TRINSIC,INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
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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
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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: 000-28467
TRINSIC, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE
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59-3501119 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
601 SOUTH HARBOUR ISLAND BOULEVARD, SUITE 220
TAMPA, FLORIDA 33602
(813) 273-6261
(Address, including zip code, and
telephone number including area code, of
Registrants principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER
SHARE, PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. (as defined in Rule 12b-2 of the Exchange Act.)
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.)
Yes o No þ
The number of shares of the Registrants Common Stock outstanding as of December 18, 2006 was
approximately 18,453,983.
TRINSIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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(Unaudited) |
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September 30, |
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December 31, |
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2006 |
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2005 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
435 |
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$ |
79 |
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Accounts receivable, net of allowance for doubtful
accounts of $28,271 and $20,489 |
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12,809 |
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13,713 |
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Prepaid expenses and other current assets |
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1,090 |
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4,713 |
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Total current assets |
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14,334 |
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18,505 |
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Property and equipment, net |
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12,056 |
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19,931 |
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Intangible assets, net |
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4,602 |
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Other assets |
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3,595 |
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2,884 |
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Total assets |
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$ |
34,587 |
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$ |
41,320 |
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Liabilities and Stockholders Deficit |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
35,203 |
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$ |
40,248 |
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Deferred revenue |
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5,211 |
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6,013 |
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Current portion of long-term debt and capital lease
obligations |
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9,012 |
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2,418 |
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Total current liabilities |
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49,426 |
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48,679 |
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Long-term debt and capital lease obligations |
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430 |
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1,025 |
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Total liabilities |
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49,856 |
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49,704 |
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Commitments and contingencies (Notes 7, 9 and 12) |
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Stockholders deficit: |
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Common stock, $0.01 par value; 150,000,000
shares authorized; 18,762,994 and 17,756,944 shares issued;
18,457,496 and 17,518,573 outstanding |
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185 |
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175 |
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Unearned stock compensation |
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(297 |
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(360 |
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Additional paid-in capital |
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417,037 |
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416,127 |
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Accumulated deficit |
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(432,189 |
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(424,321 |
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Treasury stock, 305,498 and 238,371 shares at cost |
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(5 |
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(5 |
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Total stockholders deficit |
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(15,269 |
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(8,384 |
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Total liabilities and stockholders deficit |
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$ |
34,587 |
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$ |
41,320 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
TRINSIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues |
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$ |
38,516 |
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$ |
44,030 |
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$ |
126,250 |
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$ |
151,958 |
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Operating expenses: |
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Network operations, exclusive of depreciation
and amortization shown below |
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23,302 |
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23,864 |
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76,287 |
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80,697 |
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Sales and marketing |
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916 |
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2,596 |
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3,588 |
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11,508 |
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General and administrative |
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17,827 |
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17,014 |
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46,991 |
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58,551 |
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Loss on impairment of assets |
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2,594 |
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2,594 |
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Depreciation and amortization |
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5,326 |
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2,398 |
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12,502 |
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9,531 |
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Total operating expenses |
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49,965 |
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45,872 |
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141,962 |
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160,287 |
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Operating loss |
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(11,449 |
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(1,842 |
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(15,712 |
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(8,329 |
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Nonoperating income (expense): |
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Interest and other income |
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11,845 |
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806 |
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13,887 |
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8,100 |
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Interest and other expense |
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(1,849 |
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(3,514 |
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(6,043 |
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(7,140 |
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Total nonoperating income (expense) |
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9,996 |
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(2,708 |
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7,844 |
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960 |
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Net loss |
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$ |
(1,453 |
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$ |
(4,550 |
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$ |
(7,868 |
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$ |
(7,369 |
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Weighted average shares outstanding |
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18,457,497 |
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5,520,137 |
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18,150,582 |
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5,493,993 |
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Basic and diluted net loss per share |
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$ |
(0.08 |
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$ |
(0.82 |
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$ |
(0.43 |
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$ |
(1.34 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
TRINSIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
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Nine Months Ended |
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September 30, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(7,868 |
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$ |
(7,369 |
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Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |
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Depreciation and amortization |
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12,502 |
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9,531 |
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Provision for bad debts |
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10,842 |
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9,306 |
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Loss on impairment of assets |
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2,594 |
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Gain on sale of building |
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97 |
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Expense charged for granting of restricted stock |
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983 |
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157 |
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Change in operating assets and liabilities: |
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Increase in accounts receivable |
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(9,938 |
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(4,423 |
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Decrease (increase) in prepaid expenses |
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2,274 |
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(1,555 |
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Increase in other assets |
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(711 |
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(1,686 |
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Decrease in accounts payable and accrued liabilities |
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(5,045 |
) |
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(5,977 |
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Decrease in deferred revenue |
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(802 |
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(66 |
) |
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Total adjustments |
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12,796 |
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5,287 |
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Net cash provided by (used in) operating activities |
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4,928 |
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(2,082 |
) |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(1,150 |
) |
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(2,206 |
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Purchase of customer lists |
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(1,727 |
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Net cash used in investing activities |
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(2,877 |
) |
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(2,206 |
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Cash flows from financing activities: |
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Payments on long-term debt and capital lease obligations |
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(1,149 |
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(668 |
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Proceeds from sale of building |
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400 |
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Principal repayments received on notes receivable issued for stock |
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250 |
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Payments on note payable for customer lists |
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(2,423 |
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Proceeds from note payable |
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500 |
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Proceeds from issuance of preferred stock |
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2,500 |
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Payoff of asset based loan |
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(12,934 |
) |
Proceeds from stand by credit facility |
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977 |
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13,977 |
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Net cash provided by (used in) financing activities |
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(1,695 |
) |
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3,125 |
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Net increase (decrease) in cash and cash equivalents |
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356 |
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(1,163 |
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Cash and cash equivalents, beginning of period |
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79 |
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1,363 |
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Cash and cash equivalents, end of period |
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$ |
435 |
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$ |
200 |
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Non-cash investing and financing activities: |
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Purchase of customer lists |
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$ |
5,671 |
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$ |
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Conversion of stand by credit facility and accrued interest into preferred stock |
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$ |
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$ |
21,585 |
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Conversion of preferred stock into common stock |
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$ |
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$ |
24,085 |
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The accompanying notes are an integral part of these consolidated financial statements
5
TRINSIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL TABLES ARE IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS
DESCRIPTION OF BUSINESS
Trinsic, Inc. (formerly Z-Tel Technologies, Inc.) and subsidiaries (Trinsic, we, us or our)
is a provider of residential and business telecommunications services. We offer local and long
distance telephone services in combination with enhanced communications features accessible through
the telephone, the Internet and certain personal digital assistants. In 2004 we began offering
services utilizing Internet protocol, often referred to as IP telephony, voice over Internet
protocol or VoIP.
LIQUIDITY AND CAPITAL RESOURCES
Our inability to operate profitably and to consistently generate cash flows from operations and our
reliance therefore on external funding either from loans or equity raise substantial doubt about
our ability to continue as a going concern.
The accompanying consolidated financial statements were prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business. The realization of assets and the satisfaction of liabilities in the normal course of
business is dependent upon, among other things, our ability to operate profitably, to generate cash
flow from operations and to obtain funding adequate to fund its business.
Our operations are subject to certain risks and uncertainties, particularly related to the
evolution of the regulatory environment, which impacts our access to and cost of the network
elements that we utilize to provide services to our customers.
We have incurred significant losses since our inception as a result of developing our business,
performing ongoing research and development, building and maintaining our network infrastructure
and technology, the sale and promotion of our services, and ongoing administrative expenditures.
As of September 30, 2006, we had an accumulated deficit of approximately $432.2 million and $0.4
million in cash and cash equivalents. We have funded our expenditures primarily through operating
revenues, private securities offerings, our asset based loan, our standby credit facility, a
sale-leaseback credit facility, an accounts receivable factoring facility and an initial public
offering.
For the nine months ended September 30, 2006, net cash provided by operating activities was $4.9
million as compared to $2.1 million used in operating activities for the same period in the prior
year.
On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo). The agreement provides for the sale of up to $33 million of our accounts
receivable on a continuous basis to Thermo, subject to selection criteria as defined in the
contract.
On December 15, 2005, we borrowed $1.0 million from the 1818 Fund III, L.P. (the Fund) in order
to take advantage of a tax settlement with the State of New York. On January 12, 2006, we borrowed
$1.0 million from the Fund for general corporate purposes. In connection with the loan, and the
previous $1.0 million loan received December 15, 2005, we delivered to the Fund a promissory note
bearing interest at 12% annually and due on demand and a mortgage on certain real property we own
in Atmore, Alabama where we have an operations center. Under the promissory note we may be required
to grant additional security to the Fund.
Our net cash used in investing activities was $2.9 million for the nine months ended September 30,
2006, compared to $2.2 million for the same period in the prior year. The increase was
attributable to purchasing local access lines from Sprint in 2006, offset by a reduction in our
capital expenditures.
For the nine months ended September 30, 2006, net cash used in financing activities was $1.7
million as compared to $3.1 million provided by financing activities for the same period in 2005.
This decrease in 2006 is primarily the result of the purchase of local access lines from Sprint in
2006 and the issuance of preferred stock in 2005.
Over the course of the first five months in 2006, we acquired 111,697 UNE-P local access lines from
Sprint for which we previously provided services on a wholesale basis. We acquired the lines
pursuant to a definitive agreement dated October 25, 2005. Under the agreement we purchased the
lines for $11.2 million, $5.5 million of which has been paid as of September 30, 2006. The total
purchase price includes $1.3 million that was escrowed during the latter part of 2005. The
remaining purchase price will be paid in monthly installments through July 2007.
6
On March 3, 2006 we initiated a reduction in force which terminated the employment of approximately
118 employees. All post termination wages and salaries were paid out as of April 7, 2006. In
association with the reduction in force we have ceased actively
marketing our IP telephony services.
In June 2006, we sold a building to a related party for cash proceeds of $0.4 million. The
proceeds were used to payoff our note payable to Corman Elegre and to make a small principal
paydown on our $2 million loan from the Fund mentioned above. We recorded a $0.1 million loss
associated with the sale.
Effective July 27, 2006, we finalized a settlement with an ILEC over disputed balances that reduced
our accounts payable balance by $12.1 million. We paid a total of $3.9 million. The settlement
resulted in a net gain of approximately $8.2 million that is included in interest and other income
in our third quarter statement of operations.
On August 8, 2006 and September 6, 2006, we completed the sale of 13,439 and 13,923 local access
lines to Access Integrated Networks, Inc., a privately-held telephone company headquartered in
Macon, Georgia. The sale was pursuant to an Agreement for Purchase and Sale of Customer Access
Lines that we entered into with Access Integrated Networks, Inc. on February 13, 2006. The sales
price for these lines was $2.6 million. In addition, Access loaned to us $0.5 million for which we
delivered a one-year, non-interest bearing promissory note.
On October 23, 2006, we entered into a definitive agreement to sell approximately 300 of our
VoIP-based lines to CommX Holdings, Inc., a privately-held provider of business-class voice
services, headquartered in Tampa, Florida. The lines, located in Tampa, Florida and New York City,
represent all of our VoIP-based business. We are also selling portions of our VoIP network. We
expect to close the sale within several months pending regulatory approvals. The total purchase
price will depend upon the number of lines in service at the time of closing. As a result of this
agreement to sell our VoIP-based lines, we expect our VoIP revenues to decline during the fourth
quarter of 2006 and to cease sometime during the first half of 2007. As discussed below in Note 5
Property and Equipment, we recorded an impairment charge of $2.6 million during the third quarter
associated with this decision to sell our VoIP-based business.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared by us in accordance
with accounting principles generally accepted in the United States of America for interim financial
information and are in the form prescribed by the Securities and Exchange Commissions (SEC)
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes for complete financial statements as required by accounting
principles generally accepted in the United States of America. The interim unaudited financial
statements should be read in conjunction with our audited financial statements as of and for the
year ended December 31, 2005, included in our Annual Report on Form 10-K filed with the SEC on
March 31, 2006. In the opinion of management, all adjustments considered necessary for a fair
statement have been included. Operating results for the three and nine months ended September 30,
2006 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2006.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts in the consolidated statements of operations for the three and nine months ended
September 30, 2005 have been reclassified to conform to the presentation for the three and nine
months ended September 30, 2006.
3. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
(a) Significant Accounting Policies
Our significant accounting policies are included in the Notes to Consolidated Financial Statements
in our Annual Report on Form 10-K for the year ended December 31, 2005. There have been no changes
to our significant accounting policies during 2006.
Consistent with our significant accounting policies referenced above, prepaid expenses and other
current assets includes restricted certificates of deposits with various maturity dates ranging
from December 2006 to April 2007 in the amount of $0.1 million and $2.4 million as of September 30,
2006 and December 31, 2006, respectively.
7
(b) Recent Accounting Pronouncements
In September 2006, the U.S. Securities and Exchange Commission (the SEC) issued Staff Accounting
Bulletin (SAB) No. 108, which expresses the views of the SEC staff regarding the process of
quantifying financial statement misstatements. SAB No. 108 provides guidance on the consideration
of the effects of prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. The guidance of this SAB is effective for annual financial
statements covering the first fiscal year ending after November 15, 2006. We do not anticipate that
the adoption of SAB No. 108 will have a material impact on our financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R).
This Statement, which is effective December 31, 2006 for the Company, requires employers to
recognize the funded status of defined benefit postretirement plans as an asset or liability on the
balance sheet and to recognize changes in that funded status through comprehensive income. SFAS No.
158 also establishes the measurement date of plan assets and obligations as the date of the
employers fiscal year end, and provides for additional annual disclosures. We do not anticipate
that the adoption of SFAS No. 158 will have a material impact on our financial statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements that require or permit
fair value measurements and is effective for fiscal years beginning after November 15, 2007. We are
still assessing the impact the adoption of SFAS No. 157 will have on our financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for
uncertainty in tax positions. FIN 48 requires that entities recognize the impact of a tax position
in their financial statements, if that position is more likely than not to be sustained on audit,
based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal
years beginning after December 15, 2006. We are still assessing the impact the adoption of FIN 48
will have on our financial statements.
In June 2006, the FASB issued Emerging Issues Task Force Issue No. 06-03, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation) (EITF 06-03), which states that any tax assessed by a
governmental authority that is both imposed on and concurrent with a specific revenue-producing
transaction between a seller and a customer may be shown in the financials on a gross basis
(included in revenues and costs) or a net basis (excluded from revenues). If an entity chooses the
gross presentation, it must disclose the amount of such taxes for all income statement periods
presented. EITF 06-03 is effective for all reporting periods beginning after December 15, 2006,
with earlier application permitted. We currently use the net presentation method for such taxes
and therefore we do not expect EITF 06-03 to have any impact on our financial statements.
In March 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
156, Accounting for Servicing of Financial Assets (SFAS No. 156), which amends SFAS No. 140.
SFAS 156 provides guidance addressing the recognition and measurement of separately recognized
servicing assets and liabilities, common with mortgage securitization activities, and provides an
approach to simplify efforts to obtain hedge accounting treatment. SFAS 156 is effective for all
separately recognized servicing assets and liabilities acquired or issued after the beginning of an
entitys fiscal year that begins after September 15, 2006, with early adoption being permitted. We
are still assessing the impact that the adoption of SFAS No. 156 will have on our financial
position, results of operations and cash flows.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments (SFAS 155), which amends SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133) and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (SFAS 140). SFAS 155 provides guidance to
simplify the accounting for certain hybrid instruments by permitting fair value remeasurement for
any hybrid financial instrument that contains an embedded derivative and clarifies that beneficial
interests in securitized financial assets are subject to SFAS 133. SFAS 155 is effective for all
financial instruments acquired, issued or subject to a new basis occurring after the beginning of
an entitys first fiscal year that begins after September 15, 2006. We do not anticipate that the
adoption of SFAS No. 155 will have a material impact on our financial position, results of
operations or cash flows.
4. ACCOUNTS RECEIVABLE FINANCING AGREEMENT
On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo). The agreement provided for the sale of up to $22 million of our accounts
receivable on a continuous basis to Thermo, subject to selection criteria as defined in the
contract.
During October 2005, we signed an amendment to our accounts receivable financing agreement with
Thermo. The amendment
8
increases the amount of accounts receivable that we can sell to Thermo from
$22 million to $26 million, subject to selection criteria as defined in the original contract. The
discount rate also increased from 2.5% to 2.75%. On February 1, 2006, we amended our accounts
receivable financing facility once more by increasing the facility to $33 million.
We sold approximately $168.9 million of receivables to Thermo, for net proceeds of approximately
$98.3 million, during the nine months ended September 30, 2006. We have not recorded a servicing
asset or liability to date, as our servicing fees under the agreement represent the amount of cash
collections in excess of the amounts funded by Thermo. To date, the amount of collections from our
servicing activities have approximated the amounts funded by Thermo; therefore, not giving rise to
any servicing asset or liability. We recognized costs related to the agreement of approximately
$1.7 million and $2.3 million for the three months ended September 30, 2006 and 2005, respectively.
During the nine months ended September 30, 2006 and 2005, we recognized $5.3 million and $2.3
million, respectively. We are responsible for the continued servicing of the receivables sold.
5. PROPERTY AND EQUIPMENT
At the respective dates, property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable |
|
|
|
|
|
|
|
|
Lives in |
|
September 30, |
|
|
December 31, |
|
|
|
Years |
|
2006 |
|
|
2005 |
|
Switching equipment |
|
5-10 |
|
$ |
15,298 |
|
|
$ |
15,563 |
|
Computer equipment |
|
5-10 |
|
|
38,560 |
|
|
|
39,457 |
|
Software |
|
3 |
|
|
58,245 |
|
|
|
58,517 |
|
Furniture and office equipment |
|
5-10 |
|
|
8,462 |
|
|
|
8,860 |
|
Leasehold improvements |
|
3-15 |
|
|
6,571 |
|
|
|
6,430 |
|
Land and building |
|
20-30 |
|
|
3,653 |
|
|
|
4,354 |
|
Construction-in-progress |
|
|
|
|
|
|
|
|
153 |
|
Vehicles |
|
5 |
|
|
20 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,808 |
|
|
|
133,354 |
|
Less accumulated depreciation and amortization |
|
|
|
|
(118,752 |
) |
|
|
(113,423 |
) |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
$ |
12,056 |
|
|
$ |
19,931 |
|
|
|
|
|
|
|
|
|
|
As a result of the decision to sell our VoIP-based business and various portions of our VoIP
network as discussed in Note 14 Subsequent Events, management performed an assessment of the
value of our VoIP assets, which include computer equipment, software, software development,
switching equipment and leasehold improvements. In the third quarter of 2006, it was determined
that, based upon the undiscounted future cash flows, the carrying amount of the VoIP assets would
not be recoverable.
The carrying value of the VoIP assets exceeded the fair value by $2.6 million, resulting in an
impairment charge. We calculated the fair value of the assets to be sold to CommX Holdings, Inc.
by using the estimated sales price as stated in the agreement. The fair value of the remaining
assets was determined based upon market prices for similar assets advertised for sale.
The $2.6 million impairment charge recorded during the third quarter of 2006 was composed of $1.0
million related to computer equipment, $0.9 million related to software and software development
and $0.7 million related to switching equipment. The impairment was recorded in our retail
segment.
6. INTANGIBLE ASSETS
Over the course of the first five months in 2006, we acquired 111,697 UNE-P local access lines from
Sprint for which we previously provided services on a wholesale basis. We acquired the lines
pursuant to a definitive agreement dated October 25, 2005. Under the agreement we purchased the
lines for $11.2 million, $5.5 million of which has been paid as of September 30, 2006. The
remaining purchase price will be paid in monthly installments through July 2007. The entire
purchase price has been recorded as an intangible asset.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Intangible |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Intangible |
|
|
|
Amount |
|
|
Amortization |
|
|
Assets |
|
|
Amount |
|
|
Amortization |
|
|
Assets |
|
Customer related intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer list from Touch 1 acquisition |
|
$ |
9,145 |
|
|
$ |
9,145 |
|
|
$ |
|
|
|
$ |
9,145 |
|
|
$ |
9,145 |
|
|
$ |
|
|
Customer list from acquisition of Sprint lines |
|
|
11,170 |
|
|
|
6,568 |
|
|
|
4,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,315 |
|
|
$ |
15,713 |
|
|
$ |
4,602 |
|
|
$ |
9,145 |
|
|
$ |
9,145 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2006 |
|
|
|
|
|
$ |
6,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2005 |
|
|
|
|
|
$ |
457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected amortization expense for the years ending December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
$ |
3,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
$ |
1,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. OTHER DEBT
On December 15, 2005, we borrowed $1.0 million from the Fund in order to take advantage of a tax
settlement with the State of New York. On January 12, 2006, we borrowed $1.0 million from the Fund
for general corporate purposes. In connection with the loan, and the previous $1.0 million loan
received December 15, 2005, we delivered to the Fund a promissory note bearing interest at 12%
annually and due on demand and a mortgage on certain real property we own in Atmore, Alabama where
we have an operations center. Under the promissory note we may be required to grant additional
security to the Fund.
See Note 10 Related Party Transactions for information related to the payoff of the Corman Elegre
note payable as well as the small principal paydown on the loan payable to the Fund.
Concurrent with the sale of local access lines to Access Integrated Networks, Inc. during August
2006, Access Integrated Networks, Inc. loaned Trinsic $0.5 million in exchange for an unsecured,
non-interest bearing promissory note. The note is due in August 2007.
The table below lists our current and long-term debt as of September 30, 2006 and December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
|
2005 |
|
RELATED PARTIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to Corman Elegre, customer base pledged as collateral, payable in monthly installments,
due
September 2004, interest rate at 6% |
|
$ |
|
|
|
$ |
360 |
|
|
|
|
|
|
|
|
|
|
Loan payable to the Fund, secured by a mortgage on real property located in Atmore, AL; due on demand,
interest rate at 12% |
|
|
1,977 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
UNRELATED PARTIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax settlement payable to the State of New York, payable in monthly installments through March 2008,
non-interest bearing |
|
|
1,289 |
|
|
|
2,050 |
|
|
|
|
|
|
|
|
|
|
Purchase price for local access lines due to Sprint, payable in monthly installments through July 2007,
non-interest bearing |
|
|
5,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to Access Integrated Netorks, Inc., due August 2007, non-interest bearing |
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases |
|
|
5 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
$ |
9,442 |
|
|
$ |
3,443 |
|
Less: Current portion |
|
|
(9,012 |
) |
|
|
(2,418 |
) |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
430 |
|
|
$ |
1,025 |
|
|
|
|
|
|
|
|
10
8. STOCK-BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS 123R), which revised
SFAS 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123R requires the
grant-date fair value of all stock-based payment awards, including employee stock options, to be
recognized as employee compensation expense over the requisite service period. We adopted SFAS 123R
on January 1, 2006 and applied the modified prospective transition method. Under this transition
method, we did not restate any prior periods and we are recognizing compensation expense for all
stock-based payment awards that were outstanding, but not yet vested, as of January 1, 2006.
Prior to the adoption of SFAS 123R, the Company utilized the intrinsic-value based method of
accounting under APB Opinion No. 25, (APB 25) Accounting for Stock Issued to Employees and
related interpretations, and adopted the disclosure requirements of SFAS 123. Under the
intrinsic-value based method of accounting, no compensation expense was historically recognized in
the financial statements for stock options. For additional information about our stock-based
compensation and for additional disclosures required under SFAS 123R, refer to Note 20 of the Notes
to Consolidated Financial Statements in our Form 10-K.
On January 20, 2006, our board of directors approved the full vesting of all of our unvested,
outstanding stock options. All of the stock options were out-of-the-money and we decided to
accelerate the vesting in order to avoid future administrative and other costs. As a result of
this accelerated vesting, all remaining compensation costs related to our stock options were
recorded in the three months ended March 31, 2006.
During the nine months ended September 30, 2006, our general and administrative expense includes
$1.0 million, or $0.06 per share, in compensation expense related to our stock-based payment
awards.
As noted above, we previously accounted for our stock options under APB 25. The following table
illustrates the effect on net loss and net loss per share for the three and nine months ended
September 30, 2005, if we had applied the fair value recognition provisions of SFAS No. 123, to
stock-based employee compensation. The fair value of the options granted has been estimated at the
various grant dates 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; |
|
|
|
|
No expected dividend payments on our common stock. |
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2005 |
Net loss attributable to common stockholders, as reported |
|
$ |
(4,550 |
) |
|
$ |
(7,369 |
) |
Add: Stock based compensation included in net loss |
|
|
64 |
|
|
|
157 |
|
Deduct: Total stock based employee compensation determined
under the fair value based method for all awards |
|
|
(577 |
) |
|
|
(1,856 |
) |
|
|
|
Net loss attributable to common stockholders, pro forma |
|
$ |
(5,063 |
) |
|
$ |
(9,068 |
) |
|
|
|
Basic and Diluted Net Loss per Common Share |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.82 |
) |
|
$ |
(1.34 |
) |
Pro forma |
|
$ |
(0.92 |
) |
|
$ |
(1.65 |
) |
9. COMMITMENTS AND CONTINGENCIES
We have disputed billings and access charges from certain inter-exchange carriers (IXCs) and
incumbent local exchange carriers (ILECs). We contend that the invoicing and billings of these
access charges are not in accordance with the interconnection, service level, or tariff agreements
between us and certain IXCs and ILECs. We have not paid these disputed amounts and management
believes that we will prevail in these disputes. At September 30, 2006 and 2005, the total disputed
amounts were approximately $3.6 million and $18.4 million, respectively. As of September 30, 2006
and 2005, we have accrued for $1.2 million and $11.4 million, respectively, which represents the
access charges that we believe are valid or that may be deemed valid.
As of September 30, 2006, we have agreements with three long-distance carriers to provide
transmission and termination services for all of our long distance traffic. These agreements
generally provide for the resale of long distance services on a per-minute basis and contain
minimum volume commitments. As a result of not fulfilling all of our volume commitments as outlined
in one of these contracts, we agreed to pay an increased per minute charge for minutes until the
achievement of certain minimum minute
11
requirements. Once we meet the new agreed upon minimum
minutes
we will revert to the terms of our original agreement. All other terms of the original
agreement continue in full force.
In July 2004, we entered into an agreement with an Operations Support Systems services firm to
outsource customer provisioning and other ordering through electronic bonding with the incumbent
local exchange carriers. In November 2004, we renegotiated this agreement, resulting in a
lowering of our monthly minimum payments for the six month time period beginning on July 1, 2005.
In May 2005, we renegotiated this agreement once again, resulting in a minimum annual commitment of
approximately $2.8 million for the year ending December 31, 2006. We made payments under the
agreement totaling $0.5 million and $0.1 million during the three months ended September 30, 2006
and 2005, respectively. We paid $1.7 million and $0.2 million during the nine months ended
September 30, 2006 and 2005, respectively.
On April 15, 2005, Trinsic entered into a Wholesale Advantage Services Agreement with Verizon
Services Company on behalf of Verizons Incumbent Local Exchange Carriers (Verizon ILECs). The
Wholesale Advantage Services Agreement will act as a replacement for Trinsics existing
Interconnection Agreements for the provision of UNE-P services in Verizon service areas. As long
as Trinsic meets certain volume commitments, Verizon will continue to provide a UNE-P like
service at gradually increasing rates for a five year period. The contract contains a take-or-pay
clause that is applicable for every month starting in May 2005. The calculation is based on a
snapshot of lines we had in service as of March 31, 2005 the baseline volume. If Trinsic is
unable to replace lines generated by normal churn, this take-or-pay clause may become effective and
significantly raise our cost in the Verizon footprint. In July 2006, we amended our Wholesale
Advantage Services Agreement to exclude the newly acquired Sprint lines from the baseline volume.
This significantly lowers our minimum volume commitments with Verizon. In exchange for the
decreased minimums, we accepted a rate increase across the Verizon territory. Both the decreased
volume commitment and the rate increase were effective as of January 1, 2006.
10. RELATED PARTY TRANSACTIONS
We recorded interest on our related party debt of $0.1 million and $0.5 million during the three
months ended September 30, 2006 and 2005, respectively, and we recorded interest of $0.2 million
and $1.6 million during the nine months ended September 30, 2006 and 2005, respectively.
In June 2006, we sold a building to a related party for cash proceeds of $0.4 million. The
proceeds were used to payoff our note payable to Corman Elegre and to make a small principal
paydown on our $2 million loan from the Fund mentioned above. We recorded a $0.1 million loss
associated with the sale.
11. COMPUTATION OF NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss attributable to common stockholders by
the weighted average number of common shares outstanding during the period. Incremental shares of
common stock equivalents are not included in the calculation of diluted net loss per share as the
inclusion of such equivalents would be anti-dilutive.
Net loss per share is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,453 |
) |
|
$ |
(4,550 |
) |
|
$ |
(7,868 |
) |
|
$ |
(7,369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
18,457,497 |
|
|
|
5,520,137 |
|
|
|
18,150,582 |
|
|
|
5,493,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.08 |
) |
|
$ |
(0.82 |
) |
|
$ |
(0.43 |
) |
|
$ |
(1.34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For all periods shown, basic and diluted net loss per share are the same. The following table
includes potentially dilutive items that were not included in the computation of diluted net loss
per share because to do so would be anti-dilutive:
12
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
Unexercised stock options |
|
|
57,389 |
|
|
|
102,808 |
|
Unexercised warrants |
|
|
48,744 |
|
|
|
107,878 |
|
|
|
|
|
|
|
|
|
Total potentially dilutive shares of common stock equivalents |
|
|
106,133 |
|
|
|
210,686 |
|
|
|
|
|
|
|
|
12. LEGAL AND REGULATORY PROCEEDINGS
During June and July 2001, three separate class action lawsuits were filed against us, certain of
our current and former directors and officers (the D&Os) and firms engaged in the underwriting
(the Underwriters) of our initial public offering of stock (the IPO). The lawsuits, along with
approximately 310 other similar lawsuits filed against other issuers arising out of initial public
offering allocations, have been assigned to a Judge in the United States District Court for the
Southern District of New York for pretrial coordination. The lawsuits against us have been
consolidated into a single action. A consolidated amended complaint was filed on April 20, 2002. A
Second Corrected Amended Complaint (the Amended Complaint), which is the operative complaint, was
filed on July 12, 2002.
The Amended Complaint is based on the allegations that our registration statement on Form S-1,
filed with the Securities and Exchange Commission (SEC) in connection with the IPO, contained
untrue statements of material fact and omitted to state facts necessary to make the statements made
not misleading by failing to disclose that the underwriters allegedly had received additional,
excessive and undisclosed commissions from, and allegedly had entered into unlawful tie-in and
other arrangements with, certain customers to whom they allocated shares in the IPO. The plaintiffs
in the Amended Complaint assert claims against us and the D&Os pursuant to Section 11 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated by the SEC there under. The plaintiffs in the Amended Complaint assert claims against
the D&Os pursuant to Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the SEC there under. The
plaintiffs seek an undisclosed amount of damages, as well as pre-judgment and post-judgment
interest, costs and expenses, including attorneys fees, experts fees and other costs and
disbursements. Initial discovery has begun. We believe we are entitled to indemnification from our
Underwriters.
A settlement has been reached by the plaintiffs, the issuers and insurers of the issuers. The
principal terms of the proposed settlement are (i) a release of all claims against the issuers and
their officers and directors, (ii) the assignment by the issuers to the plaintiffs of certain
claims the issuers may have against the Underwriters and (iii) an undertaking by the insurers to
ensure the plaintiffs receive not less than $1 billion in connection with claims against the
Underwriters. Hence, under the terms of the proposed settlement our financial obligations will
likely be covered by insurance. To be binding the settlement must be approved by the court. There
is no assurance that the settlement will be finally approved by the court.
Susan Schad, on behalf of herself and all others similarly situated, filed a putative class action
lawsuit against Trinsic Communications, Inc. (formerly known as Z-Tel Communications, Inc.), our
wholly-owned subsidiary corporation, on May 13, 2004. The original complaint alleged that our
subsidiary engaged in a pattern and practice of deceiving consumers into paying amounts in excess
of their monthly rates by deceptively labeling certain line-item charges as government-mandated
taxes or fees when in fact they were not. The original complaint sought to certify a class of
plaintiffs consisting of all persons or entities who contracted with Trinsic for telecommunications
services and were billed for particular taxes or regulatory fees. The original complaint asserted a
claim under the Illinois Consumer Fraud and Deceptive Businesses Practices Act and sought
unspecified damages, attorneys fees and court costs. On June 22, 2004, we filed a notice of
removal in the state circuit court action, removing the case to the Federal District Court for the
Northern District of Illinois, Eastern Division, C.A. No. 04 C 4187. On July 26, 2004, the
plaintiff filed a motion to remand the case to the state circuit court. On January 12, 2005, the
federal court granted the motion and remanded the case to the state court. On October 17, 2005, the
state court heard argument on our motion to dismiss the lawsuit and granted that motion, in part
with prejudice. The court dismissed with prejudice the claims relating to the E911 Tax, the
Utility Users Tax, and the Communications Service Tax. The court found that those tax charges
were specifically authorized by state law or local ordinance, and thus cannot be the basis of a
Consumer Fraud claim. The court also dismissed (but with leave to replead) the claims relating to
the Interstate Recovery Fee and the Federal Regulatory Compliance Fee. The court determined
that the plaintiff had failed to allege how she was actually damaged by the allegedly deceptive
description of the charges. On November 15, 2005, the plaintiff filed a First Amended Class Action
Complaint alleging that Trinsic mislabeled its Interstate Recovery Fee and Federal Cost Recovery
Fee in supposed violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. As
with the original complaint, the First Amended Class Action Complaint seeks damages, fees, costs,
and class certification. We filed a further Motion to Dismiss which was heard by the court on April
3, 2006. The court granted our motion by dismissing the plaintiffs claims for unfair practices
under the Illinois Consumer Fraud and Deceptive Business Practices Act and dismissing in part the
plaintiffs claims for deceptive practice under the Act. The court determined that the plaintiff
did not state sufficient facts indicating that her alleged damages were caused by our alleged
deception. On April 24, 2006, the plaintiff filed a Second Amended Class Action Complaint again
alleging that Trinsic mislabeled its Interstate Recovery Fee and Federal Cost Recovery Fee in
supposed violation of the Illinois Consumer Fraud and
13
Deceptive Business Practices Act. The Second
Amended Class Action Complaint seeks damages, fees, costs, and class certification. We moved to
dismiss this Second Amended Class Action Complaint, and the Court heard the motion on August 28,
2006. On September 27, 2006, the court issued a ruling allowing the plaintiffs remaining claims
to stand and ordered us to answer the Second Amended Complaint on October 4, 2006. We have filed
an answer denying all material allegations. Discovery has recently begun. We believe the
plaintiffs allegations are without merit and intend to defend the lawsuit vigorously, but we
cannot predict the outcome of this litigation with any certainty.
On November 19, 2004, the landlord of our principal Tampa, Florida facility sued us seeking a
declaration of its rights and obligations under the lease and damages for breach of contract. We
assert that the landlord has failed to provide certain services in accordance with the lease,
including maintenance of air conditioning and emergency electrical generating systems crucial to
our operations. We have taken steps necessary to provide this maintenance and have offset the costs
of these measures against the rent, which we believe we are entitled to do under the lease. Thus
far we have withheld approximately $0.3 million. We also believe we are entitled to reimbursement
from the landlord for costs associated with improvements to the leased space.
On November 19, 2004, a provider of parking spaces for our Tampa facilities sued us for parking
fees in excess of $0.3 million. Pursuant to our lease we are entitled to a number of free spaces
and we are obligated to pay for additional usage of parking spaces. We have entered into a
settlement understanding with the plaintiff. Under the settlement, we agreed to pay a total of $0.2
million, payable in installments over seven months. We made the final payment on November 1, 2006.
On August 11, 2006, Oracle sued us for payment of licensing fees alleging claims for copyright
infringement, breach of contract, account stated, open book account, and goods sold and delivered
based upon our license. We disagreed with the terms of our usage of the licensed software. We
have entered into a settlement agreement with Oracle. Under the agreement we agree to pay $0.3
million over a 10 month period beginning November 15, 2006.
13. SEGMENT REPORTING
We have two reportable operating segments: Retail Services and Wholesale Services.
The retail services segment includes our residential and business services that offer bundled local
and long-distance telephone services in combination with enhanced communication features
accessible, through the telephone, the Internet and certain personal digital assistants. We offer
these services in forty-nine states. This segment also includes our Touch 1 residential
long-distance offering that is available nation-wide.
The wholesale services segment allows companies to offer telephone exchange and enhanced services
to residential and small business customers. Sprint was our only wholesale customer during 2005 and
2006. As discussed in Note 6 above, we have acquired all of the Sprint lines for which we
previously provided wholesale services.
Management evaluates the performance of each business unit based on segment results, exclusive of
adjustments for unusual items and depreciation and amortization. Special items are transactions or
events that are included in our reported consolidated results but are excluded from segment results
due to their nonrecurring or non-operational nature. It is also important to understand when
viewing our segment results that we only record direct expenses in our wholesale services and
therefore, all employee benefits, occupancy, insurance, and other indirect or overhead related
expenses are reflected in the retail services segment.
The following summarizes the financial information concerning our reportable segments for the three
and nine months ended September 30, 2006 and 2005:
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Retail Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
38,133 |
|
|
$ |
34,045 |
|
|
$ |
121,611 |
|
|
$ |
118,378 |
|
Depreciation and amortization |
|
$ |
1,865 |
|
|
$ |
2,374 |
|
|
$ |
5,865 |
|
|
$ |
9,423 |
|
Segment results |
|
$ |
(6,251 |
) |
|
$ |
(2,873 |
) |
|
$ |
(4,114 |
) |
|
$ |
(9,045 |
) |
Capital expenditures |
|
$ |
97 |
|
|
$ |
573 |
|
|
$ |
1,150 |
|
|
$ |
2,206 |
|
Identifiable assets |
|
|
|
|
|
|
|
|
|
$ |
29,688 |
|
|
$ |
47,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Wholesale Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
383 |
|
|
$ |
9,984 |
|
|
$ |
4,639 |
|
|
$ |
33,580 |
|
Depreciation and amortization |
|
$ |
3,461 |
|
|
$ |
24 |
|
|
$ |
6,637 |
|
|
$ |
108 |
|
Segment results |
|
$ |
128 |
|
|
$ |
3,429 |
|
|
$ |
904 |
|
|
$ |
10,247 |
|
Capital expenditures |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Identifiable Assets |
|
|
|
|
|
|
|
|
|
$ |
4,898 |
|
|
$ |
5,722 |
|
The following table reconciles our segment information to the consolidated financial information
for the three and nine months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail segment |
|
$ |
38,133 |
|
|
$ |
34,045 |
|
|
$ |
121,611 |
|
|
$ |
118,378 |
|
Wholesale segment |
|
|
383 |
|
|
|
9,984 |
|
|
|
4,639 |
|
|
|
33,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated |
|
$ |
38,516 |
|
|
$ |
44,029 |
|
|
$ |
126,250 |
|
|
$ |
151,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Segment results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail segment |
|
$ |
(6,251 |
) |
|
$ |
(2,873 |
) |
|
$ |
(4,114 |
) |
|
$ |
(9,045 |
) |
Wholesale segment |
|
|
128 |
|
|
|
3,429 |
|
|
|
904 |
|
|
|
10,247 |
|
Depreciation and amortization |
|
|
(5,326 |
) |
|
|
(2,398 |
) |
|
|
(12,502 |
) |
|
|
(9,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated operating loss |
|
$ |
(11,449 |
) |
|
$ |
(1,842 |
) |
|
$ |
(15,712 |
) |
|
$ |
(8,329 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14. SUBSEQUENT EVENTS
On October 23, 2006, we entered into a definitive agreement to sell approximately 300 of our
VoIP-based lines to CommX Holdings, Inc., a privately-held provider of business-class voice
services using VoIP, headquartered in Tampa, Florida. The lines, located in Tampa, Florida and New
York City, represent all of our VoIP-based business. We are also selling portions of our VoIP
network. We expect to close the sale within several months pending regulatory approvals. The total
purchase price will depend upon the number of lines in service at the time of closing. As
discussed above in Note 5 Property and Equipment, we recorded an impairment charge of $2.6
million during the third quarter associated with this decision to sell our VoIP-based business.
15
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion together with financial statements and related notes
included in this document. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those projected in the
forward-looking statements as a result of certain factors, including, but not limited to, those
discussed in Item 1. Business, as well as Cautionary Statements Regarding Forward-Looking
Statements, and Item 1A. Risk Factors included in our Form 10-K filed with the Securities and
Exchange Commission on March 31, 2006, and other factors relating to our business and us that are
not historical facts. Factors that may affect our results of operations include, but are not
limited to, our limited operating history and cumulative losses, access to financing, uncertainty
of customer demand, rapid expansion, potential software failures and errors, potential network and
interconnection failure, dependence on local exchange carriers, dependence on third party vendors,
dependence on key personnel, uncertainty of government regulation, legal and regulatory
uncertainties, and competition. We disclaim any obligation to update information contained in any
forward-looking statement.
OVERVIEW
We offer local and long distance telephone services in combination with enhanced communication
features accessible through the telephone or the Internet. These features include Personal Voice
Assistant (PVA), Find-Me, Notify-Me, caller identification, call waiting and speed dialing.
PVA allows users to store contacts in a virtual address book and then access and utilize that
information by voice from any telephone. PVA users can also send voice e-mails. We provide
advanced, integrated telecommunications services targeted to residential and business customers.
We have successfully deployed Cisco soft switches in the Tampa and New York City markets, which
allows us to provision VoIP services. In addition to providing our services on a retail basis, we
are also providing these services on a wholesale basis. Our wholesale services provide other
companies the ability to utilize our telephone exchange services, enhanced services platform,
infrastructure and back-office operations to provide services to retail and business customers on a
private label basis. For management purposes, we are organized into two reportable operating
segments: retail services and wholesale services. As discussed in Note 6 to the consolidated
financial statements, during second quarter we substantially completed our acquisition of all of
the lines for which we previously provided wholesale services. The nature of our business is
rapidly evolving, and we have a limited operating history.
RESULTS OF OPERATIONS
The following discussion of results of operations is by business segment. Management evaluates the
performance of each business unit based on segment results, after making adjustments for unusual
items. Unusual items are transactions or events that are included in our reported consolidated
results, but are excluded from segment results due to their non-recurring or non-operational
nature. See our segment footnote to our consolidated financial statements for a reconciliation of
segmented results to the consolidated financial information.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
|
|
|
ended September 30, |
|
|
Percentage of Revenues |
|
Total revenues by segment (in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Retail Segment |
|
$ |
38.1 |
|
|
$ |
34.0 |
|
|
|
99.0 |
% |
|
|
77.3 |
% |
Wholesale segment |
|
|
0.4 |
|
|
|
10.0 |
|
|
|
1.0 |
% |
|
|
22.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
38.5 |
|
|
$ |
44.0 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Percentage of Revenues |
|
Total revenues by segment (in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Retail Segment |
|
$ |
121.6 |
|
|
$ |
118.4 |
|
|
|
96.3 |
% |
|
|
77.9 |
% |
Wholesale segment |
|
|
4.6 |
|
|
|
33.6 |
|
|
|
3.7 |
% |
|
|
22.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
126.2 |
|
|
$ |
152.0 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Two significant drivers impact our revenues: number of lines in service and average (monthly)
revenue per unit (ARPU). The more significant driver impacting our changes in revenue is the
number of lines in service. The table below provides a detailed break-down
of our lines:
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average lines in service |
|
|
Average lines in service |
|
|
|
for the three months ended |
|
|
for the nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
Type of Service |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Bundled residential services |
|
|
134,305 |
|
|
|
132,436 |
|
|
|
151,487 |
|
|
|
154,453 |
|
Bundled business services |
|
|
39,311 |
|
|
|
44,121 |
|
|
|
44,135 |
|
|
|
45,259 |
|
1+ long distance services |
|
|
24,898 |
|
|
|
34,509 |
|
|
|
26,758 |
|
|
|
36,742 |
|
Wholesale services |
|
|
|
|
|
|
192,942 |
|
|
|
17,560 |
|
|
|
236,552 |
|
VoIP |
|
|
3,107 |
|
|
|
5,288 |
|
|
|
3,269 |
|
|
|
3,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lines under management |
|
|
201,620 |
|
|
|
409,296 |
|
|
|
243,208 |
|
|
|
476,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending lines in service |
|
|
|
as of |
|
|
|
September 30, |
|
Type of Service |
|
2006 |
|
|
2005 |
|
Bundled residential services |
|
|
117,362 |
|
|
|
120,262 |
|
Bundled business services |
|
|
36,245 |
|
|
|
43,218 |
|
1+ long distance services |
|
|
24,334 |
|
|
|
33,090 |
|
Wholesale services |
|
|
|
|
|
|
173,460 |
|
VoIP |
|
|
3,021 |
|
|
|
5,357 |
|
|
|
|
|
|
|
|
Total lines under management |
|
|
180,962 |
|
|
|
375,387 |
|
|
|
|
|
|
|
|
Average and ending lines in service for 2006 include the lines purchased from Sprint. See
Note 6 Intangible Assets.
ARPU provides us with a business measure as to the average monthly revenue generation attributable
to each line in service, by business segment. ARPU is calculated by taking total revenues over a
period divided by the number of months in the period to calculate the average revenue per month and
this total is divided by the average lines in service during the period. We use this measure when
analyzing our retail services business, but not when assessing our wholesale services business for
the reasons summarized earlier within this section. The following table provides a detail of our
ARPU:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the nine months ended |
|
|
ended September 30, |
|
September 30, |
Average revenue per unit in service |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Bundled residential services |
|
$ |
79.17 |
|
|
$ |
70.73 |
|
|
$ |
74.45 |
|
|
$ |
71.65 |
|
Bundled business services |
|
$ |
44.94 |
|
|
$ |
34.75 |
|
|
$ |
42.80 |
|
|
$ |
36.09 |
|
1+ long distance services |
|
$ |
12.05 |
|
|
$ |
12.56 |
|
|
$ |
12.87 |
|
|
$ |
12.40 |
|
Price increases went into effect in the fourth quarter of 2005, causing the ARPU to increase for
the three and nine months ended September 30, 2006 as compared to the same periods in 2005.
The company expects both its retail and wholesale revenue to decline in 2006. The expected
decrease is the result of the sale of access lines to Access Integrated Networks, Inc., termination
of the companys wholesale operations, the agreement to sell all of our VoIP-based lines and normal
attrition of the remaining customer base. The decrease should be partially offset by the
acquisition of access lines from Sprint and the rate changes noted above.
17
Retail Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
|
Retail segment revenues by type |
|
ended September 30, |
|
|
Percentage of Revenues |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Bundled residential services |
|
$ |
31.9 |
|
|
$ |
28.1 |
|
|
|
83.7 |
% |
|
|
82.7 |
% |
Bundled business services |
|
|
5.3 |
|
|
|
4.6 |
|
|
|
13.8 |
% |
|
|
13.5 |
% |
1+ long-distance services |
|
|
0.9 |
|
|
|
1.3 |
|
|
|
2.5 |
% |
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
38.1 |
|
|
$ |
34.0 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
|
|
Retail segment revenues by type |
|
September 30, |
|
|
Percentage of Revenues |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Bundled residential services |
|
$ |
101.5 |
|
|
$ |
99.6 |
|
|
|
83.5 |
% |
|
|
84.1 |
% |
Bundled business services |
|
|
17.0 |
|
|
|
14.7 |
|
|
|
14.0 |
% |
|
|
12.4 |
% |
1+ long-distance services |
|
|
3.1 |
|
|
|
4.1 |
|
|
|
2.5 |
% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
121.6 |
|
|
$ |
118.4 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2006, the increases in bundled residential and bundled
business revenue as compared to the same period in 2005, were primarily the result of the
conversion of Sprint wholesale lines to the retail segment in addition to the price increases
mentioned above. The decline in 1+ long distance revenue for these same comparative periods was
primarily the result of the decline in 1+ long distance lines.
During the nine months ended September 30, 2006, bundled business and bundled residential revenue
increased as compared to the same period in 2005 due to the conversion of the Sprint lines as well
as price increases, offset slightly by decreases in average lines in service. The decrease in 1+
long distance revenue for these same comparative periods was attributable to the decreases in
average lines in service during the nine month period in 2006 as compared to 2005.
Wholesale Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
|
Wholesale segment revenues by |
|
ended September 30, |
|
|
Percentage of Revenues |
|
type (in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Sprint |
|
$ |
0.4 |
|
|
$ |
10.0 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
0.4 |
|
|
$ |
10.0 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
|
|
Wholesale segment revenues by |
|
September 30, |
|
|
Percentage of Revenues |
|
type (in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Sprint |
|
$ |
4.6 |
|
|
$ |
33.6 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
4.6 |
|
|
$ |
33.6 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sprint wholesale lines have decreased from 173,460 at September 30, 2005 to zero at September 30,
2006, resulting in a significant decline in wholesale revenue. Given our decision to exit the
wholesale services offering, we do not expect to have any significant wholesale revenue going
forward.
18
Network Operations
Our network operations expense primarily consists of fixed and variable transmission expenses for
the leasing of the UNE-P components from ILECs, domestic and international charges from service
level agreements with IXCs, and USF and certain other regulatory charges. The following table
shows the detail by segment of network operations expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network operations expense, exclusive of |
|
For the three months |
|
|
Percentage of Segment |
|
depreciation and amortization expense, by |
|
ended September 30, |
|
|
Revenues |
|
segment (in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Retail Segment |
|
$ |
23.1 |
|
|
$ |
18.7 |
|
|
|
60.5 |
% |
|
|
55.0 |
% |
Wholesale Segment |
|
|
0.2 |
|
|
|
5.2 |
|
|
|
62.9 |
% |
|
|
52.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Network Operations Expense |
|
$ |
23.3 |
|
|
$ |
23.9 |
|
|
|
60.5 |
% |
|
|
54.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network operations expense, exclusive of |
|
For the nine months ended |
|
|
Percentage of Segment |
|
depreciation and amortization expense, by |
|
September 30, |
|
|
Revenues |
|
segment (in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Retail Segment |
|
$ |
73.5 |
|
|
$ |
63.0 |
|
|
|
60.5 |
% |
|
|
53.2 |
% |
Wholesale Segment |
|
|
2.8 |
|
|
|
17.7 |
|
|
|
59.7 |
% |
|
|
52.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Network Operations Expense |
|
$ |
76.3 |
|
|
$ |
80.7 |
|
|
|
60.4 |
% |
|
|
53.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the detail by type of network operations expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network operations expense, exclusive of |
|
For the three months |
|
|
Percentage of Network |
|
depreciation and amortization, by type (in |
|
ended September 30, |
|
|
Operations |
|
millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Bundled residential services |
|
$ |
19.1 |
|
|
$ |
15.2 |
|
|
|
82.1 |
% |
|
|
63.6 |
% |
Bundled business services |
|
|
3.8 |
|
|
|
3.3 |
|
|
|
16.2 |
% |
|
|
13.8 |
% |
1+ long distance services |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.7 |
% |
|
|
0.8 |
% |
Wholesale services |
|
|
0.2 |
|
|
|
5.2 |
|
|
|
1.0 |
% |
|
|
21.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23.3 |
|
|
$ |
23.9 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network operations expense, exclusive of |
|
For the nine months ended |
|
|
Percentage of Network |
|
depreciation and amortization, by type (in |
|
September 30, |
|
|
Operations |
|
millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Bundled residential services |
|
$ |
61.1 |
|
|
$ |
52.1 |
|
|
|
80.1 |
% |
|
|
64.6 |
% |
Bundled business services |
|
|
12.0 |
|
|
|
10.2 |
|
|
|
15.7 |
% |
|
|
12.6 |
% |
1+ long distance services |
|
|
0.4 |
|
|
|
0.7 |
|
|
|
0.6 |
% |
|
|
0.9 |
% |
Wholesale services |
|
|
2.8 |
|
|
|
17.7 |
|
|
|
3.6 |
% |
|
|
21.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
76.3 |
|
|
$ |
80.7 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2006, network operations expense increased as
compared to the same periods in 2005 for residential and business services. This is primarily due
to increases in ILEC fees as well as our acquisition of Sprint lines
19
that we previously served on a
wholesale basis. For 1+ long distance services, the increased ILEC fees were offset by the
decrease in lines in service, causing network operations expense to decrease from 2005 to 2006.
Network operations expense decreased significantly for wholesale services during 2006 as compared
to 2005 as a result of our acquisition of Sprint lines.
We also analyze the average expense per unit (AEPU) for network operations, similar to the ARPU
calculation for revenues. AEPU is calculated by taking total network operations expense over a
period divided by the number of months in the period to calculate the average expense per month and
this total is divided by the average lines in service during the period. The following details
AEPU for network operations expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the nine months ended |
|
|
ended September 30, |
|
September 30, |
Average network operations expense per unit |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Bundled residential services |
|
$ |
47.40 |
|
|
$ |
38.26 |
|
|
$ |
44.81 |
|
|
$ |
37.48 |
|
Bundled business services |
|
$ |
32.22 |
|
|
$ |
24.93 |
|
|
$ |
30.21 |
|
|
$ |
25.04 |
|
1+ long distance services |
|
$ |
2.68 |
|
|
$ |
1.93 |
|
|
$ |
1.66 |
|
|
$ |
2.12 |
|
During 2006, AEPU increased because of rate increases associated with the FCCs UNE-P ruling
effective March 11, 2005 and our commercial services agreements.
We expect network operations expense to increase in 2006 as we experience rate increases associated
with our commercial services agreements with ILECs.
Retail Segment
The following table provides a detail of network operations expense as a percentage of revenues by
the respective revenue types. This table excludes an analysis of the wholesale services business
segment because management does not evaluate this measure, given that network expenses related to
wholesale services are intended to be zero-margin direct cost pass-through in nature.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the nine months ended |
Network operations expense as a |
|
ended September 30, |
|
September 30, |
percentage of revenues |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Bundled residential services |
|
|
59.9 |
% |
|
|
54.1 |
% |
|
|
60.2 |
% |
|
|
52.3 |
% |
Bundled business services |
|
|
71.6 |
% |
|
|
71.7 |
% |
|
|
70.5 |
% |
|
|
69.4 |
% |
1+ long distance services |
|
|
16.5 |
% |
|
|
15.4 |
% |
|
|
14.0 |
% |
|
|
17.1 |
% |
During the three and nine months ended September 30, 2006 as compared to the same periods in the
prior year, network operations expense as a percentage of revenues increased for bundled
residential and business services. The increase is a direct result of rate increases associated
with the FCCs UNE-P ruling effective March 11, 2005 and our commercial services agreements with
Qwest, Verizon, SBC Communications (now AT&T) and BellSouth.
Wholesale Segment
Network operations expense from the wholesale segment decreased significantly for the three and
nine month periods ended September 30, 2006 as compared to the same periods in 2005. This was the
result of the significant decrease in wholesale lines in service during 2006.
Sales and Marketing
The sales and marketing expense primarily consists of telemarketing, direct mail, brand awareness
advertising and independent sales representative commissions and salaries and benefits paid to
employees engaged in sales and marketing activities. The following table shows the detail by
segment of sales and marketing expense:
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
Percentage of Segment |
|
|
|
ended September 30, |
|
|
Revenues |
|
Sales & marketing expense by segment (in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Retail Segment |
|
$ |
0.9 |
|
|
$ |
2.6 |
|
|
|
2.5 |
% |
|
|
7.6 |
% |
Wholesale segment |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales & Marketing Expense |
|
$ |
0.9 |
|
|
$ |
2.6 |
|
|
|
2.5 |
% |
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
Percentage of Segment |
|
|
|
September 30, |
|
|
Revenues |
|
Sales & marketing expense by segment (in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Retail Segment |
|
$ |
3.6 |
|
|
$ |
11.5 |
|
|
|
3.0 |
% |
|
|
9.7 |
% |
Wholesale segment |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales & Marketing Expense |
|
$ |
3.6 |
|
|
$ |
11.5 |
|
|
|
2.9 |
% |
|
|
7.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Segment
During the three and nine months of 2006, sales and marketing expense decreased significantly as
compared to the same periods in 2005. This was mainly due to a decrease in sales commissions and
payroll related expenses. Decreases were also experienced in direct mail expenses and marketing
expenses as we have not actively marketed to VoIP or UNE-P customers in 2006.
Wholesale Segment
We are not actively seeking any new wholesale relationships at this time, therefore we have not
incurred any expenses related to this segment for either period presented.
General and Administrative
General and administrative expense primarily consists of employee salaries and benefits, outsourced
services, bad debt expense, billing and collection costs, occupancy costs, legal and provisioning
costs. The following table shows the detail by segment of general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
Percentage of Segment |
|
General & administrative expense by |
|
ended September 30, |
|
|
Revenues |
|
segment (in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Retail Segment |
|
$ |
17.8 |
|
|
$ |
15.6 |
|
|
|
46.7 |
% |
|
|
45.9 |
% |
Wholesale segment |
|
|
0.0 |
|
|
|
1.4 |
|
|
|
0.0 |
% |
|
|
14.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total General & Administrative Expense |
|
$ |
17.8 |
|
|
$ |
17.0 |
|
|
|
46.3 |
% |
|
|
38.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
Percentage of Segment |
|
General & administrative expense by |
|
September 30, |
|
|
Revenues |
|
segment (in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Retail Segment |
|
$ |
46.0 |
|
|
$ |
52.9 |
|
|
|
37.8 |
% |
|
|
44.7 |
% |
Wholesale segment |
|
|
1.0 |
|
|
|
5.7 |
|
|
|
20.8 |
% |
|
|
17.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total General & Administrative Expense |
|
$ |
47.0 |
|
|
$ |
58.6 |
|
|
|
37.2 |
% |
|
|
38.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses during the three months ended September 30,
2006 as compared to the same period in 2005 is primarily attributable to increases in bad debt
expenses, tax and licenses expenses and customer provisioning
21
expenses. Taxes and licenses expense
increased due to a one-time assessment we received and the customer provisioning expenses increased
as a result of a lump-sum penalty charged to us by a vendor. General and administrative expenses
decreased for the nine months ended September 30, 2006 as compared to the same period in 2005 due
to decreases in payroll and payroll related expenses, hardware and software support expenses and
collection expenses. These decreases were partially offset by increases in customer provisioning
expenses and legal fees.
We have improved our operating costs and overall operations. Decreases in total lines in service
have directly impacted our general and administrative needs, causing a significant reduction in
many of the expense items listed above. We anticipate general and administrative expenditures will
decrease in total into the future as management continues to rationalize its operating cost
structure. We will continue to evaluate our operations for efficiencies and our employee staffing
requirements as they relate to increased efficiencies or needs to expand or outsource services.
Retail Segment
The increases and decreases in general and administrative expenses for the retail segment are
explained above.
Included in the retail services general and administrative expense are all employee benefits
expenses, occupancy, insurance, and other indirect or overhead-related expenses as only direct
costs are recorded within our wholesale services business segment.
Wholesale Segment
The decreases in general and administrative expense for the three and nine months ended September
30, 2006 as compared to the same periods in 2005 are a direct result of our acquisition of the
Sprint wholesale lines.
Loss on Impairment of Assets
As a result of the decision to sell our VoIP-based business and various portions of our VoIP
network as discussed in Note 14 Subsequent Events, management performed an assessment of the
value of our VoIP assets, which include computer equipment, software, software development,
switching equipment and leasehold improvements. In the third quarter of 2006, it was determined
that, based upon the undiscounted future cash flows, the carrying amount of the VoIP assets would
not be recoverable.
The carrying value of the VoIP assets exceeded the fair value by $2.6 million, resulting in an
impairment charge. We calculated the fair value of the assets to be sold to CommX Holdings, Inc.
by using the estimated sales price as stated in the agreement. The fair value of the remaining
assets was determined based upon market prices for similar assets advertised for sale. The $2.6
million impairment charge was recorded in our retail segment.
Depreciation and Amortization
Depreciation and amortization expense increased for the three and nine months ended September 30,
2006 as compared to the prior year periods. The increase was the result of the amortization expense
related to our customer list intangible that was created upon the acquisition of the Sprint lines
in 2006.
Interest and Other Income
Interest and other income primarily consists of interest charged to our bundled residential and
business customers for not paying their bills on time and income from interest earned on our cash
balances.
During the three and nine months ended September 30, 2006, interest and other income includes an
$8.2 million gain from a legal settlement and $2.6 million of proceeds from the sale of access
lines to Access Integrated Networks, Inc.
During the nine months ended September 30, 2005, interest and other income includes $5.8 million of
lawsuit proceeds from a legal settlement.
Interest and Other Expense
Interest and other expense includes late fees for vendor payments, discount fees related to our
accounts receivable financing agreement, interest related to the asset based loan with Textron and
our standby credit facility, capital leases and our other debt obligations.
The decreases in interest and other expense during the three and nine months ended September 30,
2006 as compared to the same periods in 2005 were primarily attributable to the decrease in the
outstanding balance of our loan payable to The 1818 Fund, L.P.
22
LIQUIDITY AND CAPITAL RESOURCES
Our inability to operate profitably and to consistently generate cash flows from operations and our
reliance therefore on external funding either from loans or equity raise substantial doubt about
our ability to continue as a going concern.
The accompanying consolidated financial statements were prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business. The realization of assets and the satisfaction of liabilities in the normal course of
business is dependent upon, among other things, our ability to operate profitably, to generate cash
flow from operations and to obtain funding adequate to fund its business.
Our operations are subject to certain risks and uncertainties, particularly related to the
evolution of the regulatory environment, which impacts our access to and cost of the network
elements that we utilize to provide services to our customers.
We have incurred significant losses since our inception as a result of developing our business,
performing ongoing research and development, building and maintaining our network infrastructure
and technology, the sale and promotion of our services, and ongoing administrative expenditures.
As of September 30, 2006, we had an accumulated deficit of approximately $432.2 million and $0.4
million in cash and cash equivalents. We have funded our expenditures primarily through operating
revenues, private securities offerings, our asset based loan, our standby credit facility, a
sale-leaseback credit facility, an accounts receivable factoring facility and an initial public
offering.
For the nine months ended September 30, 2006, net cash provided by operating activities was $4.9
million as compared to $2.1 million used in operating activities for the same period in the prior
year.
On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo). The agreement provides for the sale of up to $33 million of our accounts
receivable on a continuous basis to Thermo, subject to selection criteria as defined in the
contract.
On December 15, 2005, we borrowed $1.0 million from the 1818 Fund III, L.P. (the Fund) in order
to take advantage of a tax settlement with the State of New York. On January 12, 2006, we borrowed
$1.0 million from the Fund for general corporate purposes. In connection with the loan, and the
previous $1.0 million loan received December 15, 2005, we delivered to the Fund a promissory note
bearing interest at 12% annually and due on demand and a mortgage on certain real property we own
in Atmore, Alabama where we have an operations center. Under the promissory note we may be required
to grant additional security to the Fund.
Our net cash used in investing activities was $2.9 million for the nine months ended September 30,
2006, compared to $2.2 million for the same period in the prior year. The increase was
attributable to purchasing local access lines from Sprint in 2006, offset by a reduction in our
capital expenditures.
For the nine months ended September 30, 2006, net cash used in financing activities was $1.7
million as compared to $3.1 million provided by financing activities for the same period in 2005.
This decrease in 2006 is primarily the result of the purchase of local access lines from Sprint in
2006 and the issuance of preferred stock in 2005.
Over the course of the first five months in 2006, we acquired 111,697 UNE-P local access lines from
Sprint for which we previously provided services on a wholesale basis. We acquired the lines
pursuant to a definitive agreement dated October 25, 2005. Under the agreement we purchased the
lines for $11.2 million, $5.5 million of which has been paid as of September 30, 2006. The total
purchase price includes $1.3 million that was escrowed during the latter part of 2005. The
remaining purchase price will be paid in monthly installments through July 2007.
On March 3, 2006 we initiated a reduction in force which terminated the employment of approximately
118 employees. All post termination wages and salaries were paid out as of April 7, 2006. In
association with the reduction in force we have ceased actively marketing our IP telephony
services.
In June 2006, we sold a building to a related party for cash proceeds of $0.4 million. The
proceeds were used to payoff our note payable to Corman Elegre and to make a small principal
paydown on our $2 million loan from the Fund mentioned above. We recorded a $0.1 million loss
associated with the sale.
Effective July 27, 2006, we finalized a settlement with an ILEC over disputed balances that reduced
our accounts payable balance by $12.1 million. We paid a total of $3.9 million. The settlement
resulted in a net gain of approximately $8.2 million that is included in interest and other income
in our third quarter statement of operations.
On August 8, 2006 and September 6, 2006, we completed the sale of 13,439 and 13,923 local access
lines to Access Integrated Networks, Inc., a privately-held telephone company headquartered in
Macon, Georgia. The sale was pursuant to an Agreement for Purchase and Sale of Customer Access
Lines that we entered into with Access Integrated Networks, Inc. on February 13, 2006. The sales
price for these lines was $2.6 million. In addition, Access loaned to us $0.5 million for which we
delivered a one-year, non-interest bearing promissory note.
23
On October 23, 2006, we entered into a definitive agreement to sell approximately 300 of our
VoIP-based lines to CommX Holdings, Inc., a privately-held provider of business-class voice
services, headquartered in Tampa, Florida. The lines, located in Tampa, Florida and New York City,
represent all of our VoIP-based business. We are also selling portions of our VoIP network. We
expect to close the sale within several months pending regulatory approvals. The total purchase
price will depend upon the number of lines in service at the time of closing. As a result of this
agreement to sell our VoIP-based lines, we expect our VoIP revenues to decline during the fourth
quarter of 2006 and to cease sometime during the first half of 2007. As discussed below in Note 5
Property and Equipment, we recorded an impairment charge of $2.6 million during the third quarter
associated with this decision to sell our VoIP-based business.
DEBT INSTRUMENTS
Accounts Receivable Financing
On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo). The agreement provides for the sale of up to $22 million of our accounts
receivable on a continuous basis to Thermo, subject to selection criteria as defined in the
contract.
During October 2005, we signed an amendment to our accounts receivable financing agreement with
Thermo. The amendment increases the amount of accounts receivable that we can sell to Thermo from
$22 million to $26 million, subject to selection criteria as defined in the original contract. The
discount rate also increases from 2.5% to 2.75%. On February 1, 2006, we amended our accounts
receivable financing facility once more by increasing the facility to $33 million.
ILEC, IXC AND RELATED DISPUTED CHARGES
Since our existence we have disputed and continue to dispute significant charges from the various
ILECs, IXCs, and certain other carriers providing us services. We have a policy of treating all
charges that we believe are without merit, but are still being presented on a bill to us as
disputes, regardless of the age of the dispute. Our outstanding disputes at September 30, 2006 and
2005 are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
Outstanding Disputes at September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
Alternatively billed services |
|
$ |
0.1 |
|
|
$ |
6.0 |
|
Late fees for non-payment of disputed charges |
|
|
0.7 |
|
|
|
5.8 |
|
Billing errors |
|
|
1.6 |
|
|
|
4.8 |
|
All others |
|
|
1.2 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
$ |
3.6 |
|
|
$ |
18.4 |
|
The late fees are accumulating from all of our disputes as we do not pay for disputed items and
therefore incur and accumulate late fees for these disputed billings.
We believe that we have adequately accrued for our disputes and we believe our maximum exposure for
these charges is $3.6 million. However, we do not believe that all of these charges are valid and
intend to continue our dispute and non-payment of these charges.
Effective July 27, 2006, we finalized a settlement with an ILEC over disputed balances that reduced
our accounts payable balance by $12.1 million. We paid a total of $3.9 million. The settlement,
which was contingent upon final payment of the full $3.9 million, resulted in a net gain of
approximately $8.2 million that is reflected in our third quarter statement of operations.
RELATED PARTY TRANSACTIONS
We recorded interest on our related party debt of $0.1 million and $0.5 million during the three
months ended September 30, 2006 and 2005, respectively, and we recorded interest of $0.2 million
and $1.6 million during the nine months ended September 30, 2006 and 2005, respectively.
In June 2006, we sold a building to a related party for cash proceeds of $0.4 million. The
proceeds were used to payoff our note payable to Corman Elegre and to make a small principal
paydown on our $2 million loan from the Fund mentioned above. We recorded a $0.1 million loss
associated with the sale.
24
SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
See Note 3 Significant Accounting Policies and Recent Accounting Pronouncements and Note 8
Stock-Based Compensation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into financial instruments for trading or speculative purposes and do not currently
utilize derivative financial instruments. Our operations are conducted primarily in the United
States and as such are not subject to material foreign currency exchange rate risk.
The fair value of our investment portfolio or related income would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature
of the major portion of our investment portfolio.
We have no material future earnings or cash flow exposures from changes in interest rates on our
long-term debt obligations, as substantially all of our long-term debt obligations are fixed rate
obligations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that material information related
to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported in
accordance with SEC rules and forms. Our management, with the participation of Chief Executive
Officer, Horace J. Davis, III and Chief Financial Officer, Donald C. Davis, has evaluated the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this
report. Based on their evaluation as of the end of the period covered by this report, Mr. Davis
and Mr. Davis have concluded that, as a result of the material weakness discussed below, our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange
Act of 1934, as amended) were not sufficiently effective to ensure that the information required to
be disclosed by us in our SEC reports was recorded, processed, summarized and reported so as to
ensure the quality and timeliness of our public disclosures in compliance with SEC rules and forms.
The areas of the internal controls that are deemed by our management to contain material weaknesses
surround the failure during the nine months ended September 30, 2006 to retain financial reporting
personnel necessary to properly identify, research, review and conclude in a timely fashion,
related to certain non-routine or complex accounting issues and related disclosures timely, and the
failure during the nine months ended September 30, 2006 to appropriately and accurately document
the Companys processes and procedures over the revenue and accounts receivable cycles, which could
affect the reported results for the accounting period.
The certifications attached as Exhibits 31.1 and 31.2 hereto should be read in conjunction with the
disclosures set forth herein.
Changes in Internal Control over Financial Reporting
As disclosed in the Companys 2005 Annual Report on Form 10-K, the Company reported material
weaknesses in the Companys internal controls surrounding the failure during the year ended
December 31, 2005 to retain financial reporting personnel necessary to properly identify, research,
review and conclude in a timely fashion, related to certain non-routine or complex accounting
issues and related disclosures timely, and the failure during the year ended December 31, 2005 to
appropriately and accurately document the Companys processes and procedures over the revenue and
accounts receivable cycles, which could affect the reported results for the accounting period.
During the
third quarter of 2006, the existing chief financial officer resigned to pursue other matters and was
replaced. Despite the change in responsibility over our financial reporting that occurred during
our most recent fiscal quarter we do not believe that the change has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Remediation of Material Weaknesses
The material weaknesses in our disclosure controls and procedures stated above in Evaluation of
Disclosure Controls and Procedures require us to make changes in internal controls over financial
reporting. As a result, we continue to build within departmental personnel the requisite skills
necessary to properly identify, research, review and conclude related to non-routine or complex
accounting issues and related disclosures timely. We also have initiated a structured process to
appropriately and accurately document our processes and procedures related to the revenue and
accounts receivable cycles. Our management believes that these changes in review procedures and
the continued building of necessary skill sets within financial reporting personnel will ensure
that the disclosed material weaknesses in reporting procedures no longer should have a material
effect on financial reporting
25
Part II
ITEM 1. LEGAL PROCEEDINGS
1. |
|
Master File Number 21 MC 92; In re Initial Public Offering Securities Litigation., in the United
States District Court for the Southern District of New York (filed June 7, 2001) |
During June and July 2001, three separate class action lawsuits were filed against us, certain of
our current and former directors and officers (the D&Os) and firms engaged in the underwriting
(the Underwriters) of our initial public offering of stock (the IPO). The lawsuits, along with
approximately 310 other similar lawsuits filed against other issuers arising out of initial public
offering allocations, have been assigned to a Judge in the United States District Court for the
Southern District of New York for pretrial coordination. The lawsuits against us have been
consolidated into a single action. A consolidated amended complaint was filed on April 20, 2002. A
Second Corrected Amended Complaint (the Amended Complaint), which is the operative complaint, was
filed on July 12, 2002.
The Amended Complaint is based on the allegations that our registration statement on Form S-1,
filed with the Securities and Exchange Commission (SEC) in connection with the IPO, contained
untrue statements of material fact and omitted to state facts necessary to make the statements made
not misleading by failing to disclose that the underwriters allegedly had received additional,
excessive and undisclosed commissions from, and allegedly had entered into unlawful tie-in and
other arrangements with, certain customers to whom they allocated shares in the IPO. The plaintiffs
in the Amended Complaint assert claims against us and the D&Os pursuant to Section 11 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated by the SEC there under. The plaintiffs in the Amended Complaint assert claims against
the D&Os pursuant to Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the SEC there under. The
plaintiffs seek an undisclosed amount of damages, as well as pre-judgment and post-judgment
interest, costs and expenses, including attorneys fees, experts fees and other costs and
disbursements. Initial discovery has begun. We believe we are entitled to indemnification from our
Underwriters.
A settlement has been reached by the plaintiffs, the issuers and insurers of the issuers. The
principal terms of the proposed settlement are (i) a release of all claims against the issuers and
their officers and directors, (ii) the assignment by the issuers to the plaintiffs of certain
claims the issuers may have against the Underwriters and (iii) an undertaking by the insurers to
ensure the plaintiffs receive not
less than $1 billion in connection with claims against the Underwriters. Hence, under the terms of
the proposed settlement our financial obligations will likely be covered by insurance. To be
binding the settlement must be approved by the court. There is no assurance that the settlement
will be finally approved by the court. On December 5, 2006 the
U.S. Court of Appeals, Second Circuit, vacated the District
Courts order granting class certification in each of six focus
cases and remanded for further proceedings. The District Court has
stayed all proceedings pending a decision from the Second Circuit as
to whether it will hear further arguments on class certification.
2. |
|
C.A. No. 04CH07882, Susan Schad, on behalf of herself and all others similarly situated, v.
Z-Tel Communications, Inc., in the Circuit Court of Cook County, Illinois, Illinois County
Department, Chancery Division, filed May 13, 2004 |
Susan Schad, on behalf of herself and all others similarly situated, filed a putative class action
lawsuit against Trinsic Communications, Inc. (formerly known as Z-Tel Communications, Inc.), our
wholly-owned subsidiary corporation, on May 13, 2004. The original complaint alleged that our
subsidiary engaged in a pattern and practice of deceiving consumers into paying amounts in excess
of their monthly rates by deceptively labeling certain line-item charges as government-mandated
taxes or fees when in fact they were not. The original complaint sought to certify a class of
plaintiffs consisting of all persons or entities who contracted with Trinsic for telecommunications
services and were billed for particular taxes or regulatory fees. The original complaint asserted a
claim under the Illinois Consumer Fraud and Deceptive Businesses Practices Act and sought
unspecified damages, attorneys fees and court costs. On June 22, 2004, we filed a notice of
removal in the state circuit court action, removing the case to the Federal District Court for the
Northern District of Illinois, Eastern Division, C.A. No. 04 C 4187. On July 26, 2004, the
plaintiff filed a motion to remand the case to the state circuit court. On January 12, 2005, the
federal court granted the motion and remanded the case to the state court. On October 17, 2005, the
state court heard argument on our motion to dismiss the lawsuit and granted that motion, in part
with prejudice. The court dismissed with prejudice the claims relating to the E911 Tax, the
Utility Users Tax, and the Communications Service Tax. The court found that those tax charges
were specifically authorized by state law or local ordinance, and thus cannot be the basis of a
Consumer Fraud claim. The court also dismissed (but with leave to replead) the claims relating to
the Interstate Recovery Fee and the Federal Regulatory Compliance Fee. The court determined
that the plaintiff had failed to allege how she was actually damaged by the allegedly deceptive
description of the charges. On November 15, 2005, the plaintiff filed a First Amended Class Action
Complaint alleging that Trinsic mislabeled its Interstate Recovery Fee and Federal Cost Recovery
Fee in supposed violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. As
with the original complaint, the First Amended Class Action Complaint seeks damages, fees, costs,
and class certification. We filed a further Motion to Dismiss which was heard by the court on April
3, 2006. The court granted our motion by dismissing the plaintiffs claims for unfair practices
under the Illinois Consumer Fraud and Deceptive Business Practices Act and dismissing in part the
plaintiffs claims for deceptive practice under the Act. The court determined that the plaintiff
did not state sufficient facts indicating that her alleged damages were caused by our alleged
deception. On April 24, 2006, the plaintiff filed a Second Amended Class Action Complaint again
alleging that Trinsic mislabeled its Interstate Recovery Fee and Federal Cost Recovery Fee in
supposed violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The Second
Amended Class Action Complaint seeks damages, fees, costs, and class certification. We moved to
dismiss this Second Amended Class Action Complaint, and the Court heard the motion on August 28,
2006. On September 27, 2006, the court issued a ruling allowing the plaintiffs remaining claims
to stand and ordered us to answer the Second Amended Complaint on October 4, 2006. We have filed
an answer denying all material allegations. Discovery has recently begun. We believe the
plaintiffs allegations are without merit and intend to defend the lawsuit vigorously, but we
cannot predict the outcome of this litigation with any certainty.
26
3. |
|
Case. No. 0410453, Wilder Corporation of Delaware, Inc. v. Trinsic
Communications, Inc., In the Circuit Court of the Thirteenth Judicial
Circuit in and for Hillsborough County, Florida, Civil Division,
Division G, filed November 19, 2004 |
On November 19, 2004, the landlord of our principal Tampa, Florida facility sued us seeking a
declaration of its rights and obligations under the lease and damages for breach of contract. We
assert that the landlord has failed to provide certain services in accordance with the lease,
including maintenance of air conditioning and emergency electrical generating systems crucial to
our operations. We have taken steps necessary to provide this maintenance and have offset the costs
of these measures against the rent, which we believe we are entitled to do under the lease. Thus
far we have withheld approximately $0.3 million. We also believe we are entitled to reimbursement
from the landlord for costs associated with improvements to the leased space.
4. |
|
Case. No. 0410441, Beneficial Management Corporation of America. v.
Trinsic Communications, Inc., In the Circuit Court of the Thirteenth
Judicial Circuit in and for Hillsborough County, Florida, Civil
Division, Division F, filed November 19, 2004 |
On November 19, 2004, a provider of parking spaces for our Tampa facilities sued us for parking
fees in excess of $0.3 million. Pursuant to our lease we are entitled to a number of free spaces
and we are obligated to pay for additional usage of parking spaces. We have entered into a
settlement understanding with the plaintiff. Under the settlement, we agreed to pay a total of $0.2
million, payable in installments over seven months. We made the final payment on November 1, 2006.
5. |
|
Case. No. 3:06-CV-4858-EDL Oracle USA, Inc. and Oracle International
Corporation v. Trinsic Communications, Inc. In the United States
District Court for the Northern District of California, filed August
11, 2006. |
On August 11, 2006, Oracle sued us for payment of licensing fees alleging claims for copyright
infringement, breach of contract, account stated, open book account, and goods sold and delivered
based upon our license. We disagreed with the terms of our usage of the licensed software. We
have entered into a tentative settlement agreement with Oracle. Under
the tentative agreement we agree to pay $0.3
million over a 10 month period beginning in December 2006.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on September 28, 2006, the following proposal was
adopted by the margins indicated:
|
1. |
|
To elect the following individuals to the Board of Directors to hold office until their
successors are elected and qualified: |
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
Nominee |
|
For |
|
|
Withheld |
|
Lawrence C. Tucker |
|
|
14,592,428 |
|
|
|
|
|
Roy Neel |
|
|
14,592,428 |
|
|
|
|
|
The terms of office of the following other directors continued after the meeting:
Andrew C. Cowen
Raymond L. Golden
W. Andrew Krusen
Richard F. LaRoche, Jr.
27
ITEM 6. EXHIBITS
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION |
3.1
|
|
Amended and Restated Certificate of Incorporation of Trinsic, Inc. as
amended. Incorporated by reference to the correspondingly numbered exhibit
to our Annual Report on Form 10-K for the year ended December 31, 2004 filed
April 15, 2005. |
|
|
|
3.2
|
|
Amended and Restated Bylaws of Trinsic, as amended. Incorporated by
reference to the correspondingly numbered exhibit to our Quarterly report on
Form 10-Q for the quarter ended September 30, 2004 filed November 15, 2004. |
|
|
|
3.3
|
|
Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Trinsic, Inc. Incorporated by reference to Exhibit 3.3 to
our Form 8-K filed September 28, 2005. |
|
|
|
4.1
|
|
Form of Common Stock Certificate. Incorporated by reference to the
correspondingly numbered exhibit to our Annual Report on Form 10-K for the
year ended December 31, 2004 filed April 15, 2005. |
|
|
|
4.2
|
|
See Exhibits 3.1, 3.2 and 3.3. of this report for provisions of the Amended
and Restated Certificate of Incorporation, as amended, and our Bylaws, as
amended, defining rights of security holders. |
|
|
|
4.9
|
|
Registration Rights Agreement between and among us and The 1818 Fund III,
L.P. Incorporated by reference to the correspondingly numbered exhibit to
our Quarterly Report on Form 10-Q for the quarter ended September 30, 2000,
filed on November 14, 2000. |
|
|
|
4.11
|
|
Certificate of Designation of Series F Junior Participating Preferred Stock.
Incorporated by reference to the correspondingly numbered exhibit to our
Annual Report on Form 10-K for the year ended December 31, 2000, filed on
March 30, 2001. |
|
|
|
4.12
|
|
Rights Agreement dated as of February 19, 2001 between Z-Tel Technologies,
Inc. and American Stock Transfer & Trust Company, as Rights Agent, as
amended July 2, 2001. Incorporated be reference to the correspondingly
numbered exhibit to our quarterly report on Form 10-Q for the quarter ended
June 30, 2001. |
|
|
|
4.13
|
|
Amendment No. 1 to Rights Agreement dated as of November 19, 2004 between
Z-Tel Technologies, Inc. and American Stock Transfer & Trust Company, as
Rights Agent. Incorporated by reference to Exhibit 4.1 to our registration
statement on form 8-A/A filed on December 6, 2004. |
|
|
|
4.14
|
|
Amendment No. 2 to Rights Agreement dated as of July 19, 2005, between
Trinsic, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
Incorporated by reference to Exhibit 4.1 to our registration statement on
form 8-A/A filed on July 21, 2005. |
|
|
|
4.15
|
|
Stock and Warrant Purchase Agreement, dated as of July 2, 2001, by and
between us, D. Gregory Smith, and others. Incorporated by reference to
Exhibit 1 to Amendment No. 1 of the Schedule 13D filed July 12, 2001 with
respect to our common stock by, among other persons, The 1818 Fund III, L.P. |
|
|
|
4.20
|
|
Exchange and Purchase Agreement dated July 15, 2005 between Trinsic, Inc.
and The 1818 Fund III, L.P. Incorporated by reference to Exhibit A to our
Form 8-K filed July 20, 2005. |
|
|
|
10.1
|
|
Employment Agreement of Horace J. Trey Davis III, dated August 15, 2005,
as amended January 30, 2006. Incorporated by reference to Exhibits A and B
of our Form 8-K filed April 20, 2006. |
28
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION |
10.2.1
|
|
1998 Equity Participation Plan. Incorporated by reference to the
correspondingly numbered exhibit to our Registration Statement on Form S-1
(File No. 333-89063), originally filed October 14, 1999, as amended and as
effective December 14, 1999. |
|
|
|
10.2.2
|
|
2000 Equity Participation Plan, as amended. Incorporated by reference to the
correspondingly numbered exhibit to our Annual Report on Form 10-K for the
year ended December 31, 2004 filed April 15, 2005. |
|
|
|
10.2.3
|
|
2004 Stock Incentive Plan. Incorporated by reference to Exhibit 4.1 to our
Registration Statement on Form S-8 filed May 8, 2005. |
|
|
|
10.3
|
|
Employment Agreement of Donald C. Davis dated August 15, 2005, as amended
June 1, 2006 and October 10, 2006. |
|
|
|
10.4
|
|
Employment Agreement of Michael M. Slauson dated August 15, 2005.
Incorporated by reference to Exhibit E of our Form 8-K filed April 20, 2006 |
|
|
|
10.5
|
|
Form of Indemnification Agreement for our executive officers and directors.
Incorporated by reference to the correspondingly numbered exhibit to our
Annual Report on Form 10-K for the year ended December 31, 2000, filed on
March 30, 2001. |
|
|
|
10.6
|
|
Employment Agreement of Paul T. Kohler dated August 15, 2005. Incorporated
by reference to Exhibit F of our Form 8-K filed April 20, 2006. |
|
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10.11
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Promissory Note, dated September 10, 1999, from Touch 1 Communications, Inc.
to William F. Corman (First Revocable Trust). Incorporated by reference to
the correspondingly numbered exhibits to our Annual Report on Form 10-K for
the year ended December 31, 2000, filed on March 30, 2001. |
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10.14
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Receivables Sales Agreement, dated as of March 28, 2005, by and between
Trinsic Communications Inc. and Touch 1 Communications s Inc., collectively
as Seller and Subservicer, and Thermo Credit, LLC, as Purchaser and Master
Servicer. Incorporated by reference to Exhibit 10.1 to our o Form 8-K filed
April 5, 2005. |
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10.15
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Promissory Note, dated December 15, 2005, from Trinsic, Inc. to The 1818
Fund III, L.P. Incorporated by reference to Exhibit A to Form 8-K filed
December 21, 2005. |
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10.16
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Agreement for Purchase and Sale of Customer Access Lines, dated October 25,
2005, by and among Sprint Communications Company L.P., Sprint Communications
Company of Virginia, Inc. and Trinsic, Inc. Incorporated by reference to the
correspondingly numbered exhibit to our Form 10-K filed March 31, 2006. |
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10.17
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Agreement for Purchase and Sale of Customer Access Lines, dated as of
February 10, 2006, between Trinsic Communications, Inc. and Access
Integrated Networks, Inc. Incorporated by reference to the correspondingly
numbered exhibit to our Form 10-Q filed May 15, 2006. |
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10.18
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Promissory Note, dated August 8, 2006, from Trinsic Communications, Inc. to
Access Integrated Networks, Inc. Incorporated by reference to Exhibit 99.1
to Form 8-K filed August 16, 2006. |
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10.19
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Agreement for Purchase and Sale of Assets, dated October 23, 2006, between
Trinsic Communications, Inc. and CommX Holdings, Inc. |
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31.1
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Certification of the Chief Executive Officer |
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31.2
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Certification of the Chief Financial Officer |
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32.1
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Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.ss.1350 |
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32.2
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Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.ss.1350 |
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of the 21st day of December 2006.
TRINSIC, INC.
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By:
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/s/ HORACE J. DAVIS, III
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Horace J. Davis, III |
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Chief Executive Officer |
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By:
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/s/ DONALD C. DAVIS |
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Donald C. Davis |
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Chief Financial Officer |
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A signed original of this report has been provided to Trinsic, Inc. and will be retained by the
Trinsic, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
30