
compute
diluted earnings per share
|
|
|
30,743
|
|
|
27,813
|
|
|
|
|
|
|
|
|
|
Income
per share - Basic:
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
0.08
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
30,382
|
|
|
27,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share - Diluted:
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
0.08
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares outstanding
|
|
|
30,743
|
|
|
27,813
|
|
*The
diluted share basis for the three months ended March 31, 2006 and 2005 excludes
4,178 and 3,234 shares, respectively, associated with the options and warrants
due to their antidilutive effect.
NOTE
5.
ACQUISITIONS
On
October 18, 2005, we and one of our subsidiaries entered into an Agreement
and
Plan of Merger (the “NTC Acquisition Agreement”) with Network Telephone
Corporation (“NTC”), providing for our acquisition of NTC. NTC was privately
held and is a facilities-based competitive local exchange carrier serving
business customers primarily in Southeast United States. Under the terms
of the
NTC Acquisition Agreement, NTC became our indirect wholly owned subsidiary
on
January 3, 2006, and, in exchange for all of the stock of NTC, we paid $16.5
million in cash ($18.4 million less cash acquired of $1.9 million), of which
approximately $1.8 million has been deposited in escrow to be held as security
for certain indemnification obligations to us under the NTC Acquisition
Agreement. The acquisition extended our networking footprint to the southeastern
United States and added significantly to our commercial services capabilities.
In
connection with the acquisition of NTC, we acquired $3.3 million of restricted
cash. This balance was comprised of certificates of deposit that were pledged
as
collateral in connection with service agreements between NTC and several
vendors. Since the date of the acquisition, $1.4 million of this balance
has
been released.
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 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
$21.3
million in cash ($24 million less cash acquired of $2.7 million) 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. 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 a
$4.7 million repayment of LDMI debt.
The
following unaudited pro forma information presents a summary of the consolidated
results of our operations as if the NTC and LDMI acquisitions had occurred
on
January 1, 2005 (in thousands, except per share data):
|
|
For the Three
Months Ended
March
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Revenues
|
|
$
|
120,516
|
|
$
|
166,285
|
|
Net
Income
|
|
$
|
2,381
|
|
$
|
7,663
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.08
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
0.08
|
|
$
|
0.26
|
|
Weighted
Average Shares:
|
|
|
|
|
|
|
|
Basic
|
|
|
30,382
|
|
|
28,886
|
|
Diluted
|
|
|
30,743
|
|
|
29,613
|
|
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 been made at the beginning of the periods
presented or the future results of the combined operations.
The
purchase price allocation of NTC used in the preparation of these financial
statements is 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. We do not expect the finalization
of
these matters to have a material effect on the allocation. The excess of
the
fair value of net assets acquired over purchase price paid was allocated
as a
pro-rata reduction to the fair values of property and equipment and identifiable
intangible assets.
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 2005
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.
For a more detailed discussion of these factors, see the Risk Factors discussion
in Item 1A of our 2005 Form 10-K. The forward-looking statements included
in
this Form 10-Q are made only as of the date of this report, and we undertake
no
obligation to update the forward-looking statements to reflect subsequent
events
or circumstances.
OVERVIEW
Talk
America Holdings, Inc., through its subsidiaries, is a leading competitive
communications services provider offering voice and data services to commercial
(primarily small and medium-sized business) and residential customers. We
are
focused on markets where we have our own networking assets, which we began
deploying in Michigan in late 2003. Currently, we are collocated in 315 end
offices in Michigan, Ohio, Kentucky, Tennessee, North Carolina, Louisiana,
Mississippi, Alabama, Florida and Georgia. As of March 31, 2006, we had
approximately 696,000 local voice and data equivalent lines, of which
approximately 463,000 were on our own network. Voice equivalent lines include
individual telephone lines and T-1 equivalent lines based on circuit bandwidth.
Data equivalent lines include DSL, dial-up and T-1 equivalent lines based
on
circuit bandwidth. Our off-network customers represent a profitable base
of
bundled phone service customers utilizing the wholesale operating platforms
of
the incumbent local exchange companies.
We
expanded into the commercial business market with the acquisition in July
2005
of LDMI Telecommunications, Inc. (“LDMI”) and the acquisition in January 2006 of
Network Telephone Corporation (“NTC”), privately held facilities-based
competitive local exchange providers serving business and residential customers
primarily in Michigan and Ohio and in the Southeast, respectively.
Our
business strategy is to continue to expand our network and grow our on-net
customer and revenue base through (i) organic growth in our core markets
serving
both commercial and residential customers; (ii) additional acquisitions that
either supplement our existing markets or offer expansion into new markets;
and
(iii) enhancement of our product portfolio. Growth in our on-net business,
both
commercial and residential, will permit us to leverage our investment in
our
network facilities due to the complementary telecommunication traffic or
usage
patterns of these customer bases.
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 March 31,
|
|
2006
|
|
2005
|
Revenue
|
100.0%
|
|
100.0%
|
Costs
and expenses:
|
|
|
|
Network
and line costs
|
51.3
|
|
50.9
|
General
and administrative expenses
|
23.7
|
|
15.1
|
Provision
for doubtful accounts
|
3.4
|
|
4.7
|
Sales
and marketing expenses
|
9.1
|
|
8.6
|
Depreciation
and amortization
|
9.3
|
|
8.0
|
Total
costs and expenses
|
96.8
|
|
87.3
|
Operating
income
|
3.2
|
|
12.7
|
Other
income (expense):
|
|
|
|
Interest
income
|
0.3
|
|
0.3
|
Interest
expense
|
(0.2)
|
|
--
|
Other
income (expense), net
|
0.1
|
|
--
|
Income
before income taxes
|
3.4
|
|
13.0
|
Provision
for income taxes
|
1.4
|
|
5.1
|
Net
income
|
2.0%
|
|
7.9%
|
The
following table sets forth for certain items of our financial data for the
period indicated the percentage increase or (decrease) in such item from
the
cooresponding period in the preceding fiscal year:
|
Three
Months Ended
March
31, 2006
|
|
|
Revenue
|
0.6%
|
Costs
and expenses:
|
|
Network
and line costs
|
1.4
|
General
and administrative expenses
|
57.7
|
Provision
for doubtful accounts
|
(27.5)
|
Sales
and marketing expenses
|
6.5
|
Depreciation
and amortization
|
18.3
|
Total
costs and expenses
|
11.6
|
Operating
income
|
(74.8)
|
Other
income (expense):
|
|
Interest
income
|
3.2
|
Interest
expense
|
808.0
|
Other
income (expense), net
|
665.0
|
Income
before income taxes
|
(73.9)
|
Provision
for income taxes
|
(72.4)
|
Net
income
|
(74.9%)
|
Revenue.
Revenue
for the first quarter 2006 was up slightly from the first quarter 2005 as
the
acquisitions of LDMI in the third quarter 2005 and NTC in the first quarter
2006
offset the decline in our revenues from our customer base located in markets
where we do not currently have networking facilities. Since 2004 we have,
and
will continue to, increase certain fees and rates related to our long distance
and bundled products and such changes in rates will adversely impact customer
turnover.
The
increase in revenue from customers that are served by our own networking
facilities, or on-net, to $61.7 million for the first quarter 2006 from $4.1
million for the first quarter 2005 was due to greater average lines in 2006
as
compared to 2005 primarily as a result of the migration of customer lines
to our
own network and, to a lesser degree, the acquisition of LDMI and NTC. As
of
March 31, 2006, our voice and data equivalent lines on-net had increased
to
463,000 from 28,000 as of March 31, 2005.
The
decrease in revenue from customers that are not served by our own networking
facilities, or off-net, to $44.3 million for the first quarter 2006 from
$103.6
million for the first quarter 2005 was due to fewer average lines in 2006
as
compared to 2005, partially offset by an increase in average monthly revenue
per
customer. Our off-net voice and data equivalent lines declined during this
period due both to the migration of off-net lines to our own network and,
in
areas where we were not building network, the attrition of customers leaving
our
services for those of other carriers. This decline was partially offset by
increased off-net lines as a result of the acquisitions of LDMI and NTC.
As of
March 31, 2006, our off-net voice and data equivalent lines had decreased
to
233,000 from 623,000 as of March 31, 2005. A significant increase in the
costs
we pay for network services from the incumbent local telephone carriers has
caused us to cease marketing to 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.
Long
distance only and other revenue increased for the first quarter 2006 to $14.5
million from $12.1 million for the first quarter 2005. The acquisition of
LDMI
and customer price increases more than offset a decline in revenues from
our
existing long distance base. 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 were up slightly in the first quarter
2006 from the first quarter 2005. Network and line costs in the first quarter
2006 included a $2.1 million benefit as a result of a reduction in costs
accrued
related to a rate proceeding recently completed by the Georgia state public
utility commission. Excluding this benefit, network and line costs as a
percentage of revenue would have increased by a greater amount from the first
quarter 2005 to the first quarter 2006, primarily due to additional network
personnel costs and increased unbundled network element platform costs. To
date,
we have been able to increase our prices to offset per line increases in
network
and line cost, but these price increases will increase customer turnover.
Network and line costs exclude depreciation and amortization of $6.3 million
for
the first quarter 2006 and $5.6 million for the first quarter 2005.
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 our products at these higher prices.
General
and Administrative Expenses.
General
and administrative expenses increased substantially in the first quarter
2006
from the first quarter 2005. This increase was primarily due to the general
and
administrative expenses attributable to the LDMI and NTC acquisitions, which
are
included in this quarter, partially offset by a reduction in the number of
employees that support our base of off-net customers. In addition, the first
quarter 2006 included stock-based compensation expenses associated with the
issuance of stock options pursuant to SFAS 123R of $1.6 million (see “Critical
Accounting Estimates - New Accounting Pronouncements,” below). As a result,
general and administrative expense as a percentage of revenue increased in
the
first quarter 2006 from the first quarter 2005.
Provision
for Doubtful Accounts.
The
provision for doubtful accounts decreased both in dollars and as a percentage
of
revenue in the first quarter 2006 from the first quarter 2005. The decrease
was
primarily due to an increase in the percentage of revenue derived from
commercial accounts that have lower bad debt experience as compared to
residential customers.
Sales
and Marketing Expenses.
Sales
and marketing expenses increased for the first quarter 2006 from the first
quarter 2005. This increase is attributable to the increase in sales and
marketing activity corresponding to the expansion of our networking footprint
and through the acquisitions of LDMI in 2005 and NTC in 2006. Our sales and
marketing efforts focus on increasing subscriber growth only in those areas
where we currently have or plan to deploy network facilities. Included in
sales
and marketing expenses are advertising expenses of $0.9 million for the first
quarter 2006 and $1.9 million for the first quarter 2005. We expect sales
and
marketing expenses to increase through the remainder of 2006 as we expand
our
marketing efforts commensurate with the growth of our networking
footprint.
Depreciation
and Amortization.
Depreciation and amortization increased in the first quarter 2006 from the
first
quarter 2005 primarily due to increased depreciation related to capital
expenditures incurred in 2005 related to our deployment of networking assets
(our local switching and collocation equipment) in Michigan and depreciation
and
amortization related to the LDMI and NTC acquisitions.
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 first quarters 2006 and 2005, our operating activities provided net
cash
flow of $3.3 million and $22.8 million, respectively. In the first quarter
2006,
cash from operations together with cash on hand was used to fund capital
expenditures and capitalized software development costs as well as the
acquisition of NTC. As of March 31, 2006, we had $25.2 million in cash and
cash
equivalents, (including $1.9 million in restricted cash) and long-term debt
and
capital lease obligations (including current maturities) of $4.7 million,
compared to $46.3 million and $5.3 million, respectively, at December 31,
2005.
Net
cash
provided by (used for):
|
First
Quarter
(in
thousands)
|
Percent
Change
|
|
2006
|
2005
|
2006
vs. 2005
|
Operating
activities
|
$3,252
|
$
22,842
|
(85.8%)
|
Investing
activities
|
(25,212)
|
(13,189)
|
91.2%
|
Financing
activities
|
(1,045)
|
38
|
(2850.0%)
|
Cash
Provided By Operating Activities. Cash
generated by operations decreased by $19.6 million from the first quarter
2005
to the first quarter 2006. The decrease was driven by lower cash flow before
changes in working capital and by higher investment in working capital primarily
as a reduction in accounts payable and the payment of accrued incentive
compensation. The decrease in cash flow before changes in working capital
was
primarily driven by increases in general and administrative expense. The
application of net operating loss carryforwards, or NOLs has limited our
current
payment of income taxes to cash taxes for alternative minimum taxes and certain
state income taxes, but we expect that Talk America’s NOLs will be substantially
utilized during 2006. The use of NOLs acquired in the LDMI and NTC acquisitions
will be limited, with the benefit spread through 2018.
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. The state commission has issued an order that results in increased
rates
charged to us. The rates charged to us are in excess of those previously
allowed
by the commission and we have accrued accordingly. In
the
second quarter 2006, we expect to make a payment relating to the Georgia
rate
case of between $4.2 million and $5.2 million, which we have previously accrued
for this matter.
Net
Cash Used in Investing Activities. Capital
expenditures and capitalized software development costs were lower in the
first
quarter 2006 as compared to the first quarter 2005. In the first quarter
2006,
approximately $6.8 million of our $7.4 million in capital expenditures consisted
of costs related to our deployment of networking assets (local switch and
collocation equipment). In
the
first quarter 2005, approximately $11.2 million of our $12.2 million in capital
expenditures consisted of costs related to our deployment of networking
assets.
We
expect
to spend between $25.0 and $30.0 million in capital expenditures and capitalized
software in 2006, primarily for the build out of the Atlanta networking
facilities and expansion of our Michigan network facilities.
The
acquisition of NTC on January 3, 2006, required the payment of $16.5 million,
net of cash acquired, for the purchase of all of the equity of NTC. 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.
Net
Cash Provided by (Used in) Financing Activities.
Net cash
used in financing activities during the first quarter 2006 was $1.0 million
and
net cash provided by financing activities during the first quarter 2005 was
$0.4
million. Net cash used in 2006 was attributable to the payment of outstanding
capitalized debt obligations. On June 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 March 31, 2006,
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.
Other
Matters
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.
Critical
Accounting Policies
Stock-Based
Compensation Expense
As
of
January 1, 2006, we account for employee stock-based compensation costs in
accordance with Statement of Financial Accounting Standards No. 123R,
“Share-Based Payment” (“SFAS 123R”). We utilize the Black-Scholes option pricing
model to estimate the fair value of employee stock based compensation at
the
date of grant, which requires the input of highly subjective assumptions,
including expected volatility and expected life. Further, as required under
SFAS
123R, we now estimate forfeitures for options that have been granted but
are not
expected to vest. Changes in these inputs and assumptions can materially
affect
the measure of estimated fair value of our share-based
compensation.
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.
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 Securities
and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to management, including our principal executive officer
and
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure. In connection with the preparation of this Quarterly
Report
on Form 10-Q, we carried out an evaluation under the supervision and with
the
participation of our management, including our principal executive officer
and
chief financial officer, of the effectiveness of the design and operation
of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of March 31, 2006. Based upon this evaluation,
our
principal executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective as of March 31,
2006.
There
were no changes in internal control over financial reporting during our most
recent fiscal quarter ended March 31, 2006, that have materially affected,
or
are reasonably likely to materially affect, our internal control over financial
reporting.
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).
|
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:
May 10, 2006
|
By:/s/
Edward B. Meyercord, III
Edward
B. Meyercord, III
Chief
Executive Officer
|
Date:
May 10, 2006
|
By:/s/
David G. Zahka
David
G. Zahka
Chief
Financial Officer (Principal Financial
Officer)
|