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, 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
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 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.
30,777,186
shares of Common Stock, par value of $0.01 per share, were issued and
outstanding as of November 8, 2006.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
Index
|
Page
|
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
Item
1. Financial Statements
|
1 |
|
|
Condensed
Consolidated Statements of Operations - Three and Nine Months Ended
September 30, 2006 and 2005 (unaudited)
|
1 |
|
|
Condensed
Consolidated Balance Sheets - September 30, 2006 and December 31,
2005
(unaudited)
|
2 |
|
|
Condensed
Consolidated Statements of Cash Flows - Nine Months Ended September
30,
2006 and 2005 (unaudited)
|
3 |
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
4 |
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
11
19
|
|
|
Item
4. Controls and Procedures
|
20 |
|
|
PART
II - OTHER INFORMATION
|
21 |
|
|
Item
1. Legal Proceedings
|
21 |
|
|
Item
1.A Risk Factors
|
23 |
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
24 |
|
|
Item
6. Exhibits
|
25 |
|
|
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except for per share data)
(Unaudited)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
106,353
|
|
$
|
120,645
|
|
$
|
340,921
|
|
$
|
348,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
and line costs, excluding depreciation and amortization (see
below)
|
|
|
54,542
|
|
|
64,413
|
|
|
178,629
|
|
|
181,090
|
|
General
and administrative expenses
|
|
|
21,684
|
|
|
23,496
|
|
|
74,160
|
|
|
59,946
|
|
Provision
for doubtful accounts
|
|
|
4,359
|
|
|
4,515
|
|
|
12,610
|
|
|
14,909
|
|
Sales
and marketing expenses
|
|
|
11,958
|
|
|
7,294
|
|
|
35,900
|
|
|
21,335
|
|
Depreciation
and amortization
|
|
|
11,084
|
|
|
11,618
|
|
|
34,235
|
|
|
30,734
|
|
Total
costs and expenses
|
|
|
103,627
|
|
|
111,336
|
|
|
335,534
|
|
|
308,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
2,726
|
|
|
9,309
|
|
|
5,387
|
|
|
40,135
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
254
|
|
|
199
|
|
|
768
|
|
|
873
|
|
Interest
expense
|
|
|
(185
|
)
|
|
(114
|
)
|
|
(616
|
)
|
|
(164
|
)
|
Other
income (expense), net
|
|
|
(11
|
)
|
|
(5
|
)
|
|
42
|
|
|
(361
|
)
|
Income
before provision for income taxes
|
|
|
2,784
|
|
|
9,389
|
|
|
5,581
|
|
|
40,483
|
|
Provision
for income taxes
|
|
|
1,613
|
|
|
4,172
|
|
|
3,296
|
|
|
16,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,171
|
|
$
|
5,217
|
|
$
|
2,285
|
|
$
|
24,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share - Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
0.04
|
|
$
|
0.18
|
|
$
|
0.08
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
30,494
|
|
|
29,808
|
|
|
30,444
|
|
|
28,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share - Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
0.04
|
|
$
|
0.17
|
|
$
|
0.07
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares outstanding
|
|
|
30,673
|
|
|
30,357
|
|
|
30,624
|
|
|
28,796
|
|
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)
|
|
September
30,
2006
|
|
December
31,
2005
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
35,594
|
|
$
|
46,288
|
|
Restricted
cash
|
|
|
1,920
|
|
|
--
|
|
Accounts
receivable, trade (net of allowance for uncollectible accounts of
$14,740
and $13,838 at September 30, 2006 and December 31, 2005, respectively)
|
|
|
36,602
|
|
|
43,600
|
|
Deferred
income taxes
|
|
|
11,158
|
|
|
18,096
|
|
Prepaid
expenses and other current assets
|
|
|
12,091
|
|
|
10,297
|
|
Total
current assets
|
|
|
97,365
|
|
|
118,281
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
92,160
|
|
|
98,492
|
|
Goodwill
|
|
|
36,479
|
|
|
36,479
|
|
Intangibles,
net
|
|
|
3,160
|
|
|
4,934
|
|
Deferred
income taxes
|
|
|
36,606
|
|
|
21,033
|
|
Capitalized
software and other assets
|
|
|
11,448
|
|
|
9,470
|
|
Total assets
|
|
$
|
277,218
|
|
$
|
288,689
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
32,823
|
|
$
|
40,025
|
|
Sales,
use and excise taxes
|
|
|
8,298
|
|
|
7,316
|
|
Deferred
revenue
|
|
|
13,440
|
|
|
13,824
|
|
Current
portion of long-term debt
|
|
|
2,554
|
|
|
3,988
|
|
Accrued
compensation
|
|
|
5,057
|
|
|
9,405
|
|
Other
current liabilities
|
|
|
8,482
|
|
|
12,933
|
|
Total
current liabilities
|
|
|
70,654
|
|
|
87,491
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,837
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
83
|
|
|
4,853
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
5,515
|
|
|
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; 31,842,321
and
31,684,056 shares issued and 30,508,638 and 30,368,267 shares outstanding
at September 30, 2006 and December
31, 2005, respectively
|
|
|
318
|
|
|
317
|
|
Additional
paid-in capital
|
|
|
385,639
|
|
|
380,481
|
|
Accumulated
deficit
|
|
|
(181,726
|
)
|
|
(184,011
|
)
|
Treasury
stock - at cost, 1,333,683 and 1,315,789 shares at September 30,
2006 and
December 31, 2005, respectively
|
|
|
(5,102
|
)
|
|
(5,000
|
)
|
Total
stockholders' equity
|
|
|
199,129
|
|
|
191,787
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
277,218
|
|
$
|
288,689
|
|
See
accompanying notes to consolidated financial statements.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,285
|
|
$
|
24,055
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Provision
for doubtful accounts
|
|
|
12,610
|
|
|
14,909
|
|
Depreciation
and amortization
|
|
|
34,235
|
|
|
30,734
|
|
Deferred
income taxes
|
|
|
1,047
|
|
|
13,341
|
|
Stock-based
compensation
|
|
|
4,172
|
|
|
--
|
|
Other
non-cash charges
|
|
|
456
|
|
|
359
|
|
Changes
in assets and liabilities, net of effect of acquisition:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(1,169
|
)
|
|
726
|
|
Prepaid
expenses and other current assets
|
|
|
1,340
|
|
|
1,745
|
|
Other
assets
|
|
|
49
|
|
|
80
|
|
Accounts
payable and accrued expenses
|
|
|
(11,278
|
)
|
|
(19,835
|
)
|
Sales,
use and excise taxes
|
|
|
22
|
|
|
(4,553
|
)
|
Deferred
revenue
|
|
|
(2,405
|
)
|
|
(3,156
|
)
|
Accrued
compensation
|
|
|
(9,008
|
)
|
|
(1,563
|
)
|
Other
liabilities
|
|
|
(6,194
|
)
|
|
(162
|
)
|
Net
cash provided by operating activities
|
|
|
26,162
|
|
|
56,680
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of fixed assets
|
|
|
675
|
|
|
63
|
|
Acquisitions,
net of cash acquired (See note 5)
|
|
|
(16,485
|
)
|
|
(26,850
|
)
|
Capital
expenditures
|
|
|
(15,377
|
)
|
|
(35,220
|
)
|
Capitalized
software development costs
|
|
|
(4,172
|
)
|
|
(2,946
|
)
|
Decreases
in restricted cash
|
|
|
1,375
|
|
|
--
|
|
Net
cash used in investing activities
|
|
|
(33,984
|
)
|
|
(64,953
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Tax
benefit of stock based compensation
|
|
|
430
|
|
|
--
|
|
Payments
of capital lease obligations
|
|
|
(3,667
|
)
|
|
(1,586
|
)
|
Proceeds
from exercise of options and warrants
|
|
|
365
|
|
|
4,685
|
|
Net
cash provided by (used in) financing activities
|
|
|
(2,872
|
)
|
|
3,099
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(10,694
|
)
|
|
(5,174
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
46,288
|
|
|
47,492
|
|
Cash
and cash equivalents, end of period
|
|
$
|
35,594
|
|
$
|
42,318
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED 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,
2006 and for the three and nine months ended September 30, 2006 and September
30, 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.
(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
|
On
September 22, 2006 our board of directors approved a merger agreement providing
for our acquisition by Cavalier Telephone Corporation that is discussed in
paragraph (d) below. In addition to other factors and matters listed above,
we
believe the following factors could affect future operating results and cash
flows:
· |
the
risk that the merger may not be consummated in a timely manner if
at
all;
|
· |
the
occurrence of any event, change or other circumstance that could
give rise
to the termination of the merger
agreement;
|
· |
the
outcome of the various legal proceedings against us that have been,
and
others that may be, instituted following announcement of the merger
agreement;
|
· |
risks
related to diverting management’s attention from ongoing business
operations;
|
· |
our
dependence on key personnel;
|
· |
risks
regarding employee retention;
|
· |
changes
in regulatory requirements;
|
· |
the
absence of certainty regarding the receipt of required regulatory
approvals or the timing or terms of such regulatory
approvals
|
(c)
Recent Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). FIN 48
prescribes a "more likely than not" threshold for financial statement
recognition and measurement of a tax position taken or expected to taken in
a
tax return. This Interpretation also provides guidance on other topics
related to accounting for income tax assets and liabilities, interest and
penalties associated with tax positions and income taxes in interim periods
as
well as income tax disclosures. This interpretation is effective as of
January 1, 2007. We are currently evaluating FIN 48 and the related impact
on our financial position and results of operations.
On
September 15, 2006, the FASB issued FAS No. 157, "Fair
Value Measurements,"
which
provides guidance for using fair value to measure assets and liabilities. The
standard also responds to investors' requests for more information about: (1)
the extent to which companies measure assets and liabilities at fair value;
(2)
the information used to measure fair value; and (3) the effect that fair value
measurements have on earnings. SFAS No. 157 will apply whenever another standard
requires (or permits) assets or liabilities to be measured at fair value. The
standard does not expand the use of fair value to any new circumstances. SFAS
No. 157 is effective for the Company as of January 1, 2008. The Company is
currently evaluating SFAS No. 157 and its effect on the Company's financial
position, results of operations or cash flows.
(d)
Proposed Merger
On
September 22, 2006, the Company, Cavalier Telephone Corporation and Cavalier
Acquisition Corp., an indirectly wholly owned subsidiary of Cavalier, entered
into an Agreement and Plan of Merger. The merger agreement provides that, upon
its terms and subject to its conditions, the Cavalier subsidiary will merge
with
and into us, and that, at the effective time and as a result of this Cavalier
merger, (i) we will become an indirectly wholly owned subsidiary of Cavalier
and
(ii) each share of our common stock that is outstanding at the effective time
of
the merger will be converted into the right to receive $8.10 in cash and each
outstanding option or warrant to purchase our common stock with a per share
exercise price lower than $8.10 will be converted into the right to receive
a
cash amount equal to $8.10 less the exercise price for such option or warrant,
as the case may be, net of any applicable taxes.
Consummation
of the Cavalier merger is subject to a number of conditions, including (i)
approval by the Company's stockholders, (ii) receipt of applicable consents
from
the Federal Communications Commission, (iii) receipt of applicable approvals
from state public service or utilities commissions (or similar state regulatory
agencies) that regulate our business, (iv) expiration or termination of the
applicable Hart-Scott-Rodino waiting period, (v) absence of any law or order
prohibiting the consummation of the Merger, (vi) the Company’s meeting of a
minimum financial performance measure for the quarter ending September 30,
2006
and (vii) subject to certain specified exceptions, the absence of any material
adverse effect with respect to our business. Subject to the satisfaction of
the
applicable conditions, we anticipate that the Cavalier merger will be
consummated before December 31, 2006. On October 6, 2006, the Company filed
its
Hart-Scott-Rodino Notification and Report Form with the Antitrust Division
and
the Federal Trade Commission and we
received notice that the waiting period had been terminated on October 16,
2006. The condition of meeting a minimum financial
performance measure for the quarter ending September 30, 2006 has also been
satisfied.
NOTE
2. COMMITMENTS AND CONTINGENCIES
The
Cavalier merger agreement contains provisions addressing the circumstances
under
which Cavalier or Talk America may terminate the merger agreement. In addition,
the merger agreement provides that, in several circumstances, Talk America
may
be required to pay Cavalier a termination fee of $6.25 million and up to $1.25
million for reimbursable expenses. During the three months ended September
30,
2006, we have incurred $0.8 million in merger-related costs, consisting of
financial advisory fees, legal and other fees and costs associated with the
Cavalier merger. As specified in the merger agreement, when and if the Cavalier
merger is consummated, we are obligated to pay our financial advisor, The
Blackstone Group, L.P. ("Blackstone") approximately $2.4 million against which
certain prior payments will be credited.
We
are aware of certain asserted class actions related to the proposed Cavalier
merger, which are against our individual directors and us, among others. Each
alleges, among other things, that our directors have breached their fiduciary
duty by accepting the Cavalier merger and generally seeks various forms of
relief, including injunctive relief, including against the consummation of
the
merger, unspecified money damages and plaintiff’s attorney fees and expenses. We
believe that these law suits are without merit and plan to defend them
vigorously. Additional lawsuits relating to the proposed merger could be filed
in the future.
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. Despite
the
reduction in our local residential bundled customer base, 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 - $3.2 million,
2007 - $3.5 million and 2008 and thereafter - $2.2 million.
In
addition, at September 30, 2006, we had outstanding purchase orders for capital
expenditures of $1.4 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.
During 2006, we renewed maintenance agreements that provide for payments as
follows: 2006 - $0.5 million, 2007 - $0.8 million, 2008 - $0.5 million and
2009
- $0.1 million.
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 and nine months ended September 30, 2006 is
$1.0
and $4.2 million, respectively. 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 and nine months ended September 30, 2006 was $0.4 and $1.9 million. The
total compensation cost capitalized during the three and nine months ended
September 30, 2006 was de
minimus.
The
application of SFAS 123(R) had the following effect on reported amounts for
the
three months ended and nine months ended September 30, 2006, relative to amounts
that would have been reported using the intrinsic value method under previous
accounting (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2006
|
|
|
|
|
Using
Previous Accounting
|
|
|
SFAS
123(R) Adjustments
|
|
|
As
Reported
|
|
|
Using
Previous
Accounting
|
|
|
SFAS
123(R) Adjustments
|
|
|
As
Reported
|
|
Operating
income
|
|
$
|
3.7
|
|
$
|
(1.0
|
)
|
$
|
2.7
|
|
$
|
9.6
|
|
$
|
(4.2
|
)
|
$
|
5.4
|
|
Income
before income taxes
|
|
$
|
3.8
|
|
$
|
(1.0
|
)
|
$
|
2.8
|
|
$
|
9.8
|
|
$
|
(4.2
|
)
|
$
|
5.6
|
|
Provision
(benefit) for income taxes
|
|
$
|
2.0
|
|
$
|
(0.4
|
)
|
$
|
1.6
|
|
$
|
5.2
|
|
$
|
(1.9
|
)
|
$
|
3.3
|
|
Net
income (loss)
|
|
$
|
1.8
|
|
$
|
(0.6
|
)
|
$
|
1.2
|
|
$
|
4.6
|
|
$
|
(2.3
|
)
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share- basic:
|
|
$
|
0.06
|
|
$
|
(0.02
|
)
|
$
|
0.04
|
|
$
|
0.16
|
|
$
|
(0.08
|
)
|
$
|
0.08
|
|
Income
(loss) per share- diluted:
|
|
$
|
0.06
|
|
$
|
(0.02
|
)
|
$
|
0.04
|
|
$
|
0.15
|
|
$
|
(0.08
|
)
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from operating activities
|
|
|
|
|
|
|
|
|
|
|
$
|
26.6
|
|
$
|
(0.4
|
)
|
$
|
26.2
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
$
|
(3.3
|
)
|
$
|
0.4
|
|
$
|
(2.9
|
)
|
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 and nine months ended
September 30, 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
September
30, 2005
|
|
Nine
Months
Ended
September
30,
2005
|
|
|
|
|
|
|
|
|
|
Net
income as reported
|
|
$
|
5,217
|
|
$
|
24,055
|
|
Add:
Stock-based
employee compensation expense included in reported net income,
net of tax
effect
|
|
|
3
|
|
|
3
|
|
Deduct:
Total
stock-based employee compensation expense determined under fair
value
based method for all options, net of tax effect
|
|
|
1,019
|
|
|
2,085
|
|
Pro
forma net income
|
|
$
|
4,201
|
|
$
|
21,973
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.18
|
|
$
|
0.86
|
|
Pro forma
|
|
$
|
0.14
|
|
$
|
0.78
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.17
|
|
$
|
0.84
|
|
Pro forma
|
|
$
|
0.14
|
|
$
|
0.76
|
|
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 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
September 30, 2006: 562,500, 360,000, 404,543, 541 and 19,222 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 and 2006 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 and
2006 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
|
|
317,500
|
|
$6.02-$9.04
|
|
$8.72
|
Exercised
|
|
(108,265)
|
|
$1.53-$7.88
|
|
$3.26
|
Cancelled
|
|
(229,870)
|
|
$3.70-$30.38
|
|
$9.48
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2006
|
|
4,980,169
|
|
$1.20-$47.64
|
|
$9.91
|
The
following table summarizes the status of stock options outstanding at September
30, 2006:
Range
of Exercise Prices
|
|
Number
Outstanding at September 30, 2006
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
Number
Exercisable at September 30, 2006
|
|
Weighted
Average Exercise Price
|
$1.20-$10.31
|
|
2,750,180
|
|
$7.07
|
|
7.2
|
|
1,413,535
|
|
$5.75
|
10.32-14.35
|
|
1,935,965
|
|
11.62
|
|
6.2
|
|
1,933,740
|
|
11.62
|
14.36-21.00
|
|
132,583
|
|
20.22
|
|
2.4
|
|
132,583
|
|
20.22
|
21.01-30.00
|
|
66,666
|
|
26.65
|
|
2.4
|
|
66,666
|
|
26.65
|
30.01-47.64
|
|
94,775
|
|
30.95
|
|
2.7
|
|
94,775
|
|
30.95
|
$1.20-$47.64
|
|
4,980,169
|
|
$9.91
|
|
6.5
|
|
3,641,299
|
|
$10.43
|
The
weighted
average estimated fair values of the stock options granted during the nine
months ended September 30, 2006 and for the years ended December 31, 2005 and
2004 based on the Black-Scholes option pricing model were $6.49, $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
|
|
85.83%
|
|
92.16%
|
93.82%
|
|
Expected
Dividend Yield
|
|
--%
|
|
--%
|
--%
|
|
Risk-Free
Interest Rate
|
|
4.46%
|
|
4.10%
|
3.49%
|
|
The
aggregate
intrinsic value of outstanding options as of September 30, 2006 was
$6.7 million, of which $5.3 million were vested. The weighted average
remaining contractual term of vested options is 5.7 years. The intrinsic value
of options exercised during the nine months ended September 30, 2006 was $0.4
million. For the nine months ended September 30, 2006, the cash received from
options and warrants exercised and the related tax benefit realized from income
tax deductions was $0.4 million and $0.4 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
|
|
|
317,500 |
|
|
6.49 |
|
Vested |
|
|
(578,463 |
) |
|
6.16 |
|
Forfeited |
|
|
(163,739 |
) |
|
6.28 |
|
Nonvested
at September 30, 2006 |
|
|
1,338,870 |
|
$ |
6.20 |
|
As
of
September 30, 2006, there was $4.1million 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. However, upon consummation of the Cavalier
merger, the acceleration of unvested options would cause us to immediately
recognize the remaining balance of unrecognized compensation cost at that time.
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
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income used to compute basic and fully diluted earnings per
share
|
|
$
|
1,171
|
|
$
|
5,217
|
|
$
|
2,285
|
|
$
|
24,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding used to compute basic earnings
per
share
|
|
|
30,494
|
|
|
29,808
|
|
|
30,444
|
|
|
28,122
|
|
Additional
common shares to be issued assuming exercise of stock options and
warrants
(net of shares assumed reacquired)*
|
|
|
179
|
|
|
549
|
|
|
180
|
|
|
674
|
|
Average
shares of common and common equivalent stock outstanding used to
compute
diluted earnings per share
|
|
|
30,673
|
|
|
30,357
|
|
|
30,624
|
|
|
28,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share - Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
0.04
|
|
$
|
0.18
|
|
$
|
0.08
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
30,494
|
|
|
29,808
|
|
|
30,444
|
|
|
28,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share - Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
$
|
0.04
|
|
$
|
0.17
|
|
$
|
0.07
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares outstanding
|
|
|
30,673
|
|
|
30,357
|
|
|
30,624
|
|
|
28,796
|
|
*
The
diluted share basis for the three months ended September 30, 2006 and 2005
excludes 4,293 and 2,572 shares, respectively, and for the nine months ended
September 30, 2006 and 2005 excludes 4,478 and 2,556 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:
|
|
For
The Three Months Ended
September
30,
|
|
For
The Nine Months Ended
September
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Revenues
|
|
$
|
106,353
|
|
$
|
141,802
|
|
$
|
340,921
|
|
$
|
461,873
|
|
Net
Income
|
|
$
|
1,171
|
|
$
|
5,064
|
|
$
|
2,285
|
|
$
|
22,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
$
|
0.17
|
|
$
|
0.08
|
|
$
|
0.76
|
|
Diluted
|
|
$
|
0.04
|
|
$
|
0.17
|
|
$
|
0.07
|
|
$
|
0.74
|
|
Weighted
Average Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,494
|
|
|
30,062
|
|
|
30,444
|
|
|
29,401
|
|
Diluted
|
|
|
30,673
|
|
|
30,612
|
|
|
30,624
|
|
|
30,075
|
|
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.
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
The
Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements. Certain information contained herein or in any
other
written or oral statements made by, or on behalf of the Company, is or may
be
viewed as forward-looking. The words "expect," "believe," "anticipate" or
similar expressions identify forward-looking statements. Although the Company
has used appropriate care in developing any such forward-looking information,
forward-looking information involves risks and uncertainties that could
significantly impact actual results. These risks and uncertainties include,
but
are not limited to, the following: the failure to obtain Company stockholder
approval of the Cavalier merger or the failure to obtain regulatory approvals
or
satisfy the other conditions to the Cavalier merger, including the third quarter
2006 performance measure; the termination of the Cavalier merger agreement
prior
to the closing; the Cavalier merger may not close in the expected time-frame;
changes in general economic conditions, including the performance of financial
markets and interest rates; competitive, regulatory, or tax changes that affect
the cost of or demand for the Company's products; and adverse litigation
results. The Company undertakes no obligation to publicly update or revise
any
forward-looking statements, whether as a result of new information, future
developments, or otherwise.
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, 8-K, and 14A
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
On
September 22, 2006, the Company, Cavalier Telephone Corporation and Cavalier
Acquisition Corp., an indirectly wholly owned subsidiary of Cavalier, entered
into an Agreement and Plan of Merger. The merger agreement provides that, upon
its terms and subject to its conditions, the Cavalier subsidiary will merge
with
and into us, and that, at the effective time and as a result of this Cavalier
merger, (i) we will become an indirectly wholly owned subsidiary of Cavalier
and
(ii) each share of our common stock that is outstanding at the effective time
of
the merger will be converted into the right to receive $8.10 in cash and each
outstanding option or warrant to purchase our common stock with a per share
exercise price lower than $8.10 will be converted into the right to receive
a
cash amount equal to $8.10 less the exercise price for such option or warrant,
as the case may be, net of any applicable taxes.
Consummation
of the Cavalier merger is subject to a number of conditions, including (i)
approval by the Company's stockholders, (ii) receipt of applicable consents
from
the Federal Communications Commission, (iii) receipt of applicable approvals
from state public service or utilities commissions (or similar state regulatory
agencies) that regulate our business, (iv) expiration or termination of the
applicable Hart-Scott-Rodino waiting period, (v) absence of any law or order
prohibiting the consummation of the Merger, (vi) the Company’s meeting of a
minimum financial performance measure for the quarter ending September 30,
2006
and (vii) subject to certain specified exceptions, the absence of any material
adverse effect with respect to our business. Subject to the satisfaction of
the
applicable conditions, we anticipate that the Cavalier merger will be
consummated before December 31, 2006. On October 6, 2006, the Company filed
its
Hart-Scott-Rodino Notification and Report Form with the Antitrust Division
and
the Federal Trade Commission and we
received notice that the waiting period had been terminated on October 16,
2006. The condition of meeting a minimum financial
performance measure for the quarter ending September 30, 2006 has also been
satisfied.
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 316 end
offices in Michigan, Ohio, Kentucky, Tennessee, North Carolina, Louisiana,
Mississippi, Alabama, Florida and Georgia. As of September 30, 2006, we had
approximately 613,700 local voice and data equivalent lines, of which
approximately 475,600 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.
Recently,
we decided to shift our marketing efforts to a bundle of broadband and voice
services for residential customers from our historic offerings of voice bundles.
This shift was in response to changes in market conditions in Michigan,
primarily increased price competition for bundles of broadband and voice
services from AT&T and Comcast, our principal competitors in Michigan. We
believe that the broadband bundle delivers value to residential customers
through high bandwidth capability and competitive pricing compared to current
offers from these companies.
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,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
and line costs
|
|
|
51.3
|
|
|
53.4
|
|
|
52.4
|
|
|
52.0
|
|
General
and administrative expenses
|
|
|
20.4
|
|
|
19.5
|
|
|
21.8
|
|
|
17.2
|
|
Provision
for doubtful accounts
|
|
|
4.1
|
|
|
3.7
|
|
|
3.7
|
|
|
4.3
|
|
Sales
and marketing expenses
|
|
|
11.2
|
|
|
6.0
|
|
|
10.5
|
|
|
6.1
|
|
Depreciation
and amortization
|
|
|
10.4
|
|
|
9.7
|
|
|
10.0
|
|
|
8.9
|
|
Total
costs and expenses
|
|
|
97.4
|
|
|
92.3
|
|
|
98.4
|
|
|
88.5
|
|
Operating
income
|
|
|
2.6
|
|
|
7.7
|
|
|
1.6
|
|
|
11.5
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
Interest
expense
|
|
|
(0.2
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
--
|
|
Other,
net
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(0.1
|
)
|
Income
before income taxes
|
|
|
2.6
|
|
|
7.8
|
|
|
1.6
|
|
|
11.6
|
|
Provision
for income taxes
|
|
|
1.5
|
|
|
3.5
|
|
|
0.9
|
|
|
4.7
|
|
Net
income
|
|
|
1.1
|
%
|
|
4.3
|
%
|
|
0.7
|
%
|
|
6.9
|
%
|
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,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Revenue
|
|
|
(11.9
|
)%
|
|
(0.2
|
)%
|
|
(2.1
|
)%
|
|
0.7
|
%
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
and line costs
|
|
|
(15.3
|
)
|
|
10.6
|
|
|
(1.4
|
)
|
|
10.1
|
|
General
and administrative expenses
|
|
|
(7.7
|
)
|
|
31.1
|
|
|
23.7
|
|
|
14.1
|
|
Provision
for doubtful accounts
|
|
|
(3.5
|
)
|
|
(21.2
|
)
|
|
(15.4
|
)
|
|
6.1
|
|
Sales
and marketing expenses
|
|
|
63.9
|
|
|
(62.2
|
)
|
|
68.3
|
|
|
(61.8
|
)
|
Depreciation
and amortization
|
|
|
(4.6
|
)
|
|
158.7
|
|
|
11.4
|
|
|
138.6
|
|
Total
costs and expenses
|
|
|
(6.9
|
)
|
|
4.4
|
|
|
8.9
|
|
|
1.7
|
|
Operating
income
|
|
|
(70.7
|
)
|
|
(34.7
|
)
|
|
(86.6
|
)
|
|
(6.6
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
27.6
|
|
|
226.2
|
|
|
(12.0
|
)
|
|
327.9
|
|
Interest
expense
|
|
|
62.3
|
|
|
(120.3
|
)
|
|
275.6
|
|
|
(76.5
|
)
|
Other,
net
|
|
|
120.0
|
|
|
100.0
|
|
|
(111.6
|
)
|
|
100.0
|
|
Income
before income taxes
|
|
|
(70.4
|
)
|
|
(36.9
|
)
|
|
(86.2
|
)
|
|
(4.7
|
)
|
Provision
for income taxes
|
|
|
(61.3
|
)
|
|
(28.9
|
)
|
|
(79.9
|
)
|
|
(1.9
|
)
|
Net
income
|
|
|
(77.6
|
)%
|
|
(42.1
|
)%
|
|
(90.5
|
)%
|
|
(16.1
|
)%
|
THIRD
QUARTER 2006 COMPARED TO THIRD QUARTER 2005
Revenue.
Revenue
for the third quarter 2006 declined from the third quarter 2005 as the
acquisition of NTC in the first quarter 2006 was not sufficient to offset the
decline in our revenues from our customer base where we do not currently have
networking facilities. Since 2004 we have increased 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.
Customer turnover remains above targeted levels which has had an adverse effect
on our revenues and if such customer turnover remains at these levels it will
continue to have an adverse impact on future revenues.
The
increase in revenue from customers that are served by our own networking
facilities, or on-net, to $63.5 million for the third quarter 2006 from $23.9
million for the third 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 NTC. As of September
30,
2006, our voice and data equivalent lines on-net had increased to 476,000 from
235,000 as of September 30, 2005.
The
decrease in revenue from customers that are not served by our own networking
facilities, or off-net, to $30.8 million for the third quarter 2006 from $79.9
million for the third 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 NTC. As of September
30, 2006, our off-net voice and data equivalent lines had decreased to 138,000
from 410,000 as of September 30, 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 decreased for the third quarter 2006 to $12.0
million from $16.9 million for the third quarter 2005. Customer price increases
for long distance customers were not sufficient to offset a decline in revenues
from our existing long distance base since we no longer actively market long
distance only services. We expect long distance customers and revenues to
decline in the future.
While
our
on-net revenues grew from the second to the third quarter 2006 and we expect
that our on-net revenues will grow from 2006 to 2007, the growth, however,
will
not be sufficient to offset the decline in our off-net revenue. As a result,
we
expect that our full year revenues will decline from 2006 to 2007.
Network
and Line Costs.
Network
and line costs declined in the third quarter 2006 from the third quarter 2005
primarily due to fewer average customer lines. Network and line costs as a
percentage of revenue decreased in the third quarter 2006 from the third quarter
2005, as customer price increases more than offset additional network personnel
costs and increased unbundled network element platform costs. In addition,
in
the third quarter 2006, we recorded a reduction to network cost of $0.9
million related to the resolution of the Georgia rate case. This reduction
was
offset by $0.4 million of network costs incurred by NTC in the second quarter,
which was recorded during the third quarter. 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 $6.9 million for the third quarter
2006
and $6.3 million for the third quarter 2005.
While
we
do not expect that network and line costs as a percentage of revenue from 2006
to 2007 to increase as a result of the revenue decline noted above, if our
usage
of services under our master carrier agreement with AT&T, which usage is
generally a reflection of our total on-net and off-net lines serviced, should
fall below the minimum annual requirements under the agreement for any year,
our
costs of purchasing these services could increase in such year and we may be
unable to increase our prices to offset this increase.
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 decreased in the third quarter 2006 from the third
quarter 2005. This decrease was primarily due to a reduction in general and
administrative headcount partially offset by the general and administrative
expenses attributable to the NTC acquisition. In addition, the third quarter
2006 included expenses related to the Cavalier merger of $0.8 million and
stock-based compensation expenses associated with the issuance of stock options
pursuant to SFAS 123R of $1.0 million (see “Critical Accounting Estimates - New
Accounting Pronouncements,” below). The decline in general and administrative
expense, however, was not in proportion to the decline in revenue primarily
because of the stock-based compensation expense in the third quarter of 2006
and, as a result, general and administrative expense as a percentage of revenue
increased in the third quarters 2006 from the third quarter 2005.
Provision
for Doubtful Accounts.
The
provision for doubtful accounts increased as a percentage of revenue in the
third quarter 2006 from the third quarter 2005. The increase was primarily
due
to the impact of customer price increases and a decline in the credit quality
of
our residential customer base.
Sales
and Marketing Expenses.
Sales
and marketing expenses increased for the third quarter 2006 from the third
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 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 third quarter 2006
and $ 0.8 million for the third quarter 2005. We expect that our sales and
marketing expense will increase from 2006 to 2007 as a result of our continuing
efforts to grow our on-net business, including the roll-out of our bundle of
broadband and voice services.
YEAR
TO DATE 2006 COMPARED TO YEAR TO DATE 2005
Revenue.
Revenue
for the year to date 2006 decreased from the year to date 2005 as the
acquisitions of LDMI in the third quarter 2005 and NTC in the first quarter
2006
were not sufficient to offset the decline in our revenues from our customer
base
located in markets where we do not currently have networking facilities.
The
increase in revenue from on-net customers to $186.3 million for the year to
date
2006 from $35.0 million for the year to date 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 acquisitions
of
LDMI and NTC.
The
decrease in revenue from off-net customers to $114.9 million for the year to
date 2006 from $272.9 million for the year to date 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.
Long
distance only and other revenue decreased for the year to date 2006 to $39.7
million from $40.2 million for the year to date 2005. The acquisition of LDMI
and customer price increases partially offset a decline in revenues from our
existing long distance base.
Network
and Line Costs.
Network
and line costs as a percentage of revenue increased in the year to date 2006
from the year to date 2005, primarily due to additional network personnel costs
and increased unbundled network element platform costs. In addition, for the
year to date 2006, we recorded a reduction to network cost of $3.1 million
related to the resolution of the Georgia rate case. 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 $19.9 million for the year to
date 2006 and $17.2 million for the year to date 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 in the year to date 2006 from the year
to
date 2005. This increase was primarily due to the general and administrative
expenses attributable to the LDMI and NTC acquisitions, partially offset by
a
reduction in overall headcount and a reduction in accrued bonus compensation.
In
addition, the year to date 2006 included expenses related to the Cavalier merger
of $0.8 million and stock-based compensation expenses associated with the
issuance of stock options pursuant to SFAS 123R of $4.2 million (see “Critical
Accounting Policies - Stock-Based Compensation Expense,” below). As a result,
general and administrative expense as a percentage of revenue increased in
the
year to date 2006 from the year to date 2005.
Provision
for Doubtful Accounts.
The
provision for doubtful accounts decreased both in dollars and as a percentage
of
revenue in the year to date 2006 from the year to date 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 year to date 2006 from the year to
date
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 $3.7 million for the year to
date
2006 and $3.2 million for the year to date 2005.
Depreciation
and Amortization.
Depreciation and amortization increased in the year to date 2006 from the year
to date 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 year to dates 2006 and 2005, our operating activities provided net
cash
flow of $26.2 million and $56.7 million, respectively. In the year to date
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 September 30, 2006, we had $37.5 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 $4.4 million,
compared to $46.3 million and $5.3 million, respectively, at December 31,
2005.
Net
cash
provided by (used for):
|
|
Year
to date
(in
thousands)
|
|
Percent
Change
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
vs. 2005
|
|
Operating
activities
|
|
$
|
26,162
|
|
$
|
56,680
|
|
|
(53.8
|
)%
|
Investing
activities
|
|
$
|
(33,984
|
)
|
$
|
(64,953
|
)
|
|
(47.7
|
)%
|
Financing
activities
|
|
$
|
(2,872
|
)
|
$
|
3,099
|
|
|
(192.7
|
)%
|
Cash
Provided By Operating Activities. Cash
generated by operations decreased by $30.5 million from the year to date 2005
to
the year to date 2006. The decrease was driven by lower cash flow before changes
in working capital and by higher investment in working capital primarily due
to
the payment related to the Georgia rate case as discussed below. The decrease
in
cash flow before changes in working capital was primarily driven by increases
in
general and administrative expense and sales and marketing 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
third quarter 2006, we made a payment relating to the Georgia rate case of
$3.6
million, for which we had previously accrued.
Net
Cash Used in Investing Activities. Capital
expenditures and capitalized software development costs were lower in the year
to date 2006 as compared to the year to date 2005. In the year to date 2006,
approximately $12.5 million of our $15.4 million in capital expenditures
consisted of costs related to our deployment of networking assets (local switch
and collocation equipment). 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.
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, the expansion of our Michigan network facilities and the purchase
of
customer premise capital equipment.
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.
Net
Cash Provided by (Used in) Financing Activities.
Net cash
used in financing activities during the year to date 2006 was $2.9 million
and
net cash provided by financing activities during the year to date 2005 was
$3.1
million. Net cash used in 2006 was attributable to the payment of outstanding
capital lease obligations. In October 2006, we received approximately $2 million
from the exercise of stock options.
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.
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 September 30,
2006.
There
were no changes in internal control over financial reporting during our most
recent fiscal quarter ended September 30, 2006, that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
We
are
aware of five asserted class actions related to the proposed Cavalier merger
filed against us.
Two
separate, substantially identical lawsuits, Daniel
Tyler, individually and on behalf of a class of persons similarly situated
v.
Edward Meyercord III, Mark Fowler, Robert Korzeniewski, Gabriel Battista, Ronald
Thoma, Talk America Holdings, Inc. and Cavalier Telephone
Corporation,
Case
No. 0609065, and Michael
Kaiser, individually and on behalf of a class of persons similarly situated
v.
Edward Meyercord III, Mark Fowler, Robert Korzeniewski, Gabriel Battista, Ronald
Thoma, Talk America Holdings, Inc. and Cavalier Telephone
Corporation,
Case
No. 0609067, each was filed on September 29, 2006 in the Court of Common Pleas
of Bucks County, Pennsylvania, Civil Division - Equity. Each
complaint:
· |
purports
to be brought on behalf of all Talk America’s stockholders (excluding the
defendants and their affiliates);
|
· |
alleges,
among other things, that the individual defendants (the Company’s
directors) breached their fiduciary obligations to the Company’s
stockholders in proposing to acquire [sic] the public shares of Talk
America at $8.10;
|
· |
alleges
that Cavalier has aided and abetted Talk America and its directors’
alleged wrongdoing;
|
· |
alleges
that the merger consideration is unfair to the public stockholder
of Talk
America since (i) there is a higher bona fide offer for $9.00 per
share
(apparently referring to the conditional Sun Capital proposal); (ii)
the
$8.10 proposed acquisition price fails to reflect and is far below
the
true valuation of Talk America; and (iii) the merger agreement does
not
contain a “go-shop” provision during which period only a substantially
reduced break-up fee would be payable if a higher bid were to emerge;
|
· |
alleges
that, as a result of defendants’ failure to take such steps as their
fiduciary obligations require, plaintiff and other class members
have been
and will be damaged in that they have not and will not receive their
proportionate share of the value of the Company assets and business,
and
have been and will be prevented from obtaining a fair price for their
common stock; and
|
· |
seeks
various forms of relief, including certification of the purported
class,
an injunction against the consummation of the merger unless and until
a
fair price is paid, unspecified money damages plus interest thereon
and
attorneys’ fees and expenses incurred in connection with the respective
lawsuit.
|
We
believe that these lawsuits are without merit and plan to defend them
vigorously.
Fred
Tobin, on behalf of himself and all others similarly situated v. Talk America
Holdings, Inc., Edward B. Meyercord, III, Gabriel A. Battista, Mark S. Fowler,
Ronald R. Thoma and Robert J. Korzeniewski,
Case
No. 0609143, was filed on October 2, 2006 in the Court of Common Pleas of Bucks
County, Pennsylvania, Civil Division-Law. The complaint purports to be
brought on behalf of all of Talk America's stockholders (excluding the
defendants and their affiliates) asserting claims based on alleged self-dealing
and breaches of fiduciary duty by the Company’s directors in connection with the
agreement to be acquired by Cavalier. The complaint alleges that the
Company's directors breached their fiduciary duties of loyalty, due care,
independence, good faith and fair dealing by failing to obtain the highest
price
reasonably available for the Company by structuring the merger agreement to
provide for a $6.25 million termination fee and up to $1.25 million in expenses,
and by utilizing a process allegedly designed to ensure the sale of Talk America
to Cavalier on terms preferential to Cavalier and Meyercord. The complaint
seeks various forms of relief, including: declaration of a proper class action;
declaration that the merger agreement is unlawful and unenforceable; injunction
prohibiting the defendants from consummating the acquisition until the Company
adopts a procedure that obtains the highest possible price for shareholders;
injunction directing the individual defendants to exercise their fiduciary
duties to obtain a transaction which is in the best interest of the
shareholders; rescission of the merger agreement; imposition of a constructive
trust; and an award of attorneys' fees, expert fees and costs. We believe
that this lawsuit is without merit and intend to to defend it
vigorously.
Edward
Katz,, individually, and on behalf of all others similarly situated v. Edward
B.
Meyercord III, Mark Fowler, Robert Korzeniewski, Gabriel Battista, Ronald Thoma,
and Talk America Holdings, Inc.,
C.A.
No. 2461-N, was filed on October 10, 2006 in the Court of Chancery of the State
of Delaware, New Castle County. The complaint purports to be brought on behalf
of all Talk America’s stockholders (excluding the defendants and their
affiliates) asserting claims based on breaches of the board’s fiduciary duties
in connection with the agreement to be acquired by Cavalier and in responding
to
the bid by Sun Capital. The complaint alleges that the Company’s directors are
not complying with their fiduciary duties by failing duly to pursue and obtain
the best value reasonably available on a sale of the Company and the directors
are passively allowing the forced vote provision of the merger agreement to
push
an uninformed decision on the stockholders. The complaint further alleges that
the Company’s directors have breached and/or aided and abetted breaches of
fiduciary duties owed to Talk America and its stockholders. The complaint seeks
various forms of relief, including declaration of a proper class action,
ordering the individual defendants to affirmatively fulfill their fiduciary
duties by acting to undertake an appropriate evaluation of alternatives to
maximize value for Talk America’s public stockholders prior to any vote on the
merger agreement, ordering defendants to account for all damages suffered by
the
plaintiff and other class members as a result of the alleged wrongs, and
awarding the plaintiff the costs and disbursements of this lawsuit. We believe
that this lawsuit is without merit and plan to defend it
vigorously.
Bruce
Murphy, individually and on behalf of all others similarly situated v. Edward
B.
Meyercord III, Mark Fowler, Robert Korzeniewski, Gabriel Battista, Ronald Thoma,
and Talk America Holdings, Inc.,
C.A.
No. 2493-N, was filed on October 23, 2006 in the Court of Chancery of the State
of Delaware, New Castle County. The complaint purports to be brought on behalf
of all Talk America’s stockholders (excluding the defendants and their
affiliates). The complaint alleges that the Company’s directors have acted and
are acting contrary to their fiduciary duty to maximize value on a change in
control of Talk America. In that connection, the complaint alleges that (i)
the
merger is inadequate and unfair to plaintiff and other class members because
it
is at a substantially lower price than the offer by Sun Capital; (ii) the merger
will deny the plaintiff and other class members the opportunity either to
benefit by the higher offer or to share proportionately in the future success
of
Talk America and its valuable assets; and (iii) the merger benefits Meyercord
but is detrimental to the plaintiff and the class. The complaint seeks various
forms of relief, including an injunction against the consummation of the merger,
unspecified rescissory damages in the event the merger is consummated,
unspecified money damages plus interest thereon against the defendants, and
plaintiff’s attorneys’ fees and expenses. We believe that this lawsuit is
without merit and plan to defend it vigorously.
Additional
lawsuits pertaining to the proposed merger could be filed in the
future.
Item
1A. Risk Factors
In
addition to the risk factors disclosed under Item 1A of our 2005 Form
10-K:
There
are risks arising from our merger agreement with
Cavalier.
As
of
September 22, 2006, we entered into a merger agreement with Cavalier that
provides for our acquisition by Cavalier. In addition to the risk that such
acquisition transaction does not take place and our shareholders do not receive
the consideration provided for therein, the merger agreement provisions subject
us to certain restrictions on the conduct of our business prior to completion
of
the transaction that could delay or prevent us from undertaking business
opportunities that may arise pending completion of the transaction or that
could
discourage competing proposals to acquire us or lower the price that a competing
bidder might be willing to pay for us. Further, if the merger agreement is
terminated under certain circumstances, we could be obligated to pay Cavalier
fees and reimbursed expenses aggregating up to $7.5 million. We
are
also subject to potential liabilities under lawsuits filed and that may be
filed
against us arising from the proposed acquisition transaction. In
addition, compliance with the merger agreement and the prospect of the
acquisition transaction contemplated thereby may result in detrimental diversion
of management’s attention from our ongoing business operations and in
difficulties in retaining our employees.
Item
4. Submission of Matters to a Vote of Security Holders
(a) Our
Annual Meeting of Stockholders was held on August 9, 2006. Three proposals
were voted upon at the meeting: (1) the election of one director, (2) the
ratification of the appointment of PricewaterhouseCoopers LLP as the independent
certified public accountants for 2006, and (3) the ratification and approval
of
the Talk America Employee Stock Purchase Plan.
(b) The
votes
in respect of the director were as follows:
For
the
election of Edward B. Meyercord, III as director, there were 21,291,463 votes
cast for, 0 votes cast against and 5,414,087 abstentions and broker non-votes.
The
terms
of office of the following directors continued after the meeting: Gabriel
Battista, Mark Fowler, Robert Korzeniewski, and Ronald Thoma
(c) The
votes
in respect of the other matters voted upon at the meeting were as
follows:
For
the
ratification of PricewaterhouseCoopers LLP as independent auditors, there were
26,622,434 votes cast for, 61,513 votes cast against and 21,602 abstentions
and
broker non-votes.
For
the
ratification and approval of the Talk America Employee Stock Purchase Plan,
there were 16,833,600 votes cast for, 759,191 votes cast against and 9,088,143
abstentions and broker non-votes.
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:
November 9, 2006
|
By:
/s/ Edward B. Meyercord, III
Edward
B. Meyercord, III
Chief
Executive Officer
|
Date:
November 9, 2006
|
By:
/s/ Gavid G. Zahka
David
G. Zahka
Chief
Financial Officer (Principal Financial
Officer)
|