UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2004
Commission
File No. 000-26728
TALK
AMERICA HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Delaware |
23-2827736 |
(State
or other jurisdiction of |
(I.R.S.
Employer |
incorporation
or organization) |
Identification
Number) |
|
|
12020
Sunrise Valley Drive, Suite 250 |
20191 |
Reston,
Virginia |
(zip
code) |
(Address
of principal executive offices) |
|
(703)
391-7500
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
Name
of each exchange on which registered |
None |
Not
applicable |
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, Par Value $.01 Per Share
Rights
to Purchase Series A Junior Participating Preferred Stock
(Title
of class)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes [X] No [ ]
As of
June 30, 2004, the aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the average of the high and low
prices of the common stock on June 30, 2004 of $7.73 per share as reported on
the Nasdaq National Market, was approximately $206,312,664 (calculated by
excluding solely for purposes of this form outstanding shares owned by directors
and executive officers).
As of
March 11, 2005, the registrant had issued and outstanding 27,078,605 shares of
common stock, par value $.01 per share.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
ITEMS
OMITTED PURSUANT TO RULE 12b-25
Item 6,
Item 7, Item 8, Item 9A, Item 15 - Financial Statement Schedules and Exhibits
23, 31 and 32.
TALK
AMERICA HOLDINGS, INC. AND SUBSIDIARIES
INDEX
TO FORM 10-K
FOR
THE YEAR ENDED DECEMBER 31, 2004
ITEM
NO. |
PAGE
NO. |
PART
I |
|
1.
Business |
1 |
2.
Properties |
24 |
3.
Legal Proceedings |
25 |
4.
Submission of Matters to a Vote of Security Holders
|
25 |
|
|
PART
II |
|
5.
Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities |
26 |
7A.
Quantitative and Qualitative Disclosure About Market Risk |
27 |
9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure |
28 |
9B.
Other Information |
28 |
|
|
PART
III |
|
10.
Directors and Executive Officers of the Registrant
|
28 |
11.
Executive Compensation
|
30 |
12.
Security Ownership of Certain Beneficial Owners and Management
|
33 |
13.
Certain Relationships and Related Transactions
|
34 |
14.
Principal Accounting Fees and Services |
34 |
|
|
PART
IV |
|
15.
Exhibits |
35 |
Unless
the context otherwise requires, references to "us," "we," and "our" or to "Talk
America" refer to Talk America Holdings, Inc. and its subsidiaries.
PART
I
Cautionary
Note Concerning Forward-Looking Statements
Certain of
the statements contained in this Form 10-K Report may be considered
"forward-looking statements" for purposes of the securities laws. From time to
time, oral or written forward-looking statements may also be included in other
materials released to the public. These forward-looking statements are intended
to provide our management’s current expectations or plans for our future
operating and financial performance, based on our current expectations and
assumptions currently believed to be valid. For these statements, we claim
protection of the safe harbor for forward-looking statements provided by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can be identified by the use of forward-looking words or phrases,
including, but not limited to, "believes," "estimates," "expects," "expected,"
"anticipates," "anticipated," "plans," "strategy," "target," "prospects" and
other words of similar meaning in connection with a discussion of future
operating or financial performance. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct.
All
forward-looking statements involve risks and uncertainties that may cause our
actual results to differ materially from those expressed or implied in the
forward-looking statements. This Form 10-K Report includes important information
as to risk factors in the "Business" section under the headings “Business
Strategies,” "Business Operations," "Competition" and "Regulation" and in
"Management’s Discussion and Analysis of Financial Condition and Results of
Operations." In addition to those factors discussed in this Form 10-K Report,
you should see our other reports on Forms 10-K, 10-Q and 8-K subsequently filed
with the Securities and Exchange Commission from time to time for information
identifying factors that may cause actual results to differ materially from
those expressed or implied in the forward-looking statements.
ITEM
1. BUSINESS.
OVERVIEW
Talk
America Holdings, Inc., through its subsidiaries, offers a bundle of local and
long distance phone services and internet access services to residential and
small business customers in the United States. We operate our own nationwide
long distance network and our own local network in Michigan. We currently
deliver local services primarily through the use of the unbundled network
element platforms of the incumbent local exchange companies under wholesale
operating agreements with these companies; but an increasing percentage of our
customers will be served on our network in Michigan. We have developed
integrated order processing, provisioning, leads management, billing, payment,
collection, customer service and information systems that enable us to provide
high-quality service to residential and small business customers. We provide our
customers with savings through competitively priced services and products,
simplicity through consolidated billing and award winning customer service. We
operate our own sales and customer service centers.
BUSINESS
STRATEGY
We have
built a large, profitable base of bundled phone service customers by using the
wholesale operating platforms of the incumbent local exchange companies. In
2005, we plan to migrate an additional 150,000 customers in Detroit and Grand
Rapids, Michigan to our own networking platform. In 2003, we began developing
our network in Michigan and by the end of 2004 had approximately 25,000 bundled
lines on our network and by the end of 2005 we expect to have approximately
175,000 bundled lines on our network. We have
automated the business processes required to migrate our customers off the
incumbent local exchange company platform to our network. The migration to our
network is transparent to the customer. The local
networking platform enhances our operating flexibility and provides us with the
opportunity to deliver digital subscriber line, or DSL, service to our customers
at attractive margins. In addition, local networking is an alternative to the
wholesale operating platforms of the incumbent local exchange companies, which
are effectively not available to us for new customers after March 11, 2005 and
for all customers after March 11, 2006, due to significant changes to the
Federal Communications Commission rules that required the incumbent local
exchange companies to provide us the unbundled network elements of their
operating platforms on a wholesale basis. We are expanding our network by
increasing the number of end offices of the incumbent local exchange company
where we collocate our networking equipment. However, we have not previously
developed, deployed or operated a local network of our own and of this scale and
there can be no assurance that we shall be able successfully to do so and
thereafter profitably provide local telephone services through such a network.
We are
adding internet services to our existing phone service bundle for both our
networked and non-networked customers. We believe these enhancements to our
existing services will increase our revenues and profitability from those
customers while also meeting their needs and demands and reducing our customer
turnover. In 2004 we launched our dial-up Internet access service and ended the
year with approximately 22,000 customers. In addition, we began offering digital
subscriber line, or DSL, services to customers on our local network and expect
to actively market the product in 2005 in those areas of Michigan where we have
deployed our network facilities.
Serving
the medium sized businesses in those areas where we plan to deploy network
facilities is also a component of our future business strategy. Expansion into
this business market will increase our addressable market in such an area and
will permit us to leverage our investment in our network facilities due to the
complementary telecommunication traffic or usage patterns of these business
customers and our residential and small business customers. We will consider and
pursue the acquisition of customers or networking assets to enter the business
market, complement existing networking plans or to supplement customer density
where there is a potential for deployment of network facilities, but
there can be no assurances that we will be able to do so successfully.
SERVICES
AND PRODUCTS
We
provide various bundled phone service packages, stand-alone long distance
service and internet access products to residential and small business
customers. We focus on providing consumers value through competitively priced
plans designed to fit their particular calling patterns, broad feature
selections, consolidated billing and customer service.
Bundled
Phone Services
We offer
our customers the flexibility to create their own phone service package (our
“bundled phone package”) using their current telephone number. Each bundled
phone package includes complete basic phone service with unlimited local calling
and free unlimited “member-to-member” calling anywhere our customers are
located. Customers may also select additional features and services to add in
their packages, including enhanced domestic and international calling plans,
depending on their individual needs and budgets. We ended 2004 with
approximately 671,000 billed bundled lines. However, due to the recent
significant changes to the FCC rules and our plans to increase product pricing
for our customers located outside of Michigan, we expect the number of bundled
customers to drop significantly by the end of 2005 and to continue to decrease
on an accelerated basis in 2006 outside of those areas where we have deployed
network facilities.
Features
Our
customers have the option of selecting from many different features, which they
can purchase either individually or as part of a package. We generally offer the
following features depending on the customer’s location:
Call
Waiting |
Call
Return Block |
Distinctive
Ring I |
Caller
ID |
Speed
Dialing 30 |
Distinctive
Ring II |
Caller
ID with Name |
Speed
Dialing 8 |
Ringmaster
I |
Call
Waiting with ID and Name |
Repeat
Dialing |
Ringmaster
II |
Internet
Call Waiting |
Anonymous
Call Rejection |
Custom
Toll Restriction |
Remote
Call Forwarding |
Call
Trace |
Voicemail
|
Ring
no answer Call Forward |
Call
Block |
3-way
Calling |
Busy
Call Forward |
900/976
Block |
3-way
Calling with Call Transfer |
Call
Forward Remote Access |
Privacy
Director/Mgr |
Call
Return |
Wire
Maintenance |
Non-Published
Numbers |
Additional
Listings |
Domestic
Long Distance Services
Domestic
long distance service is automatically included in each package, allowing the
customer to place long distance calls and to be billed based on their usage.
Additionally, customers have the option of adding either a statewide long
distance plan or a nationwide long distance plan as part of their telephone
service package. The statewide plan includes unlimited long distance calling
within the customer’s state, and, in some places, Canada. The nationwide long
distance plan includes unlimited long distance calling inside the United States
and to Canada and Puerto Rico.
International
Long Distance Services
We also
automatically include an international calling plan in each of our packages that
allows the customer to place international calls and to be billed based on their
usage. For customers that frequently make international calls, they may choose
one of our international calling plans that feature discounted billing options.
Long
Distance Services
We
provide 1+ long distance telecommunication services on a stand-alone basis as
well as bundled with our package plans as described above. Our long distance
service includes intrastate, interstate and international calling services as
well as calling cards. We ended 2004 with 128,000 stand-alone long distance
subscribers.
Internet
Access Products
Dial-up
Internet Services
We offer
standard and accelerated dial-up Internet access to our residential telephone
customers throughout the United States. The "accelerated" dial-up services
utilize compression, caching and other technologies that reduce the time for
certain web pages to download to users' computers when compared to standard
dial-up access services. As of December 31, 2004, we had approximately 22,000
dial-up Internet access customers.
DSL
Internet Services
We offer
digital subscriber line, or DSL, internet speeds of up to 4.0 megabytes per
second download speed and 384 kilobytes per second upload speed in the Detroit,
Michigan region where we have deployed our own local networking assets.
Generally, we make DSL available to customers who are within 16,500 feet of one
of our collocation facilities.
DSL
technology reduces the bottleneck in the transport of information, particularly
for data services, by increasing the data carrying capacity of copper telephone
lines. We believe that, for many residential customers within the geographic
areas that can be served by DSL technology, existing copper connections using
DSL technology from customer homes to our network offers a lower cost
alternative for high-quality broadband services than cable or broadband wireless
connections. As we increase the number of collocation facilities in our network
in 2005, we expect to increase our addressable market for DSL.
BUSINESS
OPERATIONS
Local
Phone Services
Overview
We offer
local services through both our own network and the unbundled network element
platform of the incumbent local exchange companies, or ILECS, including the
Regional Bell Operating Companies such as SBC, Verizon and BellSouth. The
unbundled network element platform of the incumbent local exchange companies
offer to us, in an individual or combined form, a series of unbundled network
elements that comprise the most important facilities, features, functions and
capabilities of an incumbent local exchange company's network. When offered in
the combination known as the unbundled network element platform, these
components include the loop and switching elements needed to provide local
telephone service to a customer. However, as a result of the FCC’s final rules,
beginning on March 11, 2005, the unbundled network element platform became
unavailable to us for adding new customers. Further, as of March 11, 2005 there
is a $1 increase per line, per month in the cost for us to continue providing
service to our existing customers that are on the unbundled network element
platform and as of March 11, 2006, we will no longer be able to use the
unbundled network element platform and thus will be forced to transition our
customers from the unbundled network element platform to our own network
facilities or to service them through total resale service agreements or with
elements purchased through commercial agreements that we may enter into with the
incumbent local exchange companies.
Beginning
in 2003, we deployed networking assets in Michigan and, as of December 31, 2004,
we had approximately 25,000 bundled lines on our network. We are continuing the
expansion of our network by collocating our networking equipment in the
incumbent local exchange companies’ end offices to provide service over our own
network to a larger portion of our existing customer base. By December 31, 2005
we expect to have 175,000 bundled lines on our network, and we are actively
exploring network opportunities in areas outside of Michigan, although there can
be no assurances that we will be able to economically deploy networking assets
in such areas.
In
addition to providing us with alternatives to our reliance on the unbundled
network element operating platforms of the incumbent local exchange companies,
our own local networking should provide us with certain strategic benefits such
as increased operating flexibility with respect to capability to enhance and
expand our service and product offerings for our customers and the opportunity
to increase our operating margins. In order to viably support our local network,
we must maintain a sufficient number of customers on the network.
As we
continue to pursue the development and deployment of our own networking
platform, we expect that our capital expenditures will increase from what they
were in 2004. In 2005, we expect capital expenditures, including capitalized
software development, to be approximately $43 to $47 million, primarily in
connection with the deployment of our facilities in Michigan.
Local
Network
Our local
network is comprised of equipment and facilities that are either owned or leased
by us and certain telecommunication services for which we contract with a
variety of other carriers. We maintain certain pieces of equipment in
collocation sites owned or leased by SBC, the incumbent local exchange company
in Michigan. The incumbent local exchange companies are currently required to
provide us with access to these collocation sites, however, such access can be
conditioned upon our paying charges for upgrading the power supply or physical
layout of the collocation site. Failure of the incumbent local exchange company
to provide us with access to the collocation site or access in a timely manner
will affect our ability to continue building our local network. The following
diagram outlines the basic method by which we provide our customers with local
phone service.
In order
to provide a customer with phone service on our local network, we must first
submit an order with the incumbent local exchange company to move, or “hot cut,”
the customer’s existing unbundled network element loop. The loop is the copper
telephone line that connects the customer’s premise to the incumbent local
exchange company’s switch. For our existing unbundled network element platform,
we hot cut transfer the customer’s loop from the incumbent local exchange
company’s switch to our loop carrier equipment in the collocation
site at the incumbent local exchange company’s end
office, assigned to that customer. There are limitations on the number of phone
lines the incumbent local exchange company is required to hot cut over to our
network per day at a particular end office.
Upon
confirmation that the customer line has been switched to either our digital loop
carrier and digital subscriber line access multiplexer equipment or our
broadband loop carrier equipment, we update numerous external databases,
including E911 databases, which, as the customer’s local phone provider, we are
required to timely and accurately update.
The
customer lines in each collocation site are aggregated and connected to our
Lucent 5ESS-2000 switch located in Southfield, Michigan, using DS3 or higher
capacity transmission equipment that we lease primarily from SBC, the incumbent
local exchange company, supplemented by leases with competitive access
providers. This transmission is referred to as transport. As we expand our local
switching capacity during 2005, these dedicated transport facilities, dark fiber
(otherwise unused fiber optic cable that is leased by us for transport), and
entrance facilities under the FCC’s rules may be unavailable to us on an
unbundled basis at cost-based rates along certain routes. This may adversely
impact us where our own switching facilities have been deployed and could
substantially impede our plans to deploy additional network facilities. We could
be forced to use other means to effect this deployment, including the use of
facilities purchased from the incumbent local exchange carrier at higher
tariffed special access rates or transport services purchased from other
competitive access providers. In either event, our cost of service
could rise dramatically and our plans for a service roll-out using our own
network facilities could be delayed substantially or derailed entirely.
Our
Lucent 5ESS-2000 switch is generally considered extremely reliable and features
the Digital Networking Unit-SONET technology. The Digital Networking Unit is a
switching interface that is designed to increase the reliability of the
5ESS-2000 and to provide much greater capacity in a significantly smaller
footprint. Our switch is connected to other carriers in the public switched
telephone network through circuit trunking equipment. We lease the circuit
trunking equipment primarily from incumbent local exchange companies. If the
incumbent local exchange companies are no longer required to provide this
circuit trunking equipment or to provide it at Total
Element Long Run Incremental Cost, or TELRIC,
based rates, we will be forced to acquire this trunking equipment at higher
rates from either a competitive access provider, if available, or, if they are
willing to lease the trunking equipment to us, from the incumbent local exchange
company. The equipment that comprises this physical layer of our network can
support both voice and data communications technologies.
As of
March 14, 2005, we have customers on our local network in 14 collocation sites
around the Detroit, Michigan and one switch in Southfield, Michigan. We expect
to have customers in 81 collocation sites in Michigan as of March 11, 2006. In
Michigan, SBC is currently only required to hot cut over to our network 20 lines
related to new customers per end office per day. Migration of existing customers
or acquired customers is on a negotiated basis. In addition to the difficulties
and uncertainties of operating a service that we have not previously operated,
operating our own local switches will, as it does with our long distance
switches, subject us to the risk of significant interruption. Fires or natural
disasters, for example, could cause damage to our switching equipment or to
transmission facilities connecting our switches. Any interruption in our
services over our network caused by such damage could have a material adverse
impact on our financial condition and results of operations. In such
circumstances, we could attempt to minimize the interruption of our service by
carrying traffic through one of our other local switches or obtaining a portable
disaster recovery switch from Lucent (discussed below). However, we have not
previously developed, deployed or operated a local network of our own or of this
scale and there can be no assurance that we shall be able successfully to do so
and thereafter profitably provide local telephone services through such a
network. In
addition, we are dependent upon a variety of vendors for the provision of
equipment necessary for the construction, deployment and migration of customers
to our local network, and failure of these vendors to deliver the equipment in a
timely manner may result in delays in the deployment, and ultimately, the
migration of customers to our network.
Our
network described above, like most networks today, carries local voice traffic
via circuit switch-based networks. Circuit switch-based systems establish a
dedicated channel for each telecommunication signal (such as a telephone call
for voice or fax), maintain the channel for the duration of the call, and
disconnect the channel at the conclusion of the call. In contrast, packet
switch-based telecommunications systems are a newer technology, under which the
information to be transmitted is formatted into a series of shorter digital
messages called “packets.” In addition to supporting data, packet switch-based
systems have been used for long haul voice traffic and is now starting to be
deployed to support local phone service. Each packet consists of a portion of
the complete message plus the addressing information to identify the destination
and return address. A key feature that distinguishes Internet architecture from
the public telephone network is that on the packet-switched Internet, a single
dedicated channel between telecommunication points is not required. Packet
switch-based systems may offer several advantages over circuit switch-based
systems, particularly the ability to commingle packets from several
telecommunications sources together simultaneously onto a single channel. For
most telecommunications, particularly those with bursts of information followed
by periods of “silence,” the ability to commingle packets provides for superior
network utilization and efficiency, resulting in more information being
transmitted through a given telecommunication channel. We believe that in the
longer term most new networks will be based on packet switching to take
advantage of transport efficiencies, more open standards for interoperability,
lower capital costs and easier deployment and maintenance.
In Grand
Rapids, Michigan, we have deployed a newly developed soft-switch technology. The
soft-switch is a distributed computer system that performs the same functions as
a circuit switch. It can support both circuit and packet-switched
communications. We are currently testing the soft-switch technology and, if
successful, plan to use this technology to complement and relieve traffic from
our Lucent 5ESS-2000 circuit switch. Soft-switch technology is currently being
used by very few residential phone providers and has not been used on this
scale. There can be no assurances that the technology will be able to be
successfully and economically deployed in the residential market or that we will
be successful in developing, deploying and managing the technology. We expect
however, that, if successful, the soft-switched technology will enable us to
enter into more markets due to the lower cost of the soft-switch technology than
that of a traditional circuit switch technology.
We also
continue to actively explore other next generation networking opportunities with
a variety of vendors in order to decrease our cost of delivering service, reduce
our reliance upon the incumbent local exchange companies and provide local
telephone services through new, innovative methods of delivery.
Long
Distance Phone Services
Overview
We
generally use our own nationwide long distance network to provide long distance
phone services directly to our customers. We operate our own switches and are
thus subject to the risk of significant interruption, as discussed with respect
to our operation of our own local switches, above. In such circumstances, we
could attempt to minimize the interruption of our long distance service by
carrying traffic through our resale arrangements with other
carriers.
Long
Distance Network
Our long
distance network is comprised of equipment and facilities that are either owned
or leased by us. We contract for certain telecommunication services with a
variety of other carriers. We own, operate and maintain five Lucent 5ESS-2000
switches in our long distance network, which feature the Digital Networking
Unit-SONET technology. The switches are connected to each other by connection
lines and digital cross-connect equipment that we own or lease. We also have
installed lines to connect our long distance switches to switches owned by
various local telecommunication service carriers. We are responsible for
maintaining these lines and have entered into a contract with a third party
vendor with respect to the monitoring, servicing and maintenance of this
equipment. In 2005, we expect to decommission two of our switches.
With
respect to connections to local carriers, international and operator assisted
services, in December 2003, we entered into a four-year master carrier agreement
with AT&T. The agreement provides us with a variety of services, including
transmission facilities to connect our network switches as well as services for
international calls, local traffic, international calling cards, overflow
traffic and operator assisted calls. The agreement also provides that, subject
to certain terms and conditions, we will purchase these services exclusively
from AT&T during the term of the agreement, provided, however, that we are
not obligated to purchase exclusively in certain cases, including if such
purchases would result in a breach of any contract with another carrier that was
in place when we entered into the AT&T agreement, or if vendor diversity is
required. Our AT&T agreement establishes pricing and provides for annual
minimum commitments based upon usage as follows: 2005 - $32 million, 2006 - $32
million and 2007 - $32 million and obligates us to pay 65 percent of the revenue
shortfall, if any. Despite the expected reduction in our local bundled customer
base due to the reduction in our addressable market, we anticipate that we will
not be required to make any shortfall payments under this contract as a result
of the restructuring of the obligations or the addition of network minutes as a
result of acquisitions, there can be no assurances that we will be successful in
our efforts. To the extent that we are unable to meet these minimum commitments,
our costs of purchasing the services under the agreement will correspondingly
increase.
Internet
Access Services
We offer
DSL internet access to customers who are located within 16,500 feet of a
collocation site in our local network. DSL service is provided through either
broadband loop carrier equipment or digital loop carrier equipment and digital
subscriber line access multiplexer equipment. We are dependent upon a small
number of vendors to provide us with this equipment and failure to attain the
equipment in a timely manner will affect our ability to offer DSL services. In
addition, a portion of those customers located within 16,500 feet of a
collocation site in our local network will not be able to receive DSL service
due to line conditions, the presence of a fiber-optic cable connection to the
home and other limitations of the incumbent local exchange company’s line
facilities. We utilize a third party vendor to supply modems to our DSL
customers to enable them to establish a DSL connection at their premise.
We also
offer dial-up internet access service to bundled phone customers, whether or not
such customer is on our local network. The service is provided through a third
party vendor, who also hosts the email service for both our dial-up and DSL
services. We are dependent upon this vendor for the content of and support for
our internet access portal.
INTEGRATED
INFORMATION SYSTEMS
We have
integrated leads management, order processing, provisioning, billing, payment,
collection, customer service and information systems that enable us to offer and
deliver high-quality, competitively priced telecommunication services to our
customers and process millions of call records each day. These operational
support systems were developed by our employees and customized for our business
and operational requirements and, due to the system's component-based
architecture, provide an extensible framework for the introduction of new
products and services. We use "state-of-the-art" software and hardware
applications and products to support our systems and development efforts.
We are
currently migrating our database systems from an Informix to an Oracle
architecture and expect the migration to be completed in 2005, although there
can be no assurances that we will be able to do so successfully. Through
dedicated electronic connections with our local and long distance networks and
the incumbent local exchange companies, we have designed our systems to process
information on a "real time" basis. We have automated the business processes
required to deploy and support our local circuit switch-based network, and
continue to automate the business processes required to provide DSL service.
Should we expand our network or customer base through the acquisition of another
company or the acquisition of another company’s customers or assets, we would
need to integrate such company systems or customers into our information
systems, particularly our provisioning and billing systems, and there can be no
assurances that we would be able to do so successfully. Further, if we are
successful in implementing our business strategy to enter the medium-sized
business market, we will need to either redesign our integrated information
systems to support new business products and billing needs of these customers or
purchase the necessary information systems from a third party, which may prove
costly and cause delays, and then integrate these information systems into our
reporting and decision support systems. There can be no guarantee that we will
be successful in integrating these customers into or be able to redesign these
systems on a timely basis.
Our core
operational support systems include the following:
· |
Our
leads database system is utilized in the marketing of our
telecommunication services. The leads database system enables us to alter
telemarketing campaigns to track areas where mass advertisements are
airing, manage the bundled sales price by customer, zone and state,
maintain customer credit information, and comply with various regulatory
requirements. |
· |
Our
proprietary automated order processing system enables us to shorten the
customer provisioning time cycle and reduce associated costs. Prior to
submitting an order to provision a customer to our service, our system
processes the customer's credit history, and, once the customer's credit
is approved, the customer's service record detailing the customer's
existing phone service is immediately verified. In addition, our system
has enabled us to significantly increase our customer provisioning rate
for qualified and verified orders while reducing the number of orders that
are rejected by the incumbent local exchange company, reducing manual work
requirements. |
· |
Our
automated service provisioning system enhances our ability to add customer
lines to our telecommunication service and to change the features
associated with that particular customer's service, reducing manual work
requirements. |
· |
Our
billing system enables us to preview and run a bill cycle each day of the
month for the many different, tailored service packages, increasing
customer satisfaction while minimizing revenue leakage in the provision of
local telecommunication service. |
· |
Our
proprietary automated payment and collections management system is
integrated with our billing and customer relationship management system.
This system increases the efficiency of our collection process,
accelerates the recovery of accounts receivable and assists in the
retention of valuable customers. |
· |
Our
new customer relationship manager system, enables our customer service
representatives to access data in a real-time, organized manner, while the
representative is speaking with the customer, thereby reducing the length
of customer service calls and improving the customer
experience. |
In
addition, we maintain our own web site at www.talkamerica.com and www.talk.com
to provide for customer sign-up and to provide customers and potential customers
with information about our products and services as well as billing information
and customer service. We provide these services and features using our
web-enabled technologies that allow us to offer our customers:
· |
Detailed
rate schedules and product and service related
information. |
· |
Online
sign-up for our telecommunication and data
services. |
· |
Real-time
and 24 x 7 billing services and online information, providing customers
with up to the hour billing information. |
The
information functions of our systems are designed to provide easy access to all
information about a customer, including volumes and patterns of use. This
information can be used to identify emerging customer trends and to respond with
services to meet customers' changing needs. This information also allows us to
identify unusual usage by an individual customer, which may indicate fraud. FCC
rules, however, may limit our use of customer proprietary network information.
See "Regulation."
SALES
AND MARKETING
We use
diverse sales and marketing channels to reach the residential and small business
markets with our service offerings. Our sales and marketing efforts focus on
marketing a bundle of local and long distance phone services directly to
customers exclusively under our own brand. As a result of the FCC’s final rules
regarding access to the incumbent local exchange companies’ networks, beginning
on March 11, 2005, we are only marketing our services in those markets where we
can provision customers directly to our own network facilities. In anticipation
of this reduction, in November 2004, upon expiration of our lease, we closed our
Fort Meyers telemarketing center and we expect to continue evaluating further
reductions and consolidations in our telemarketing centers. Due to the reduction
in our addressable market and the number of leads for residential and small
businesses, we expect to focus most of our sales and marketing activity in
Detroit and later this year in Grand Rapids, Michigan and expect a significant
reduction in the number of new customers that we add in the periods after March
11, 2005 compared to prior periods and for sales and marketing expense to
decline in 2005. In order to maintain economic efficiencies with our local
network, we must maintain a high number of customers in each collocation site
and thus must continue to penetrate these particular markets in which we have
been marketing for over three years in order to counter reductions in such
levels due to customer turnover.
We employ
a targeted approach to customer acquisition and use database-marketing tools to
identify and prioritize target customers. We offer our customers the ability to
build their own telecommunications package beginning with an extended local
calling area, a diverse selection of intrastate and interstate calling plans,
discounted feature packages and ala carte feature selection, and several options
for Internet access. Customers can switch to us online, through a telesales
representative, or through an authorized agent, each of which uses consultative
sales tools to assist the customer’s creation of the right plan for their
telecommunications needs. At the point of sale, we provide each customer with an
estimate of their first month’s invoice, including all fees and taxes. Customers
are able to keep their same phone lines and number, can easily add features,
and, generally within days of the sale, are switched to our service and receive
a personalized welcome kit explaining their service.
We market
our bundled services within our targeted markets through the following
channels:
· |
Telemarketing
- We operate our own call centers and purchase residential and small
business lead databases utilized for targeted, professional and courteous
outbound telesales campaigns. Telemarketing is an important sales channel
for us. Any changes in the federal or state "do not call" regulations
could adversely affect us. See
"Regulation." |
· |
Direct
Mail - We purchase small business and residential lead databases utilized
for demographically targeted direct mail campaigns designed to direct
inbound calls to our telemarketing centers. |
· |
Referrals
- We solicit, through the use of referral promotions and our
member-to-member free long distance product, the names of potential
customers or referrals from our existing
customers. |
· |
Online
Marketing - We have developed a productive online marketing presence,
through traditional online media and business
relationships. |
· |
Direct
Sales - Utilizing independent agents, we solicit new customers in targeted
geographic areas. |
· |
Broadcast
Media - We solicit inbound subscriber calls through advertising on
television, radio and in print. |
While we
do not actively market our stand-alone long distance telecommunications service,
we offer the long distance telecommunications service when contacted by persons
located in those regions where local service is unavailable. We also add long
distance customers when the customer requests its local service provider to
provide the customer with our long distance telecommunications
service.
We focus
on targeting, acquiring and retaining profitable customers that we can directly
provision to our own network platform by providing savings, simplicity and
service. We continue to seek new marketing partners and arrangements to expand
both our opportunities to attract other customers to our services and the
products and services that we offer to our customer base.
COMPETITION
The
telecommunication industry is highly competitive. Major participants in the
industry regularly introduce new services and marketing activities. Competition
in the telecommunication industry is based upon the ability to offer services at
competitive prices, customer service, billing service and perceived quality. We
expect the number of competitors in the telecommunication industry to shrink
significantly in 2005 as a result of announcements of intentions to exit the
consumer market and the FCC’s final rules regarding access to the incumbent
local exchange companies’ networks issued on February 4, 2005. In Michigan, we
expect our competitor to be SBC, which is the incumbent local exchange company,
and Comcast, which is the largest provider of cable television and broadband
internet access in Michigan. SBC offers the same services as we do plus other
services, such as television programming, and is substantially larger and has
greater financial, technical and marketing resources. Further, SBC and AT&T
have recently announced SBC’s proposed acquisition of AT&T and both Verizon
and Qwest have recently announced bids for the acquisition of MCI, which we
expect to further reduce our ability to compete. In addition, Comcast offers
television programming, broadband internet access and, in Michigan, has begun
offering voice over internet protocol phone service in certain areas at a cost
that appears to be below that of traditional circuit-switched service, and is
also substantially larger and has greater financial, technical and marketing
resources. Our success will depend upon our continued ability to provide high
quality, high value services at prices generally competitive with, or lower
than, those charged by our competitors.
The
incumbent local exchange companies and the major carriers, including SBC,
Verizon, BellSouth, AT&T, Sprint Corporation and MCI/Worldcom, Inc., have
targeted price plans at residential customers - our primary target market - with
significantly simplified rate structures and with bundles of local services with
long distance, which may lower overall local and long distance prices.
Competition is also fierce for the small businesses that we also serve. In
addition, both cable providers and wireless carriers have marketed their
services as an alternative to traditional long distance and local services,
further increasing competition. Reductions in prices charged by competitors may
have a material adverse effect on us.
The
incumbent local exchange companies are well-capitalized, well-known companies
that have the capacity to "bundle" other services, such as local and wireless
telephone services and high speed Internet access, with long distance telephone
services. The incumbent local exchange companies' name recognition in their
existing markets, the established relationships that they have with their
existing local service customers, their ability to take advantage of those
relationships, and the possibility that interpretations of the
Telecommunications Act and the FCC’s final rules regarding the unbundled network
element platform may be favorable to the incumbent local exchange companies,
also make it more difficult for us to compete with them.
As a
result of the FCC’s final rules, which made the unbundled network element
effectively unavailable to us after March 11, 2005 for new customers, we will
cease marketing in those markets where we do not have our own networking
facilities. Based on previous announcements as discussed above, we expect other
competitive local exchange carriers to likewise decide to cease marketing in
these markets, resulting in very limited competition for the incumbent local
exchange company. While we plan to continue serving our existing customer base
in these markets, due to the regulatory actions and our plans to increase
product pricing for our customers located outside of Michigan, we expect the
number of bundled customers to drop significantly by the end of 2005 and to
continue to decrease on an accelerated basis outside of those areas where we
plan to deploy network facilities in 2006. These price increases will result in
customers seeking other providers for their telecommunications needs, further
bolstering the incumbent local exchange companies’ dominance of the market.
The
internet access market is also highly competitive. Residential broadband
internet access in Michigan is currently dominated by Comcast, through use of
its hybrid fiber-coaxial cable networks, and SBC through the use of digital
subscriber line technology. Both Comcast and SBC have an established brand name
and reputation for quality in their service areas, possess sufficient capital to
deploy broadband equipment rapidly, own the cable or telephone line themselves
and can bundle digital data services with their existing services to achieve
economies of scale in serving their customers. Dial-up internet access is
offered by many providers with more brand recognition, the ability to bundle the
service with other internet based services and the ability to offer free
services, such as virus protection and parental controls.
REGULATION
Overview
We are
subject to federal, state, local and foreign laws, regulations, and orders
affecting the rates, billing, terms, and conditions of certain of our service
offerings, our costs and other aspects of our operations, including our
relations with other service providers. Regulation varies in each jurisdiction
and may change in response to judicial proceedings, legislative and
administrative proposals, government policies, competition and technological
developments. We cannot predict what impact, if any, such changes or proceedings
may have on our business or results of operations, and we cannot guarantee that
regulatory authorities will not raise material issues regarding our compliance
with applicable regulations.
The FCC
has jurisdiction over our facilities and services to the extent they are used in
the provision of interstate or international communications services or as
otherwise required by federal law. State regulatory commissions, commonly
referred to as PUCs, generally have jurisdiction over facilities and services to
the extent they are used in the provision of intrastate services. Local
governments may assert authority to regulate aspects of our business through
zoning requirements, permit or right-of-way procedures and franchise fees.
Foreign laws and regulations apply to communications that originate or terminate
in a foreign country. Generally, the FCC and State public utility commissions do
not regulate Internet, video conferencing and certain data services, although
the underlying communications components of such offerings may be regulated. Our
operations also are subject to various environmental, building, safety, health
and other governmental laws and regulations.
Federal
law generally preempts state statutes and regulations that restrict the
provision of competitive local, long distance and enhanced services;
consequently, we generally are free to provide the full range of local, long
distance and data services in every state. While this federal preemption greatly
increases our potential for growth, it also increases the amount of competition
to which we may be subject.
Federal
Regulation
The
Communications Act of 1934, as amended, or the “1934 Act,” grants the FCC
authority to regulate interstate and foreign communications by wire or radio. We
are regulated by the FCC as a non-dominant carrier and are subject to less
comprehensive regulation than dominant carriers. Nevertheless, we remain subject
to numerous requirements of the Communications Act, applicable to most common
carriers, which require us to offer service upon reasonable request and pursuant
to just and reasonable charges and terms that are not unjustly or unreasonably
discriminatory. The FCC has authority to impose additional requirements on
non-dominant carriers.
The
Telecommunications Act of 1996, or the “1996 Act,” amended the 1934 Act to
eliminate many barriers to competition in the U.S. communications industry, by
setting standards for relationships between communications providers, including
between new entrants, such as our company, and the Regional Bell Operating
Companies and other incumbent local exchange companies. In general, the 1996 Act
requires incumbent local exchange companies to provide competitors with
nondiscriminatory access to, and interconnection with, the incumbent local
exchange company networks, and to provide unbundled network elements at
cost-based prices. The FCC and state public utility commissions have adopted
extensive rules to implement the 1996 Act, and revisit such regulations on an
ongoing basis in light of court decisions and as marketplaces
evolve.
Several
congressmen have recently suggested that Congress should consider rewriting
substantial portions of the 1996 Act. Any effort to reform the 1996 Act could
result in changes that would materially reduce the obligations of the
incumbent
local exchange companies to
interconnect with, or provide unbundled network elements to, competitors. Any
such legislative change could have a material adverse impact on our business and
operations.
The
announced merger of AT&T with SBC and Verizon’s and Qwest’s announced bids
for MCI will, if they are completed, effectively eliminate the two largest
competitive local exchange carriers in the United States, each of which was a
strong voice in federal and state lobbying related to telecommunications
matters. These mergers will place an increased demand on our resources and
employees for lobbying and other regulatory matters and there can be no
assurances that our efforts will prove effective.
Long
Distance Competition
Section 271
of the 1934 Act, enacted as part of the 1996 Act, established a process by which
a Regional Bell Operating Company could obtain authority to provide long
distance service in a state within its region. The process required
demonstrating to the FCC that the Regional Bell Operating Company has adhered to
a 14-point competitive checklist and that granting such authority would be in
the public interest. Each of the Regional Bell Operating Companies already has
received FCC approval to provide long distance services in each state within its
respective region, resulting in increased competition in certain markets and
services. The Regional Bell Operating Companies have a continuing obligation to
comply with the checklist. Section 272 of the 1934 Act requires that, for a
period of three years after receiving Section 271 approval in any state
(absent an FCC extension), a Regional Bell Operating Company must comply with
certain other structural and operational safeguards, including the provision of
in-region long distance service through a separate affiliate.
Local
Service Regulation
The 1996
Act required the FCC to establish national rules implementing the local
competition provisions of the 1996 Act, which impose duties on all local
exchange carriers, including competitive local exchange companies such as our
company, to provide network interconnection, reciprocal compensation, resale,
number portability and access to rights-of-way.
The 1996
Act imposes additional duties on incumbent local exchange companies, including
the duty to provide access on an unbundled basis to individual network elements
on non-discriminatory terms and cost-based rates; to allow competitors to
interconnect with their networks in a nondiscriminatory manner at any
technically feasible point on their networks; to permit collocation of
competitors' equipment at the incumbent local exchange company premises; and to
offer retail services at wholesale rates to competitive local exchange companies
for resale.
Unbundled
Network Elements
Access to
incumbent
local exchange companies’
unbundled network elements at cost-based rates is critical to our business. Our
local telecommunications services to date predominantly have been provided
through the use of combinations of unbundled network elements, and it is the
availability of cost-based rates for these elements that has enabled us to price
our local telecommunications services competitively. However, the obligation of
incumbent
local exchange companies to
provide the unbundled network elements upon which we have relied at such
cost-based rates is the subject of recent regulatory action that will result in
the availability of these elements being substantially reduced or otherwise
subject to significantly higher, non-cost-based rates.
The 1996
Act requires incumbent local exchange companies to provide requesting
telecommunications carriers with nondiscriminatory access to network elements on
an unbundled basis at any technically feasible point on rates, terms and
conditions that are just, reasonable and nondiscriminatory, in accordance with
the other requirements set forth in Sections 251 and 252 of the 1934 Act. The
1996 Act gives the FCC authority to determine which network elements must be
made available to requesting carriers such as us. For network elements that are
not proprietary, the Commission is required to determine whether the failure to
provide access to such network elements would impair the ability of the carrier
seeking access to provide the services it seeks to offer. The FCC has determined
that most network elements are nonproprietary in nature and thus are subject to
the "impair" standard. The FCC's initial list of incumbent local exchange
company network elements that are required to be unbundled on a national basis
was first released in 1996 and has been subject to almost constant review and
revision since then.
When the
FCC first adopted unbundled network element rules, it indicated that it would
reexamine the list of unbundled network elements every three years. In
December 2001, the FCC initiated its first so-called “triennial review” of
those rules. In August 2003, in the Triennial Review Order, or TRO, the FCC
substantially modified its rules governing access to unbundled network elements.
The FCC redefined the "impair" standard, concluding that a requesting carrier is
impaired when a lack of access to an unbundled network element poses barriers to
entry, including operational and economic barriers that are likely to make entry
into a market uneconomic. The FCC limited requesting carrier access to certain
aspects of the loop, transport, switching and signaling databases unbundled
network elements but continued to require some unbundling of these elements. In
the TRO, the FCC
also determined that certain broadband elements, including fiber-to-the-home
loops in greenfield situations, broadband services over fiber-to-the-home loops
in overbuild situations, packet switching and the packetized portion of hybrid
loops, are not subject to unbundling obligations.
All of the
FCC’s decisions regarding unbundling have been the subject of judicial review.
Most recently, on March 2, 2004, the U.S. Court of Appeals for the District
of Columbia Circuit, or the D.C. Circuit, in United
States Telecom Ass'n v. FCC, or the
USTA
II
decision, vacated certain portions of the TRO and
remanded to the FCC for further proceedings. Specifically, the D.C. Circuit
vacated the FCC's delegation of decision-making authority to state commissions
and several of the FCC's nationwide impairment determinations. The D.C. Circuit
found that the FCC used a flawed methodology when making certain impairment
determinations, including those relating to the mass market switching and local
transport network elements, and remanded those determinations to the FCC for
further analysis and justification. The D.C. Circuit affirmed the FCC's decision
to relieve the incumbent local exchange companies from unbundling obligations
with respect to broadband elements. The D.C. Circuit did not make a formal
pronouncement regarding the status of the FCC's findings regarding enterprise
market loops, batch hot cuts or preemption of inconsistent state
laws.
The FCC
and the United States Solicitor General declined to seek certiorari from the
Supreme Court. The National Association of Regulatory Utility Commissioners and
a coalition of competitive local exchange companies separately petitioned for
certiorari. The Supreme Court has denied those petitions.
In orders
released in August 2004, the FCC extended relief from the unbundling
obligations to fiber-to-the-home loops serving predominantly residential
multiple dwelling units and granted the same relief to fiber-to-the-curb that it
has applied to fiber-to-the-home.
On
October 27, 2004, the FCC issued an order granting requests by the Regional
Bell Operating Companies that the FCC forbear from enforcing the independent
unbundling requirements of Section 271 of the 1934 Act with regard to the
broadband elements that the FCC had determined in the TRO are not
subject to unbundling obligations (fiber-to-the-home loops, fiber-to-the-curb
loops, the packetized functionality of hybrid loops and packet switching). The
FCC declined to address broader forbearance requests by SBC and Qwest, who had
asked the FCC to forbear from applying applicable Section 271 requirements
to any element that the FCC has determined no longer meets the impairment
standard.
On
December 15, 2004, the FCC adopted rules modifying the unbundling obligations
for incumbent local exchange companies under Section 251 of the 1934 Act,
reducing the incumbent local exchange companies’ obligation to provide unbundled
local switching as well as certain levels of unbundled loops and transport. The
FCC issued final rules on February 4, 2005. Those rules were effective on March
11, 2005. In response to the USTA
II
decision, the FCC
clarified that it evaluated impairment with regard to the capabilities of a
reasonably efficient competitor. The FCC also modified the impairment standard
set forth in the TRO by: (1)
setting aside the TRO’s
“qualifying service” interpretation of section 251(d)(2), but prohibiting the
use of unbundled
network elements for the
provision of exclusively long distance or exclusively wireless services; (2)
drawing inferences regarding the prospects for competition in one geographic
market based on the state of competition in another, similar market; and (3)
determining that in the context of local exchange markets, a general rule
prohibiting access to unbundled
network elements whenever
a requesting carrier is able to compete using an incumbent
local exchange company’s tariffed
special access offering would be inappropriate. It is not clear at this time
whether we will be successful in finding viable substitutes for unbundled
switching in markets outside of Michigan and for the other elements affected by
the TRO, the
USTA
II decision
or the FCC’s December 15, 2004 order and what the ultimate effect will be on our
business and operations. However, as a result of these decisions, the
availability of unbundled
network elements at
cost-based rates has been substantially reduced and will have a material effect
on the way we conduct our business and operations and may have a material
adverse effect on our profitability.
The
principal parts of the FCC’s December 15, 2004 order regarding unbundled
switching and unbundled loops and transport are summarized below:
Local
Switching: The FCC
eliminated an incumbent
local exchange company’s
obligation to provide local switching (and the unbundled network element
platform, in particular, upon which we have historically relied) to requesting
carriers at Total
Element Long Run Incremental Cost, or
TELRIC, rates. In doing so, the FCC found that competitive
local exchange companies are not
impaired nationwide without access to unbundled local switching. The FCC adopted
a twelve-month transition plan for competitive
local exchange companies to
transition away from the unbundled network element platform commencing on March
11, 2005 and ending on March 10, 2006. The transition plan applies only to our
customer base as it exists on March 11, 2005 and we will continue to be
permitted to obtain local switching for our current customers at a rate per
customer equal to the greater of: (1) the rate at which we leased that
combination of elements on June 15, 2004, plus one dollar; and (2) the rate, if
any, the applicable state public utility commission establishes between June 16,
2004 and the effective date of the FCC’s order, for the unbundled network
element platform, plus one dollar.
Local
Loops and Transport: The FCC
also made impairment findings and placed certain limitations with respect to
local loops and dedicated interoffice transport. The FCC established 10 DS1s and
12 DS3s as the maximum transport a carrier can purchase per route. Furthermore,
for local loops, the FCC concluded that competitive local exchange companies are
impaired without access to (1) DS1-capacity
loops except in any building within the service area of a wire center containing
60,000 or more business lines and four or
more fiber-based collocators; and (2) DS3-capacity loops except in any building
within the service area of a wire center containing 38,000 or more business
lines and four or
more fiber-based collocations. The FCC determined that competitive
local exchange companies are not
impaired without access to dark fiber loops in any instance. For dedicated
transport, the FCC found that competitive
local exchange companies are
impaired without access to (1) DS1 transport except on routes connecting a pair
of wire centers where both wire
centers contain at least four fiber-based collocators or at least 38,000
business lines; and (2) DS3 or dark fiber transport except on routes connecting
a pair of wire centers where both wire
centers contain at least three fiber-based collocators or at least 24,000
business lines. The FCC concluded that competitive
local exchange companies are not
impaired without access to entrance facilities connecting an incumbent
local exchange company’s
network with a competitive
local exchange company’s
network in any instance. For both local loops and dedicated transport, the FCC
adopted a twelve-month transition plan for competitive
local exchange companies to
transition away from the use of DS1 and DS3 loops and dedicated transport where
there is no impairment, and an eighteen-month transition plan to transition away
from dark fiber. The transition plans apply only to the customer base as it
exists on March 11, 2005, and do not permit competitive
local exchange companies to add
new dedicated transport unbundled
network elements in the
absence of impairment. During the transition periods, competitive
local exchange companies will
retain access to unbundled high-capacity loops and transport at a rate equal to
the greater of: (1) 115% of the rate the requesting carrier paid for the
unbundled network element on June 15, 2004; and (2) 115% of the rate the state
commission has established or establishes, if any, between June 16, 2004, and
the effective date of the FCC’s order. The incumbent local exchange companies
have issued accessible letters, which announced that they would not provision
any loops in areas that they deemed to be unimpaired and further that they would
not provision any transport on routes they deemed to be competitive. Although we
and other competitive local exchange carriers are challenging this action, if
the incumbent local exchange companies are successful, our business could be
negatively impacted. On February 18, 2005, SBC issued a list of its Michigan end
offices that SBC maintains meets the FCC’s criteria for non-impairment. While
SBC’s position with respect to the impairment standing of its Michigan end
offices can be challenged in the state commissions, if SBC were to prevail on
its current position, we would be limited in our ability to purchase local
loops and dedicated interoffice transport. As we
expand our local network during 2005, the unavailability of these dedicated
transport facilities, dark fiber and entrance facilities under the FCC’s rules
at cost-based rates may adversely impact us where our own switching facilities
have been deployed and could substantially impede our plans to deploy additional
network facilities. We could be forced to use other means to effect this
deployment, including the use of facilities purchased from the incumbent local
exchange carrier at higher tariffed special access rates or transport services
purchased from other competitive access providers. In either event,
our cost of service could rise dramatically and our plans for a service roll-out
for use of our own network facilities could be delayed substantially or derailed
entirely.
Although
the incumbent
local exchange company’s
unbundling requirements for local circuit switching arising under Section 251 of
the 1996 Act have been eliminated by the FCC’s December 15, 2004 order,
competitive carriers’ access to local circuit switching on an unbundled basis is
preserved under Section 271 of the 1996 Act as a condition to the Regional
Bell Operating Company’s
ability to provide in-region long distance services. However, the local circuit
switching element, if accessible to competitive carriers only pursuant to
Section 271 of the 1996 Act, may be offered at significantly higher rates and
subject to less favorable terms and conditions imposed by the incumbent
local exchange companies,
including the possibility that the incumbent
local exchange companies will not
be required to combine unbundled local circuit switching provided pursuant to
Section 271 with other non-unbundled network elements or tariffed
services.
As of
March 11, 2005, local circuit switching effectively became unavailable to us for
new orders. Accordingly, for new customers and possibly new lines for existing
customers we will be unable to offer our telecommunications services as we have
done in the past and will instead be required to serve customers by other means,
including through total service resale agreements with the incumbent
local exchange companies,
commercial agreements with the incumbent local exchange companies, through the
use of our own network facilities, by migrating customers onto the networks of
other facilities-based competitive local telephone companies or by purchasing
critical network elements on an unbundled basis at "just and reasonable" rates
pursuant to Section 271 of the 1996 Act, which presumably will be higher than
the rates currently available to us. Since element purchases pursuant to
Section 271will be on an unbundled basis, we will need to pay additional charges
to combine these elements. For existing customers, as detailed earlier, the FCC
announced a one year transition during which competitors will be obligated to
pay an immediate $1 price increase for existing customer’s switching. With the
transition period, we will have a year to transition such customers to our own
network facilities, resale, competitive substitutes or elements purchased
through Section 271. Our transition from providing telecommunications services
on an unbundled network element platform basis to providing services on our own
network or otherwise will result in a significant reduction in the number of new
customers that we add in the periods after March 11, 2005 compared to prior
periods, will prevent service roll-out in some markets, increase our costs
and negatively impact our business, prospects, operating margins, results
of operations, cash flows and financial condition.
In
anticipation of the recent developments regarding the FCC’s unbundling rules, we
have already installed a local switch in Michigan along with related collocation
equipment and have begun to carry calls over its circuits, using a combination
of our own switching capacity and unbundled loop and dedicated interoffice
transport facilities purchased from SBC. We plan to have established eighty-one
(81) collocations by the end of 2005 and, as of March 11, 2005, have “hot cut”
over 25,000 lines from SBC’s network on to our own network; we expect to have
175,000 lines on our network by the end of 2005. The use of our own local switch
will diminish our reliance on incumbent
local exchange company-
provided local circuit switching, but will increase our reliance on incumbent
local exchange company
unbundled loop and unbundled transport facilities over time.
However,
as we expand upon our local switching during 2005, the unavailability of
dedicated transport facilities, dark fiber and entrance facilities under the
FCC’s rules on an unbundled basis at cost-based rates along certain routes may
adversely impact us where our own switching facilities have been deployed. If
many routes become effectively unavailable to us under the FCC’s newly adopted
rules, our plans to deploy our own network facilities could be substantially
impeded, and we could be forced to use other means to effect this deployment,
including the use of facilities purchased at higher tariffed special access
rates or transport services purchased from other facilities-based competitive
local telephone carriers. In either event, our cost of service could
rise dramatically and our plans for a service roll-out for use of our own
network facilities could be delayed substantially or derailed entirely.
This would have a material adverse effect on our business, prospects, operating
margins, results of operations, cash flows and financial condition.
We
believe the loss of the availability of DS3 and DS1 loops at cost-based rates
will result in materially higher prices on loops that we must purchase from
either the incumbent local exchange company or a competitive access provider. At
this time, we cannot determine how many loops will become unavailable at
cost-based rates or the effect upon our network plans.
On
January 18, 2005, the U.S. Court of Appeals for the D.C. Circuit ordered the FCC
to provide promptly a release date for the new rules and on January 26, 2005,
the FCC informed the Court of the FCC Chairman’s plans to release the rules on
or before February 4, 2005. The FCC issued its final rules on February 4, 2005.
Appeals of the order have been filed in several U.S. appellate courts and the
appeals have been assigned to the U.S. Court of Appeals for the Third Circuit,
although it is expected that the Regional Bell Operating Companies will move to
transfer the cases to the U.S. Court of Appeals for the D.C. Circuit. More
appeals are expected.
The FCC
has encouraged incumbent local exchange companies and competitive local exchange
companies to engage in commercial negotiations to provide access to incumbent
local exchange company facilities that may no longer be available as unbundled
network elements as a result of the withdrawal of unbundling obligations,
including the unbundled
network element platform.
Although a few such agreements have been announced, a majority of competitive
local exchange companies have not negotiated new agreements as of this date.
While we have engaged in general discussions with some of the incumbent local
exchange companies, we have been unable to reach any agreements and there can be
no assurances that we will be able to reach any agreement in the
future.
FCC rules
implementing the local competition provisions of the 1996 Act currently permit
competitive local exchange companies to lease unbundled network elements at
rates determined by state public utility commissions employing the FCC's
Total
Element Long Run Incremental Cost, or
TELRIC, forward looking, cost-based pricing model. On September 15, 2003,
the FCC opened a proceeding reexamining the TELRIC methodology and wholesale
pricing rules for communications services made available for resale by incumbent
local exchange companies in accordance with the 1996 Act. This proceeding will
comprehensively re-examine whether the TELRIC pricing model produces
unpredictable pricing inconsistent with appropriate economic signals; fails to
adequately reflect the real-world attributes of the routing and topography of an
incumbent local exchange company's network; and creates disincentives to
investment in facilities by understating forward-looking costs in pricing
Regional Bell Operating Company network facilities and overstating efficiency
assumptions. We have participated in this proceeding as a member of a consortium
of competitive
local exchange companies. To date
the FCC has not yet issued revised TELRIC rules. The TELRIC methodology still
governs our pricing for loops purchased from the incumbent local exchange
companies. We cannot predict if the FCC will order new TELRIC pricing or if
Congress will amend the 1996 Act, affecting such pricing. The application and
effect of a revised TELRIC pricing model on the communications industry
generally and on certain of our business activities cannot be determined at this
time but it would have a material impact on our business.
On
October 27, 2004, BellSouth filed a petition with the FCC requesting forbearance
from (1) all Title II common-carriage requirements that otherwise apply to
incumbent
local exchange company
broadband transmission; and (2) Computer
Inquiry rules to
the extent that they require incumbent
local exchange companies to
tariff and offer the transport component of their broadband services on a
stand-alone basis and to take service under those same terms and conditions
(including related Part 64 accounting requirements). The three other Regional
Bell Operating Companies have since filed similar requests. If the petition is
granted, incumbent
local exchange companies could
refuse to offer underlying broadband transmission services to unaffiliated
providers of broadband services or charge above-cost rates that make it
economically infeasible for unaffiliated providers to compete with the
incumbent
local exchange company’s
broadband services. The pleading cycle in this matter was completed on January
28, 2005. We do not at this time know what the impact of these proceedings will
be on our ability to provide broadband services.
Interconnection
Agreements
Pursuant
to FCC rules implementing the 1996 Act, we negotiate interconnection agreements
with incumbent local exchange companies to obtain access to unbundled network
elements and other services, generally on a state-by-state basis. These
agreements typically have two- to three-year terms. We currently have
interconnection agreements, or their equivalent, in effect with SBC, BellSouth,
Verizon and Qwest in the states where such companies act as the incumbent local
exchange company. Our agreements generally are subject to amendment based upon a
change of law. Following the adoption or vacating of unbundling rules, the
incumbent local exchange companies typically invoke the change of law provisions
in our interconnection agreements. These provisions generally provide that when
a party to the agreement believes that its obligations under the agreement have
changed as a result of a change in applicable law, it may request that the other
party enter into negotiations to amend the agreement, and that in the event the
parties are unable to agree upon an amendment, the dispute is to be arbitrated
either by a neutral arbitrator or by the relevant state commission. Several of
the incumbent local exchange companies claim to have provided us with such
change of law notification, although we dispute the effectiveness of these
notices, but we do not know when any such negotiations, where applicable, might
begin or conclude or the impact on our business of any amendments to our
interconnection agreements resulting from such negotiations. In an increasing
number of cases, incumbent local exchange companies are taking the position that
changes of law, including reductions in incumbent local exchange companies’
unbundling obligations, do not require negotiations. Rather, incumbent local
exchange companies are arguing with respect to many interconnection agreements
that the agreements are amended automatically and immediately without a written
amendment. Additionally, incumbent local exchange companies are taking the
position that they can reject an order for elements on a route that they deem to
be competitive under the FCC’s final rules. We have opposed these positions and
cannot predict at this time whether the incumbent local exchange companies will
prevail in their arguments regarding automatic amendment with respect to any
particular interconnection agreement we currently operate under or their ability
to unilaterally reject orders, nor can we precisely determine what the impact
will be of any such resolution. While we have engaged in discussions with
incumbent local exchange companies regarding our various interconnection
agreements, we have not been successful in entering into any new agreements or
amendments thereto.
We are in
the process of renegotiating our interconnection agreements and/or replacing
them by opting into other carriers’ existing agreements (described below) with:
SBC for the states of Connecticut, Texas, Arkansas, Oklahoma, Kansas, Ohio,
Indiana, Illinois, Michigan, Wisconsin, California, Nevada and Missouri;
BellSouth for the states of Alabama, Mississippi, North Carolina, South
Carolina, Florida, Georgia, Louisiana and Tennessee; and Qwest for Washington,
Oregon, Montana, Wyoming, Utah, Arizona, New Mexico, North Dakota, South Dakota,
Nebraska, Minnesota, and Iowa. If any negotiation process does not produce, in a
timely manner, an interconnection agreement that we find acceptable, we may
petition the applicable PUC to arbitrate any open issues. Arbitration decisions
in turn may be reviewed by federal courts. We cannot predict how successful we
will be in negotiating terms critical to our provision of local network
services, and we may be forced to arbitrate certain provisions of necessary
agreements. We are currently a party to interconnection agreement arbitration
proceedings with Verizon in the District of Columbia, New Jersey and
Pennsylvania. Pending the completion of such proceedings and approval of
successor agreements, we are operating in these states with these incumbent
local exchange companies under the rates, terms and conditions of the
predecessor agreements pursuant to their evergreen provisions. Other
interconnection agreement arbitration proceedings before various state
commissions brought by other carriers may result in decisions that could affect
our business, but we cannot predict the extent of any such impact. As an
alternative to negotiating an interconnection agreement, we may adopt, or opt
into, another carrier's approved agreement, in its entirety. We cannot predict
whether an acceptable alternative will be available for us to opt into at such
time as we are looking for a new or successor agreement in any given state with
a particular incumbent local exchange company.
Collocation
FCC rules
generally require incumbent local exchange companies to permit competitors to
collocate equipment used for interconnection and/or access to unbundled network
elements. Changes to those rules, upheld in 2002 by the D.C. Circuit, allow
competitors to collocate multifunctional equipment and require incumbent local
exchange companies to provision cross-connects between collocated carriers. We
cannot determine the effect, if any, of future changes in the FCC’s collocation
rules on our business or operations.
Access
Charges
We pay
access fees to local exchange carriers for the origination and termination of
our long distance communications traffic. Generally, intrastate access charges
are higher than interstate access charges. Therefore, to the extent access
charges increase or a greater percentage of our long distance traffic is
intrastate, our costs of providing long distance services will increase.
As a
local exchange provider, we bill long distance providers access charges for the
origination and termination of those providers' long distance calls.
Accordingly, in contrast with our long distance operations, our local exchange
business benefits from the receipt of intrastate and interstate long distance
traffic. As an entity that collects and remits access charges, we must properly
track and record the jurisdiction of our communications traffic and remit or
collect access charges accordingly. The result of any changes to the existing
regulatory scheme for access charges or a determination that we have been
improperly recording the jurisdiction of our communications traffic could have a
material adverse effect on our business.
The FCC
has indicated that its existing carrier compensation rules constitute
transitional regimes that will conclude in mid-2005, when a new interstate
intercarrier compensation regime based on bill-and-keep or another alternative
should be in place. Because we both make payments to and receive payments from
other carriers for the exchange of local and long distance calls, we will be
affected by changes in the FCC's intercarrier compensation rules. We cannot
predict the impact that any such changes may have on our business.
Our costs
of providing long distance services, and our revenues for providing local
services, also are affected by changes in access charge rates imposed on
competitive local exchange companies. Pursuant to the FCC's 2001 CLEC Access
Charge Order, which lowered the rates that competitive local exchange companies
may charge long distance carriers for the origination and termination of calls
over local facilities, access rates were reduced during 2003 and were reduced
again during 2004. AT&T and Sprint have appealed the CLEC Access Charge
Order to the D.C. Circuit, arguing that the FCC's benchmark rates are too
high.
The FCC
issued the first Access Charge Reform Report and Order in 1997. Although the FCC
has since issued five further orders in that docket, several petitions for
reconsideration and clarification of the 1997 Order remain pending. On
December 15, 2003, the FCC issued a public notice requesting that the
parties to such petitions file supplemental notices identifying any issues that
were raised in the petitions and that have not been otherwise resolved. We
cannot predict whether the FCC will further modify its access charge rules as a
result of this proceeding, or the effect that any such changes would have on our
business.
Over the
last several years, the FCC has granted incumbent local exchange companies
significant flexibility in pricing interstate special and switched access
services. In August 1999, the FCC granted immediate pricing flexibility to
many incumbent local exchange companies and established a framework for granting
greater flexibility in the pricing of all interstate access services once an
incumbent local exchange company market satisfies certain prescribed competitive
criteria. In February 2001, the D.C. Circuit upheld the FCC's prescribed
competitive criteria. To date, the FCC has granted pricing flexibility in
numerous specific markets to the Regional Bell Operating Companies. This pricing
flexibility may result in Regional Bell Operating Companies lowering their
prices in high traffic density areas, including areas where we compete or plan
to compete. We anticipate that the FCC will continue to grant incumbent local
exchange companies greater pricing flexibility for access services if the number
of actual and potential competitors increases in each of these
markets.
The FCC
issued a Notice of Public Rulemaking on February 10, 2005 in WCC Docket No.
05-25. This notice includes a broad examination of the regulatory framework that
is applied to local exchange carriers’ interstate special access services
preventing them from exceeding certain prices after June 30, 2005. In conducting
this examination, the FCC announced that it seeks comment on the special access
regulatory regime that should follow the expiration of the Coalition for
Affordable Local and Long Distance Service plan, including whether to maintain
or modify the Commission’s pricing flexibility rules for special access
services. We cannot predict whether the FCC will further modify its access
change rules as a result of this proceeding or the effect that any such changes
would have on our business.
On
February 10, 2005, the FCC also adopted a Further Notice of Proposed Rulemaking,
and solicited comment on whether to adopt any of seven different comprehensive
proposals for reform of the FCC's existing rules relating to intercarrier
compensation. Further action in that proceeding could lead to substantial
changes to the way that reciprocal compensation, switched access and universal
charges are established and administered, and could lead to material reductions
in our intercarrier compensation revenues.
Detariffing
Consistent
with other deregulatory measures, the FCC has largely eliminated carriers'
obligations to file tariffs with the FCC containing prices, terms and conditions
of service. All carriers, including us, were required to complete this
detariffing process for interstate domestic commercial, or customer-specific,
services by January 31, 2001, for consumer mass-market services by
July 31, 2001, and for international services by January 2002. In lieu
of federal tariffs, the FCC requires carriers to post information relating to
the rates, terms, and conditions of services on their corporate web sites.
Detariffing precludes our ability to rely on filed rates, terms and conditions
as a means of providing notice to customers of prices, terms and conditions
under which we offer services, and requires us instead to rely on individually
negotiated agreements with end users. We remain subject to the 1934 Act's
requirements that rates, terms and conditions of communications service be just,
reasonable and not discriminatory, and we are subject to the FCC's jurisdiction
over customer complaints regarding our communications services.
In 2002,
a coalition of consumer-protection advocates and state public utility
commissions asked the FCC to require non-dominant interexchange carriers to give
at least 30 days advance written notice to their presubscribed customers of
any material change to the rates, terms or conditions of a carrier-customer
agreement. The coalition argued that since detariffing took effect, customer
agreements generally offered by interexchange carriers reserve for the carriers
the right to unilaterally change rates, terms and conditions at any time,
thereby preventing consumers from making informed decisions regarding the terms
under which they acquire service from carriers. To date, the FCC has not
instituted such a proceeding. If adopted, such requirements could constrain our
ability to modify our rates, terms and conditions in response to competitive
market pressures.
Advanced
Services
Section
706 of the 1996 Act requires the FCC to encourage the deployment of advanced
telecommunications capabilities to all Americans, and Section 10 of the 1934 Act
requires the FCC to forbear from applying regulation where forbearance from
regulation would be in the public interest. Several incumbent
local exchange companies have
petitioned the FCC pursuant to these provisions to modify or eliminate network
unbundling obligations related to these advanced services, or to forbear from
imposing the FCC’s unbundling and interconnection rules. In addition,
incumbent
local exchange companies have
filed similar petitions asking the FCC to bar competitive carriers like us from
billing and collecting interexchange carrier switched access charges when
providing service through the use of the local switching unbundled network
element. If any of these petitions for waiver or forbearance are approved by
action or inaction of the FCC, our access to critical unbundled network elements
could be thwarted, or our ability to collect switched access charges could be
forestalled, which could have a material adverse effect on our
operations.
Universal
Service
Section 254
of the 1934 Act and the FCC's implementing rules require all communications
carriers providing interstate or international communications services to
periodically contribute to the Universal Service Fund, or USF. The USF supports
four programs administered by the Universal Service Administrative Company with
oversight from the FCC: (i) communications and information services for
schools and libraries, (ii) communications and information services for
rural health care providers, (iii) basic telephone service in regions
characterized by high communications costs or low income levels, and
(iv) interstate common line support. Periodic USF contribution requirements
currently are measured and assessed based on the total subsidy funding needs and
each contributor's percentage of the total of certain interstate and
international end user communications revenues reported to the FCC by all
communications carriers. We measure and report our revenues in accordance with
rules adopted by the FCC. The contribution rate factors are calculated and
revised quarterly and we are billed for our contribution requirements each month
based on projected interstate and international end-user communications
revenues, subject to periodic true up.
USF
contributions may be passed through to consumers on an equitable and
nondiscriminatory basis either as a component of the rate charged for
communications services or as a separately invoiced line item. Since
April 1, 2003, communications carriers have been prohibited from using a
separate line item on invoices to identify, as a recovery of USF contributions,
amounts that exceed the rate of actual USF contributions.
A
proceeding pending before the FCC has the potential to significantly alter our
USF contribution obligations. The FCC is considering changing the basis upon
which our USF contributions are determined from a revenue percentage measurement
to a connection or telephone number measurement. Adoption of this proposal could
have a material adverse affect on our costs, our ability to separately list USF
contributions on end-user bills and our ability to collect these fees from our
customers.
The
application and effect of changes to the USF contribution requirements and
similar state requirements on the communications industry generally and on
certain of our business activities cannot be predicted. If our collection
procedures result in over-collection, we could be required to make
reimbursements of such over-collection and be subject to penalty, which could
have a material adverse affect on our business, financial condition and results
of operations. If a federal or state regulatory body determines that we have
incorrectly calculated or remitted any USF contribution, we could be subject to
the assessment and collection of past due remittances as well as interest and
penalties thereon. No such proceeding has been commenced at this time against
us.
Telephone
Numbering
The FCC
oversees the administration and the assignment of local telephone numbers, an
important asset to voice carriers, by NeuStar, Inc., in its capacity as
North American Numbering Plan Administrator. Extensive FCC regulations govern
telephone numbering, area code designation and dialing procedures. Since 1996,
the FCC has permitted businesses and residential customers to retain their
telephone numbers when changing local telephone companies, referred to as Local
Number Portability. The availability of number portability is important to
competitive carriers like us, because customers, especially businesses, may be
less likely to switch to a competitive carrier if they cannot retain their
existing telephone numbers.
The FCC
and state public utility commissions work with industry groups and companies to
address potential problems stemming from the depletion in certain markets of the
pool of telephone numbers that communications service providers make available
to their customers. If a sufficient number of telephone numbers are not
available to us in a market, our operations in that market may be adversely
affected or we may be unable to enter that market until sufficient numbers
become available.
Communications
Assistance for Law Enforcement Act
The
Communications Assistance for Law Enforcement Act, or CALEA, requires
communications providers to provide law enforcement officials with call content
and call identifying information under a valid electronic surveillance warrant,
and to reserve a sufficient number of circuits for use by law enforcement
officials in executing court-authorized electronic surveillance. Because we
provide facilities-based services, we incur costs in meeting these requirements.
Noncompliance with these requirements could result in substantial fines.
Although we will attempt to comply, we cannot assure that we would not be
subject to a fine in the future.
Network
Information
FCC rules
protect the privacy of certain information about customers that communications
carriers, including us, acquire in the course of providing communications
services. Such protected information, known as Customer Proprietary Network
Information, or CPNI, includes information related to the quantity,
technological configuration, type, destination and the amount of use of a
communications service. The FCC's initial CPNI rules prevented a carrier from
using CPNI to market certain services without the express approval of the
affected customer, referred to as an opt-in approach. In July 2002, the FCC
revised its opt-in rules in a manner that limits our ability to use the CPNI of
our subscribers without first engaging in extensive customer service processes
and record keeping. Certain states have also adopted state-specific CPNI rules.
We use our subscribers' CPNI in accordance with applicable regulatory
requirements. However, if a federal or state regulatory body determines that we
have implemented those guidelines incorrectly, we could be subject to fines or
penalties. In addition, correcting our internal customer systems and CPNI
processes could generate significant administrative expenses.
Regulation
of Internet Service Providers and VoIP
To date,
the FCC has treated Internet service providers, or ISPs, as enhanced service
providers exempt from federal and state regulations governing common carriers,
including the obligation to pay access charges and contribute to the USF.
Nevertheless, regulations governing the disclosure of confidential
communications, copyright, excise tax and other requirements may apply to our
Internet access services. In addition, Congress has passed a number of laws that
concern the Internet and Internet users. Generally, these laws limit the
potential liability of ISPs and hosting companies that do not knowingly engage
in unlawful activity. Congress is actively considering a variety of Internet
regulation bills, some of which, if signed into law, could impose obligations on
us to monitor the Internet activities of our customers.
Where
communications service providers have offered enhanced services in addition to
their communications services, the FCC and state public utility commissions
generally have exempted the enhanced service component and its associated
revenue from legacy communications regulations. Some of the services we provide
are enhanced services. Future and pending FCC and state proceedings may
significantly affect our future provision of enhanced services.
The use
of the public Internet and private Internet protocol networks to provide voice
communications services, including voice-over-Internet protocol, or VoIP, is a
relatively recent market development. The provision of such services is largely
unregulated within the United States. In a 1998 Report to Congress, the FCC
declined to conclude that IP telephony services constitute telecommunications
services and stated that it would undertake a subsequent examination of whether
certain forms of phone-to-phone Internet telephony are information services or
telecommunications services. The FCC indicated that, in the future, it would
consider the extent to which phone-to-phone Internet telephony providers could
be considered telecommunications carriers such that they could be subject to
regulations governing traditional telephone companies. The FCC also stated that,
although it did not have a sufficient record upon which to make a definitive
ruling, the record suggested that, to the extent that certain forms of
phone-to-phone IP telephony appear to possess the same characteristics as
traditional communications services and to the extent the providers of those
services utilize circuit-switched access in the same manner as interexchange
carriers, the FCC may find it reasonable to require that IP telephony providers
pay charges similar to access charges. The FCC recognized, however, that it
should consider forbearing from imposing rules that would apply to
phone-to-phone Internet telephony providers if they were classified as
telecommunications carriers. To date, the FCC has not imposed regulatory
surcharges or traditional common carrier regulation upon providers of Internet
communications services.
Several
pending FCC proceedings will affect the regulatory status of Internet telephony.
On February 12, 2004, the FCC adopted a notice of proposed rulemaking to
address, in a comprehensive manner, the future regulation of services and
applications making use of Internet protocol, including VoIP. In the absence of
federal legislation, we expect that through this IP-Enabled
Services
proceeding the FCC will resolve certain regulatory issues relating to VoIP
services and develop a regulatory framework that is unique to IP telephony
providers or that subjects VoIP providers to minimal regulatory requirements. We
cannot predict when the FCC may take such actions. The FCC may determine that
certain types of Internet telephony should be regulated like basic interstate
communications services, rendering VoIP calls subject to the access charge
regime that permits local telephone companies to charge long distance carriers
for the use of the local telephone networks to originate and terminate
long-distance calls, generally on a per minute basis. The FCC also may conclude
that Internet telephony providers should contribute to the USF. The FCC's
pending review of intercarrier compensation policies (discussed above) also may
have an adverse impact on enhanced service providers.
In a
series of decisions issued in 2004, the FCC clarified that the FCC, not the
state public utility commissions, has jurisdiction to decide the regulatory
status of certain IP-enabled services, including certain types of VoIP. On
November 12, 2004, in response to a request by Vonage Holdings Corp.
(Vonage), a VoIP services provider, the FCC issued an order preempting the
Minnesota PUC from imposing traditional telephone company regulation of VoIP
service, finding that the FCC alone could make such decisions because the
service cannot be separated into interstate and intrastate communications
without negating federal rules and policies. In September 2003, the
Minnesota PUC had issued an order requiring Vonage to comply with Minnesota laws
that regulate telephone companies. That order was appealed to the U.S. District
Court for the District of Minnesota, which issued a permanent injunction based
on its determination that federal communications law preempts the Minnesota PUC
from imposing state law common carrier telecommunications regulations on
information service providers such as Vonage. The Minnesota PUC appealed the
judgment to the U.S. Court of Appeals for the Eighth Circuit. While the appeal
was pending, the FCC issued its preemption order. In an order filed December 22,
2004, the Eighth Circuit concluded that the intervening FCC preemption order was
binding on the court and could not be challenged in the litigation. On that
basis, the Court of Appeals affirmed the judgment of the district court, that
the Minnesota PUC did not have jurisdiction to regulate the provision of the
Vonage services. Four state commissions, including Minnesota, and the National
Association of State Utility Consumer Advocates (NASUCA) have asked federal
appeals courts to overturn the FCC’s November 2004 order.
On
October 18, 2002, AT&T filed a petition with the FCC seeking a
declaratory ruling that would prevent incumbent local exchange companies from
imposing traditional circuit-switched access charges on phone-to-phone IP
services. In April 2004, the FCC issued an order concluding that, under
current rules, AT&T's phone-to-phone IP telephony service is a
telecommunications service upon which interstate access charges may be assessed.
AT&T's service consists of an interexchange call initiated by an end user
who dials 1 + the called number from a regular telephone. When the
call reaches AT&T's network, AT&T converts it into an IP format and
transports it over AT&T's Internet backbone. AT&T then converts the call
back from the IP format and delivers it to the called party through local
exchange carrier local business lines. This decision is thus limited to
interexchange service that: (1) uses ordinary customer premises equipment
with no enhanced functionality; (2) originates and terminates on the public
switched telephone network; and (3) undergoes no net protocol conversion
and provides no enhanced functionality to end users due to the provider's use of
IP technology. The FCC made no determination regarding retroactive application
of its ruling, and stated that the decision does not preclude it from adopting a
different approach when it resolves the IP-Enabled
Services or
Intercarrier
Compensation
rulemaking proceedings.
On
February 5, 2003, pulver.com filed a petition with the FCC seeking a
declaratory ruling that its Free World Dialup service, which facilitates
point-to-point broadband Internet protocol voice communications, is neither
telecommunications nor a telecommunications service as these terms are defined
in the 1934 Act. The FCC granted the pulver.com petition on February 12,
2004, establishing that Free World Dialup is an information service, as defined
in the 1934 Act. The FCC limited this finding to VoIP services that, like Free
World Dialup, exist solely as an Internet application, similar to electronic
mail and instant messaging, and which do not rely on the public switched
telephone network. Information services are subject to federal regulatory
authority, but may not be regulated by state authorities.
On
December 23, 2003, Level 3 Communications LLC filed a petition asking the
FCC to forbear from applying interstate and intrastate access charges to VoIP
communications. The FCC issued a Public Notice in January 2004 seeking
comment on the petition and a decision is expected in March 2005.
On
February 23, 2005, the FCC denied a petition filed by AT&T requesting that
the FCC deem its “enhanced” prepaid calling card plan interstate and
informational in nature, and thus exempt from universal service and intrastate
access charge payments. The FCC ruled that the AT&T prepaid calling cards at
issue constituted “telecommunications service” that is subject to the assessment
of switched access charges and universal service fund assessments. The FCC also
requested further comment on whether other types of prepaid cards, including
those that provide callers the option to listen to information or are
transmitted using internet protocol technology, are also subject to switched
access charge and universal service fund assessment.
Other
aspects of VoIP and Internet telephony services, such as regulations relating to
the confidentiality of data and communications, copyright issues, taxation of
services, licensing and 911 emergency access, may be subject to federal or state
regulation. For instance, in 2002 the FCC undertook an examination of whether
emergency 911 requirements should be extended to packet-based networks and
services. Similarly, changes in the legal and regulatory environment relating to
the Internet connectivity market, including regulatory changes that affect
communications costs or that may increase the likelihood of competition from
Regional Bell Operating Companies or other communications companies could
increase our costs of providing service.
Taxes
and Regulatory Fees
We are
subject to numerous local, state and federal taxes and regulatory fees,
including but not limited to a 3% Federal excise tax on communications service,
FCC regulatory fees and public utility commission regulatory fees. We have
procedures in place to ensure that we properly collect taxes and fees from our
customers and remit such taxes and fees to the appropriate entity pursuant to
applicable law and/or regulation. If our collection procedures prove to be
insufficient or if a taxing or regulatory authority determines that our
remittances were inadequate, we could be required to make additional payments,
which could have a material adverse effect on our business.
On
July 2, 2004, the Internal Revenue Service issued an advance notice of
proposed rulemaking asking for public comment on expanding the current 3% excise
tax to new communications services, such as VoIP and other IP-based services,
applications, and technologies, to reflect changes in technology. The comment
cycle ended September 30, 2004. We cannot predict the outcome of this
proceeding on our business.
State
Regulation
The 1934
Act maintains the authority of individual states to impose their own regulation
of rates, terms and conditions of intrastate services, so long as such
regulation is not inconsistent with the requirements of federal law. Because we
provide communications services that originate and terminate within individual
states, including both local service and in-state long distance toll calls, we
are subject to the jurisdiction of the PUC and other regulators in each state in
which we provide such services. For instance, we must obtain a Certificate of
Public Convenience and Necessity or similar authorization before we may commence
the provision of communications services in a state. We have obtained
Certificates of Public Convenience and Necessity to provide facilities-based or
resold competitive local and interexchange service in every state, including the
District of Columbia. As our local service business expands, we may offer
additional intrastate services and may become subject to additional state
regulations.
In
addition to requiring certification, state regulatory authorities may impose
tariff and filing requirements and obligations to contribute to state universal
service and other funds. State commissions also have jurisdiction to approve
negotiated rates, and to establish rates through arbitration for
interconnection, including rates for unbundled network elements.
We also
are subject to state laws and regulations regarding slamming, cramming and other
consumer protection and disclosure regulations. These rules could substantially
increase the cost of doing business in any particular state. State commissions
have issued or proposed several substantial fines against competitive local
exchange companies for slamming or cramming. The risk of financial damage from
slamming, in the form of fines, penalties and legal fees and costs, and to
business reputation is significant. A slamming complaint before a state
commission could generate substantial litigation expenses. In addition, state
law enforcement authorities may use their consumer protection authority against
us if we fail to meet applicable state law requirements.
States
also retain the right to sanction a service provider or to revoke certification
if a service provider violates relevant laws or regulations. If any regulatory
agency were to conclude that we are or were providing intrastate services
without the appropriate authority, the agency could initiate enforcement
actions, which could include the imposition of fines, a requirement to disgorge
revenues, or refusal to grant regulatory authority necessary for the future
provision of intrastate services.
We may be
subject to requirements in some states to obtain prior approval for, or notify
the state commission of, any transfers of control, sales of assets, corporate
reorganizations, issuance of stock or debt instruments and related transactions.
Although we believe such authorizations could be obtained in due course, there
can be no assurance that state commissions would grant us authority to complete
any of these transactions, or that such authority would be granted on a timely
basis.
Rates for
intrastate switched access services, which we provide to long-distance companies
to originate and terminate in-state toll calls, are subject to the jurisdiction
of the state in which the call originated and /or terminated. Such regulation by
states could have a material adverse affect on our revenues and business
opportunities within that state. State public utility commissions also regulate
the rates incumbent local exchange companies charge for interconnection of
network elements with, and resale of services by, competitors. In response to
the USTA II decision
and the FCC's ongoing TRO
proceedings, some state commissions have continued proceedings to address issues
affecting the rates, terms and conditions of intrastate services while other
states suspended or terminated their proceedings. Any such proceedings may
affect the rates, terms, and conditions contained in our interconnection
agreements. The pricing, terms and conditions under which the incumbent local
exchange company in each of the states in which we currently operate offers such
services may preclude our ability to offer a competitively viable and profitable
product within these and other states prospectively.
Some
states are considering enactment of legislation that would deregulate
incumbent
local exchange company
broadband facilities and services. If such legislation became law, it could
prevent state regulators from requiring that incumbent
local exchange companies allow
competitive carriers to interconnect with critical facilities used to provide
broadband services on reasonable terms.
On
January 6, 2005, the Michigan Public Service Commission (Michigan PSC) issued an
order that will allow SBC Michigan to deregulate its rates for business local
exchange service in key area exchanges (Access Area A) where it competes with us
for a one-year trial period, effective January 7, 2005 through January 6, 2006.
The commission’s decision comes in response to notices filed with the commission
by SBC on Oct. 26, 2004, which stated that competitive markets exist for its
local exchange services in all but northern Michigan and the Upper Peninsula.
SBC argued that the services and listed areas meet the criteria for competitive
classification outlined in section 208 of the Michigan Telecommunications Act
(MTA). The Michigan PSC determined that only the rates for business basic local
exchange service would be classified as competitive, while other aspects of
service - including licensing, interconnection obligations, local calling areas,
Lifeline, and “911” - would remain subject to regulation. The one-year trial
period will allow the Michigan PSC to assess the effects of the FCC’s phase out
of the unbundled network element platform and allow it to decide whether to make
the competitive declaration permanent. The PSC also scheduled further
proceedings to address whether it should grant SBC’s request to deregulate its
business basic local exchange service in the less densely populated areas
exchanges (Access Area B) and its residential basic local exchange service. If
successful in these actions, it is possible that SBC will be able to offer
extremely low promotional prices and then increase these prices without review
or approval of the Michigan PSC. Presently, SBC cannot increase these prices
without prior approval from the Michigan PSC due to the designation of these
local services as a regulated service. By changing the characterization of these
services to deregulated services, it will be difficult for us to compete with
SBC. We cannot predict the outcome of such further proceedings.
Also on
January 6, 2005, the U.S. District Court for the Eastern District of Michigan
granted a motion for summary judgment filed by SBC Michigan for injunctive
relief against the Michigan PSC’s June 2004 approval of an interim batch hot cut
process. The Michigan PSC had approved an interim batch hot cut process and
ordered the parties to engage in collaborative discussions to reach agreements
regarding the content and testing procedures for a permanent batch hot cut
migration process. SBC in July 2004 asked the court to preliminarily enjoin the
Michigan PSC from enforcing the order. SBC argued that the Michigan PSC was
acting under a delegation of authority from the FCC, which the D.C. Circuit
subsequently held unlawful in USTA
II. The
district court agreed with SBC that the appeals court ruling vacated the
Michigan PSC’s authority to adopt batch hot-cut requirements. The Michigan PSC
appealed this decision to the Sixth Circuit on February 7, 2005. We cannot
predict the outcome of any such appeal if it is filed.
Local
Regulation
In some
municipalities where we have installed facilities, we are required to pay
license or franchise fees based on a percentage of our revenue generated from
within the municipal boundaries. We cannot guarantee that fees will remain at
their current levels following the expiration of existing franchises or that
other local jurisdictions will not impose similar fees.
Federal
and State Regulation of Marketing
Our
current and past direct and partner marketing efforts all require compliance
with relevant federal and state regulations that govern the sale of
telecommunication services. The FCC and many states have rules that prohibit
switching a customer from one carrier to another without the customer’s express
consent and specify how that consent must be obtained and verified. Most states
also have consumer protection laws that further define the framework within
which our marketing activities must be conducted. While directed at curbing
abusive marketing practices, the design and enforcement of these rules can have
the incidental effect of entrenching incumbent local exchange companies and
hindering the growth of new competitors, such as our business.
Our
marketing efforts are carried out through a variety of marketing programs,
including referrals from existing customers, outbound telemarketing, direct
sales through independent agents, broadcast media, online marketing initiatives
and direct mail. Restrictions on the marketing of telecommunication services are
becoming stricter in the wake of widespread consumer complaints throughout the
industry about "slamming" (the unauthorized change of a customer’s service from
one carrier to another carrier) and "cramming" (the unauthorized provision of
additional telecommunication services). The 1996 Act strengthened penalties
against slamming, and the FCC issued and updated rules tightening federal
requirements for the verification of orders for telecommunication services and
establishing additional financial penalties for slamming. In addition, many
states have been active in restricting marketing through new legislation and
regulation, as well as through enhanced enforcement activities. On October 1,
2003, the FCC's rules and regulations governing the creation and enforcement of
national "do not call" databases became effective, which has had the effect of
reducing the total number of leads available to us for outbound telemarketing
(which is currently one of our important sales channels) in a given market. On
February 18, 2005, the FCC released new rules that clarified certain aspects of
the national “do not call” database. Notwithstanding, we can still market to
these leads through our other sales channels, including direct mail. Our
marketing activities have subjected us to investigations or enforcement actions
by government authorities. The constraints of federal and state regulation, as
well as increased FCC, Federal Trade Commission and state enforcement attention,
could limit the scope and the success of our marketing efforts and subject them
to enforcement actions, which may have an adverse effect on us.
Statutes
and regulations designed to protect consumer privacy also may have the
incidental effect of hindering the growth of newer telecommunication carriers
such as us. For example, the FCC rules that restrict the use of "customer
proprietary network information" (information that a carrier obtains about its
customers through their use of the carrier’s services) may make it more
difficult for us to market additional telecommunication services (such as local
and wireless), as well as other services and products, to our existing
customers.
Other
Domestic Regulation
We are
subject to a variety of federal, state, and local environmental, safety and
health laws, and regulations governing matters such as the generation, storage,
handling, use, and transportation of hazardous materials, the emission and
discharge of hazardous materials into the atmosphere, the emission of
electromagnetic radiation, the protection of wetlands, historic sites, and
endangered species and the health and safety of employees. We also may be
subject to laws requiring the investigation and cleanup of contamination at
sites we own or operate or at third-party waste disposal sites. Such laws often
impose liability even if the owner or operator did not know of, or was not
responsible for, the contamination.
We
operate several sites in connection with our operations. We are not aware of any
liability or alleged liability at any operated sites or third-party waste
disposal sites that would be expected to have a material adverse effect on us.
Although we monitor our compliance with environmental, safety and health laws
and regulations, we cannot give assurances that it has been or will be in
complete compliance with these laws and regulations. We may be subject to fines
or other sanctions by federal, state and local governmental authorities if we
fail to obtain required permits or violate applicable laws and
regulations.
CORPORATE
HISTORY AND INFORMATION
Talk
America Inc. (formerly, Talk.com Holding Corp. and Tel-Save, Inc.), our
predecessor and now our principal operating subsidiary, was incorporated in
Pennsylvania in May 1989 as a provider of long distance phone service. We were
incorporated in June 1995. In 2000, we decided to expand beyond our historical
long distance service offerings and utilize the unbundled network element
platform to enter the large local telecommunications market and diversify our
product portfolio through the bundling of local service with our core long
distance service offerings. In 2003 we began to develop our own local network to
reduce our reliance upon the unbundled network element platform and expect to
continue using our own local network to provide services to new
customers.
The
address of our current principal executive offices is 12020 Sunrise Valley
Drive, Suite 250, Reston, Virginia 20190, and our telephone number is (703)
391-7500. Our web addresses are www.talkamerica.com and www.talk.com. We make
available free of charge on our websites, www.talkamerica.com and www.talk.com,
our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K, and amendments to our reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we file such material with, or furnish it to, the
Securities and Exchange Commission.
EMPLOYEES
As of
December 31, 2004, we employed approximately 1,200 persons. We consider
relations with our employees to be good.
ITEM
2. PROPERTIES.
We lease
11,000 square feet of office space in Reston, Virginia, that serves as our
headquarters and is the location of executive and marketing and network
personnel. We own a 24,000 square foot facility in New Hope, Pennsylvania that
is the location of certain other executives and our finance, legal and
information technology development personnel and some of our marketing
personnel. We also lease properties in the cities in which switches for our
network have been installed (New York, New York; San Francisco, California;
Chicago, Illinois; Dallas, Texas; Jacksonville, Florida; and Southfield,
Michigan). We lease 3,500 square feet of office space in Chicago, Illinois for
additional information technology development personnel.
With
respect to our sales, provisioning and customer service operations, we own a
32,000 square foot facility located in Palm Harbor, Florida. We also lease the
following facilities for sales, provisioning and customer service operations: a
29,000 square foot facility in Orlando, Florida; a 5,000 square foot facility in
Greenville, South Carolina; a 25,000 square foot facility in Palm Harbor,
Florida, and; a 8,000 square foot facility in New Port Richey, Florida.
ITEM
3. LEGAL PROCEEDINGS.
We are
party to a number of legal actions and proceedings arising from our provision
and marketing of telecommunications services (including matters involving do not
call and billing regulations), as well as certain legal actions and regulatory
matters arising in the ordinary course of business. We believe that the ultimate
outcome of the foregoing actions will not result in a liability that would have
a material adverse effect on our financial condition or results of
operations.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Our
executive officers, as of March 11, 2005, were as follows:
Name |
|
Age |
|
Position |
|
|
|
|
|
Edward
B. Meyercord, III (1) |
|
39 |
|
Chief
Executive Officer, President and Director |
Warren
Brasselle |
|
47 |
|
Executive
Vice President - Network Operations |
Jeffrey
Earhart |
|
43 |
|
Executive
Vice President - Customer Operations |
Aloysius
T. Lawn, IV |
|
46 |
|
Executive
Vice President - General Counsel and Secretary |
Timothy
W. Leonard |
|
44 |
|
Chief
Information Officer |
Thomas
Walsh |
|
45 |
|
Senior
Vice President - Finance and Treasurer |
David
G. Zahka |
|
45 |
|
Chief
Financial Officer |
(1) |
Director
whose term expires in 2006. |
All
officers are elected annually by the Board of Directors and hold office until
their successors are elected and qualified.
EDWARD B.
MEYERCORD, III. Mr. Meyercord currently serves as our Chief Executive Officer
and President. From May 2001 through December 2003, Mr. Meyercord served as our
President. He served as our Chief Financial Officer between August 1999 and
December 2001 and Chief Operating Officer between January 2000 and May 2001. He
joined us in September of 1996 as the Executive Vice President, Marketing and
Corporate Development. Prior to joining us, Mr. Meyercord was a Vice President
in the Global Telecommunications Corporate Finance Group at Salomon Brothers,
Inc., based in New York. Prior to Salomon Brothers he worked in the corporate
finance department at PaineWebber Incorporated. Mr. Meyercord is also a member
of our Board of Directors.
WARREN
BRASSELLE. Mr. Brasselle currently serves us as Executive Vice President -
Network Operations. Between April 2000 and February 2004, Mr. Brasselle served
us as Senior Vice President - Operations. Prior to joining us, Mr. Brasselle was
Vice President of Operations for Cable and Wireless North America since 1996,
where he was broadly responsible for the design, provisioning, and maintenance
of Cable & Wireless' voice, data, and IP network. Mr. Brasselle also held a
variety of operational positions at MCI, now MCI WorldCom Inc. and Williams
Telecommunications.
JEFFREY
EARHART. Mr. Earhart currently serves us as Executive Vice President - Customer
Operations. Between 2000 and 2004, he served us as Senior Vice President -
Customer Operations and between 1997 and 2000, as Vice President, Operations.
Mr. Earhart originally joined us as our Director of Retail Sales and
Provisioning in 1990, a position he held until 1992. Prior to rejoining us in
1997, Mr. Earhart served as President of Collective Communications Services, an
independent long distance reseller of our long distance services.
ALOYSIUS
T. LAWN, IV. Mr. Lawn joined us in January 1996 and currently serves as our
Executive Vice President - General Counsel and Secretary. Prior to joining us,
from 1985 through 1995, Mr. Lawn was an attorney in private
practice.
TIMOTHY
W. LEONARD. Mr. Leonard joined us in September 2000 and currently serves as our
Chief Information Officer. Prior to joining us, from 1991 through 2000, Mr.
Leonard was an independent contractor who performed engagements in the
information technology area for numerous Fortune 1000 companies. From 1988 to
1991, Mr. Leonard served as a senior consultant with the PA Consulting Group, an
information technology consulting company.
THOMAS M.
WALSH. Mr. Walsh joined us in September of 2000 and currently serves as our
Senior Vice President - Finance and Treasurer. Before joining us, he served as
director of finance at Comcast Cellular Communications, a telecommunications
company, from 1996 to 1999, and Regional Controller of SBC Mobil Systems, a
successor corporation, from 1999 to 2000. Prior to Comcast Cellular
Communications, he worked for Call Technology Corporation, a telecommunications
company, where he was responsible for all finance and accounting functions as
Chief Financial Officer. Prior to his tenure with Call Technology Corporation,
Mr. Walsh served as an Audit Manager for Ernst & Young. Mr. Walsh is a
Certified Public Accountant.
DAVID G.
ZAHKA. Mr. Zahka joined us in December of 2001 as Chief Financial Officer.
Before joining us, he spent more than 15 years with PaineWebber Incorporated,
and its successor UBS Warburg, where he served most recently as Executive
Director of the Financial Sponsors Group. At PaineWebber, Mr. Zahka also served
as Senior Vice President of Debt Capital Markets and First Vice President of its
Utility Finance Group.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Market
Information; Holders; Dividends
Our
common stock, $.01 par value per share, is traded on the Nasdaq National Market
under the symbol "TALK." As of March 11, 2005, there were approximately 886
record holders of our common stock. We have never declared or paid any cash
dividends on our capital stock and do not anticipate paying cash dividends in
the foreseeable future. High and low quotations listed below are actual closing
sales prices as reported by the Nasdaq National Market:
Common
Stock |
|
Price
Range Of Common Stock |
|
|
|
High |
|
Low |
|
2003 |
|
|
|
|
|
|
|
First
Quarter |
|
$ |
7.34 |
|
$ |
3.52 |
|
Second
Quarter |
|
|
13.26 |
|
|
6.78 |
|
Third
Quarter |
|
|
16.04 |
|
|
9.97 |
|
Fourth
Quarter |
|
|
15.39 |
|
|
9.68 |
|
2004 |
|
|
|
|
|
|
|
First
Quarter |
|
|
12.05 |
|
|
8.14 |
|
Second
Quarter |
|
|
10.05 |
|
|
7.07 |
|
Third
Quarter |
|
|
7.70 |
|
|
5.05 |
|
Fourth
Quarter |
|
|
7.47 |
|
|
5.01 |
|
Equity
Compensation Plans and Securities
The
following table sets forth certain information as of December 31, 2004 with
respect to compensation plans under which our equity securities are authorized
for issuance:
Plan
Category |
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights |
|
Weighted-average
exercise price of outstanding options, warrants and
rights |
|
Number
of securities remaining available for future issuance under equity
compensation plans(1) |
|
|
|
|
|
|
|
Equity
compensation
plans approved by
security holders |
|
2,620,093 |
|
$7.35 |
|
459,429 |
Equity
compensation
plans not approved
by security holders (2) |
|
2,261,751 |
|
$9.64 |
|
219,155 |
Total |
|
4,881,844 |
|
$8.41 |
|
678,584 |
(1) Under all
plans, if any shares subject to a previous award are forfeited, or if any award
is terminated without issuance of shares or satisfied with other consideration,
the shares subject to such award shall again be available for future
grants.
(2) These
shares are primarily under our 2001 Non-Officer Long Term Incentive Plan,
pursuant to which up to 1,666,666 shares of our common stock may be issued to
our non-executive employees in the form of options, rights, restricted stock and
incentive shares. The balance of these shares include shares issuable on
exercise of certain options granted to non-executive employees and granted to
executive officers in connection with their initial employment and without
shareholder approval as permitted by the rules of Nasdaq. To the extent
permitted by the rules of Nasdaq, there may be further grants of securities by
option or otherwise without shareholder approval, both to non-executive
employees and in connection with the initial employment of executive officers.
See also Note 6 of the Notes to Consolidated Financial Statements in Item 8
of Part II of this Annual Report, which Note is incorporated herein by
reference.
Stock
Purchases
We made
no purchases of our common stock in the quarter ended December 31, 2004. On June
1, 2004, we announced that our Board of Directors had authorized a share buy
back program for us to purchase up to $50 million of our outstanding shares. The
shares may be purchased from time to time on the open market and private
transactions. There is currently no stated expiration date for this program and
through December 31, 2004, we had not purchased any shares under this
program.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.
In the
normal course of business, our financial position is subject to a variety of
risks, such as the collectibility of our accounts receivable and the
recoverability of the carrying values of our long-term assets. Our long-term
obligations consist primarily of long-term debt with fixed interest rates. We do
not presently enter into any transactions involving derivative financial
instruments for risk management or other purposes.
Our
available cash balances are invested on a short-term basis (generally overnight)
and, accordingly, are not subject to significant risks associated with changes
in interest rates. Substantially all of our cash flows are derived from our
operations within the United States and we are not subject to market risk
associated with changes in foreign exchange rates.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM
9B. OTHER INFORMATION.
Effective as
of March 15, 2005, we entered into a three-year employment agreement with
Timothy Leonard. Under the contract, Mr. Leonard is entitled to a minimum annual
base salary of $250,000 and certain other perquisites made generally
available to our senior executive officers.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
AND EXECUTIVE OFFICERS
See the
information regarding our executive officers included in Part I of this Annual
Report under the caption “EXECUTIVE OFFICERS OF THE REGISTRANT,” which
information is incorporated herein by reference. Our directors, as of March 11,
2005, were as follows:
Name |
|
Age |
|
Position |
|
|
|
|
|
Gabriel
Battista (3) |
|
60 |
|
Chairman
of the Board of Directors |
Mark
Fowler (1) |
|
63 |
|
Director |
Robert
Korzeniewski (1) |
|
48 |
|
Director |
Edward
B. Meyercord, III (2) |
|
39 |
|
Chief
Executive Officer, President and Director |
Ronald
Thoma (3) |
|
70 |
|
Director |
(1) |
Director
whose term expires in 2005. |
(2) |
Director
whose term expires in
2006. |
(3) |
Director
whose term expires in 2007. |
All
officers are elected annually by the Board of Directors and hold office until
their successors are elected and qualified.
GABRIEL
BATTISTA. Mr. Battista currently serves as Chairman of our Board of Directors.
From January 1999 through May 2001 Mr. Battista served as our Chairman of the
Board of Directors, Chief Executive Officer and President. From May 2001 through
December 2003, Mr. Battista served as our Chairman of the Board of Directors and
Chief Executive Officer. From January 2004 through December 2004, Mr. Battista
served as Executive Chairman of the Board of Directors; Mr. Battista’s term as
an employee of the Company ended on December 31, 2004 (he continues as the
non-executive Chairman of our Board and a Director). Prior to joining us in
January of 1999 as a Director and Chief Executive Officer, Mr. Battista served
as Chief Executive Officer of Network Solutions Inc., an Internet domain name
registration company. Prior to joining Network Solutions, Mr. Battista served
both as CEO and as President and Chief Operating Officer of Cable &
Wireless, Inc., a telecommunication provider. His career also included
management positions at US Sprint, GTE Telenet and The General Electric Company.
Mr.
Battista serves as a trustee of Capitol College and as a director of a privately
held company.
MARK
FOWLER. Mr. Fowler has been one of our Directors since September 1999. From 1981
to 1987, he was the Chairman of the FCC. From 1987 to 1994, Mr. Fowler was
Senior Communications Counsel at Latham & Watkins, a law firm, and of
counsel from 1994 to 2000. From 2000 through 2004, Mr. Fowler founded and served
as Chairman of the Board of Directors of AssureSat, Inc., a provider of
telecommunications satellite backup services. Since 2002, Mr. Fowler has been
self-employed and pursuing investments in various companies and real estate.
From 1991 to 1994, he was the founder, Chairman and Chief Executive Officer of
PowerFone Holdings Inc., a telecommunications company. From 1994 to 2000 he was
a founder and chairman of UniSite, Inc., a developer of antenna sites for use by
multiple wireless operators. From 1999 to December 2002, Mr. Fowler served as a
director of Pac-West Telecomm, Inc., a competitive local exchange carrier. From
1999 to date, Mr. Fowler has served as a director of Beasley Broadcast Group, a
radio broadcasting company.
ROBERT
KORZENIEWSKI. Mr. Korzeniewski has been one of our Directors since July 2003. He
is currently the Executive Vice President, Corporate Development and Strategy,
with VeriSign Inc., which provides infrastructure services for Internet and
telecommunications networks. From 1996 to 2000, Mr. Korzeniewski served as Chief
Financial Officer of Network Solutions, Inc., which was acquired by VeriSign in
June 2000. From 1987 to 1996, he held a variety of senior financial positions
with SAIC. Mr. Korzeniewski is a certified public accountant. He serves as a
director of Kintera, Inc., a software provider for nonprofit organizations. Mr.
Korzeniewski is also a director of a number of privately held
companies.
EDWARD B.
MEYERCORD, III. Mr. Meyercord currently serves as our Chief Executive Officer
and President. From May 2001 through December 2003, Mr. Meyercord served as our
President. He served as our Chief Financial Officer between August 1999 and
December 2001 and Chief Operating Officer between January 2000 and May 2001. He
joined us in September of 1996 as the Executive Vice President, Marketing and
Corporate Development. Prior to joining us, Mr. Meyercord was a Vice President
in the Global Telecommunications Corporate Finance Group at Salomon Brothers,
Inc., based in New York. Prior to Salomon Brothers he worked in the corporate
finance department at PaineWebber Incorporated. Mr. Meyercord has served as
one of our Directors since 2001.
RONALD
THOMA. Mr. Thoma is currently a business consultant, having retired in 2000 as
an Executive Vice President of Crown Cork and Seal Company, Inc., a manufacturer
of packaging products, where he had been employed since 1955. Mr. Thoma has
served as one of our Directors since 1995.
Audit
Committee. In 2004,
the Audit Committee consisted of Mark S. Fowler, Robert Korzeniewski and Ronald
R. Thoma. Our Board has determined that all of the members of the Audit
Committee are independent, as that term is defined in the NASD’s listing
standards. Our Board of Directors has also determined that Robert Korzeniewski
is an "audit committee financial expert" as this term is defined in the rules
and regulations adopted by the SEC.
Code
of Ethics. We have
adopted a code of ethics that applies to our principal executive officer,
principal financial officer and principal accounting officer. The text of this
code of ethics is posted on our internet website, www.talkamerica.com. We intend
to satisfy our disclosure requirements regarding an amendment to, or waiver
from, a provision of this code of ethics by posting such information on our
internet website, www.talkamerica.com.
SECTION
16(a) BENEFICIAL OWNERSHIP COMPLIANCE
Under
Section 16(a) of the Securities Exchange Act of 1934, as amended, our directors
and certain officers and persons who are the beneficial owners of more than 10
percent of our Common Stock are required to report their ownership of the Common
Stock, options and certain related securities and any changes in that ownership
to the SEC. Specific due dates for these reports have been established, and we
are required to report any failure to file by such dates in 2004. We believe
that all of the required filings have been made in a timely manner. In making
this statement, we have relied on copies of the reporting forms received by
us.
ITEM
11. EXECUTIVE COMPENSATION.
The
following table sets forth information for the fiscal years ended December 31,
2004, 2003 and 2002 as to the compensation for services rendered paid by us to
our Executive Chairman of the Board, to our Chief Executive Officer and to the
five other most highly compensated executive officers whose annual salary and
bonus exceeded $100,000.
Summary
Compensation Table
|
Annual
Compensation |
Long
Term
Compensation |
Name
and Principal Position |
Year |
Salary
(1) |
Bonus
(1) |
Securities
Underlying
Options/SARS |
|
|
|
|
|
Gabriel
Battista, Executive Chairman of |
2004 |
$500,000 |
$1,000,000 |
-- |
the
Board of Directors |
2003 |
$500,000 |
$645,000 |
250,000(2) |
|
2002 |
$500,000 |
$535,000 |
-- |
|
|
|
|
|
Edward
B. Meyercord, III, Chief |
2004 |
$500,000 |
$310,000 |
-- |
Executive
Officer, President and Director |
2003 |
$350,000 |
$452,500 |
300,000(3)(4) |
|
2002 |
$350,000 |
$381,500 |
-- |
|
|
|
|
|
Aloysius
T. Lawn, IV, Executive Vice |
2004 |
$275,000 |
$139,900 |
-- |
President
- General Counsel and |
2003 |
$275,000 |
$287,800 |
60,000(3) |
Secretary |
2002 |
$275,000 |
$245,400 |
-- |
|
|
|
|
|
Warren
A. Brasselle, Executive Vice |
2004 |
$250,000 |
$127,500 |
-- |
President
- Network Operations |
2003 |
$250,000 |
$265,500 |
60,000(3) |
|
2002 |
$250,000 |
$233,500 |
8,333(5) |
|
|
|
|
|
Timothy
Leonard, Chief Information |
2004 |
$250,000 |
$127,500 |
-- |
Officer |
2003 |
$250,000 |
$265,500 |
60,000(3) |
|
2002 |
$224,039 |
$217,500 |
25,000(6) |
|
|
|
|
|
Jeffrey
Earhart, Executive Vice |
2004 |
$250,000 |
$124,000 |
-- |
President
- Customer Operations |
2003 |
$230,000 |
$312,000 |
60,000(3) |
|
2002 |
$230,000 |
$333,000 |
-- |
|
|
|
|
|
David
G. Zahka, Chief Financial Officer |
2004 |
$250,000 |
$124,000 |
-- |
|
2003 |
$250,000 |
$264,500 |
60,000(3) |
|
2002 |
$250,000 |
$233,500 |
-- |
(1) The costs
of certain benefits not properly categorized as salary or benefits are not
included because they did not exceed, in the case of any executive officer named
in the table, the lesser of $50,000 or 10% of the total annual salary and bonus
reported in the above table.
(2) Options
to purchase shares of our common stock. Mr. Battista was granted options under
our 2003 Long Term Incentive Plan to purchase 250,000 shares of our common stock
at an exercise price of $10.49 per share that vest in one year.
(3) Options
to purchase shares of our common stock. Messrs. Meyercord, Lawn, Earhart,
Brasselle, Zahka and Leonard were granted options under our 2003 Long Term
Incentive Plan to purchase 200,000, 60,000, 60,000, 60,000, 60,000 and 60,000
shares, respectively, of our common stock at an exercise price of $10.49 per
share that vest over three years.
(4) Options
to purchase shares of our common stock. Mr. Meyercord was granted options under
our 1998 Long Term Incentive Plan to purchase 50,000 shares of our common stock
at an exercise price of $10.49 per share that vest over three years. Mr.
Meyercord was also granted options under our 2000 Long Term Incentive Plan to
purchase 50,000 shares of our common stock at an exercise price of $10.49 per
share that vest over three years.
(5) Options
to purchase shares of our common stock. Mr. Brasselle was granted options under
our 1998 Long Term Incentive Plan to purchase 8,333 shares of our common stock
at an exercise price of $1.53 per share that vest over three years.
(6) Options
to purchase shares of our common stock. In 2002, prior to Mr. Leonard becoming
one of our executive officers, Mr. Leonard was granted options under our 2001
Non-Officer Long Term Incentive Plan to purchase 25,000 shares of our common
stock at an exercise price of $1.53 per share that vest over three
years.
During
2004, there were no grants of stock options to the executive officers named in
the Summary Compensation Table, above. The following table sets forth certain
information as to aggregated option/SAR exercises in our fiscal year ended
December 31, 2004 and option/SAR values as of December 31, 2004 for each of the
executive officers named in the Summary Compensation Table, above.
Aggregated
Option/SAR Exercises in Last Fiscal Year
and
Fiscal Year-End Option/SAR Values
Name |
Shares
Acquired on Exercise |
Value
Realized |
Number
of Securities Underlying Unexercised Options/SARs
-----------------------------
Exercisable/Unexercisable |
Value
of Unexercised In-the-Money
Options/SARs
(1)
-----------------------------
Exercisable/Unexercisable |
Gabriel
Battista |
0 |
0 |
883,332/83,333 |
$2,242,083.92/$51,666.46 |
Edward
B. Meyercord, III |
0 |
0 |
316,667/249,999 |
$763,500.00/$31,000.00 |
Aloysius
T. Lawn, IV |
0 |
0 |
148,332/85,833 |
$356,300.00/$28,416.46 |
Warren
A. Brasselle |
0 |
0 |
110,556/42,777 |
$319,540.02/$14,134.93 |
Timothy
Leonard |
0 |
0 |
101,666/48,333 |
$319,365.74/$42,414.97 |
Jeffrey
Earhart |
0 |
0 |
105,000/71,000 |
$305,400.00/$19,220.00 |
David
G. Zahka |
0 |
0 |
120,000/40,000 |
$542,000.00/$0.00 |
(1) Calculated
as the difference between the exercise/base-price of the options/SARs and a
year-end fair market value of the underlying securities equal to
$6.62.
Compensation
Of Directors
We
currently pay non-employee directors an annual retainer of $20,000. We also pay
the Chairman of the Audit Committee an additional annual retainer of $5,000. The
Board approved grants of options to Messrs. Fowler, Thoma and Korzeniewski on
December 22, 2004, to purchase 15,000 shares of Common Stock each under the 1998
Long Term Incentive Plan at the market value on the date of grant, who are
non-employee directors. Non-employee directors are also reimbursed for
reasonable expenses incurred in connection with attendance at Board meetings or
meetings of committees thereof.
Employment
Contracts
Edward B.
Meyercord, III entered into a three-year employment agreement to serve as our
Chief Executive Officer and President effective as of January 1, 2004.
Commencing in 2004, under the contract, Mr. Meyercord is entitled to a minimum
annual base salary of $500,000 and certain other perquisites made generally
available to our senior executive officers.
Aloysius
T. Lawn, IV entered into a three-year employment agreement effective as of July
30, 2004. Under the contract, Mr. Lawn is entitled to a minimum annual base
salary of $275,000 and certain other perquisites made generally available to our
senior executive officers.
Warren
Brasselle entered into a three-year employment agreement effective as of July
30, 2004. Under the contract, Mr. Brasselle is entitled to a minimum annual base
salary of $250,000 and certain other perquisites made generally available to our
senior executive officers.
Timothy
Leonard entered into a three-year employment agreement effective as of March 15,
2005. Under the contract, Mr. Leonard is entitled to a minimum annual base
salary of $250,000 and certain other perquisites made generally available to our
senior executive officers.
Jeffrey
Earhart entered into a three-year employment agreement effective as of July 30,
2004. Under the contract, Mr. Earhart is entitled to a minimum annual base
salary of $250,000 and certain other perquisites made generally available to our
senior executive officers.
David G.
Zahka entered into a three-year employment agreement effective as of July 30,
2004. Under the contract, Mr. Zahka is entitled to a minimum annual base salary
of $250,000 and certain other perquisites made generally available to our senior
executive officers.
Each of
the employment agreements for Messrs. Meyercord, Lawn, Brasselle, Leonard,
Earhart and Zahka provides for immediate vesting of options in event of a
"change of control" (as defined in the agreements) of us and provides for
severance benefits in the event employment is terminated by us without cause
prior to the end of the term and for a certain period beyond the end of the term
in the event of a "change of control." The severance benefits in the event
employment is terminated by us without cause prior to the end of the term are
generally the payment of an amount equal to one year’s base salary plus all
bonus amounts due such executive at the time of termination, as well as the
continuation of various employee benefits for one year. The severance benefits
in the event employment is terminated for a certain period beyond the end of the
term in the event of a "change of control" are generally the payment of an
amount equal to one year’s base salary plus all the average annual incentive
bonus earned by the executive in the preceding four years, as well as the
continuation of various employee benefits for one year.
Each of
the above-described agreements requires the executive to maintain the
confidentiality of our information and assign any inventions to us. In addition,
each of the executive officers has agreed that he will not compete with us by
engaging in any capacity in any business that is competitive with our business
during the term of his respective agreement and thereafter for specified
periods.
Each of our executive officers is entitled to
particiapte in our long-term incentive plans and in annual bonus plans that may
be established by our Board of Directors or the compensation committee
thereof.
Compensation
Committee Interlocks And Insider Participation
None.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The
Compensation Plans and Securities table from Item 5 of this Annual Report is
incorporated herein by reference.
The
following table sets forth certain information known to us with respect to
beneficial ownership of our common stock as of March 10, 2005 (except as
otherwise noted) by (i) each stockholder who is known by us to own beneficially
more than five percent of the outstanding common stock, (ii) each of our
directors and nominees for director, (iii) each of the executive officers named
below and (iv) all our current directors and executive officers as a group.
Except as otherwise indicated below, we believe that the beneficial owners of
the common stock listed below have sole investment and voting power with respect
to such shares.
Name
of Beneficial Owner or Identity of Group |
|
Number
of Shares Beneficially Owned (1) |
|
Percent
of Shares Beneficially Owned |
|
|
|
|
|
Paul
Rosenberg
650
N. E. 5th Avenue
Boca
Raton, Fl 33432
|
|
1,919,995(2) |
|
7.2% |
LSV
Asset Management
One
North Wacker Drive, Suite 4000
Chicago,
IL 60606
|
|
1,466,940(3) |
|
5.5% |
CCM
Master Qualified Fund, Ltd., Coghill Capital Management, LLC and Clint D.
Coghill
One
North Wacker Drive, Suite 4350
Chicago,
IL 60606 |
|
2,612,117(4) |
|
9.8% |
|
|
|
|
|
Gabriel
Battista |
|
928,333(5) |
|
3.4% |
Mark
S. Fowler |
|
122,374(5) |
|
* |
Edward
B. Meyercord, III |
|
417,043(5) |
|
1.5% |
Ronald
R. Thoma |
|
44,311(5) |
|
* |
Robert
Korzeniewski |
|
7,667(5) |
|
* |
Aloysius
T. Lawn, IV |
|
225,381(5) |
|
1.0% |
Jeffrey
Earhart |
|
140,768(5) |
|
1.0% |
Warren
Brasselle |
|
123,166(5) |
|
* |
Timothy
Leonard |
|
125,999(5) |
|
* |
David
G. Zahka |
|
126,666(5) |
|
* |
All
directors and executive officers as a group
(11
persons) |
|
2,348,374(5) |
|
8.2% |
* Less than
1%
(1) The
securities "beneficially owned" by a person are determined in accordance with
the definition of "beneficial ownership" set forth in the regulations of the SEC
and, accordingly, may include securities owned by or for, among others, the
spouse, children or certain other relatives of such person. The same shares may
be beneficially owned by more than one person. Beneficial ownership may be
disclaimed as to certain of the securities.
(2) The
foregoing information is derived from the Schedule 13D/A filed by Paul
Rosenberg, the Rosenberg Family Limited Partnership, PBR, Inc. and the New
Millennium Charitable Foundation on February 12, 1999.
(3) The foregoing
information is derived from the Schedule 13G filed by LSV Asset Management on
February 11, 2005. This Schedule indicates that, as of December 31, 2004, LSV
Asset Management had beneficial ownership of 1,466,940 shares, with sole power
to vote or to direct the vote for 871,940 shares and sole power to dispose or to
direct the disposition of 1,466,940 shares.
(4) The
foregoing information is derived from the Schedule 13G/A filed by CCM Master
Qualified Fund, Ltd., Coghill Capital Management, LLC and Clint D. Coghill on
February 9, 2005. This Schedule indicates that, as of December 31, 2004, CCM
Master Qualified Fund, Ltd., Coghill Capital Management, LLC and Clint D.
Coghill had beneficial ownership of 2,612,117 shares, with shared voting power
for 2,612,117 shares and shared dispositive power for 2,612,117
shares.
(5) Includes
shares of our common stock that could be acquired upon exercise of options
exercisable within 60 days after March 10, 2005 as follows: Gabriel Battista -
883,332; Mark S. Fowler - 35,000; Edward B. Meyercord III - 366,667; Ronald R.
Thoma - 25,000; Robert Korzeniewski - 6,667; Aloysius T. Lawn IV - 194,165;
Jeffrey Earhart - 136,000; Warren Brasselle - 113,333; Timothy Leonard -
109,999; David G. Zahka - 120,000; and all directors and executive officers as a
group - 2,073,496.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective
as of January 1, 2005, Mr. Gabriel Battista, whose term as the executive
chairman of our board of directors and an employee (he continues as the
non-executive chairman of our board and a director) ended on December 31, 2004,
entered into a one-year consulting agreement with Talk America Holdings, Inc.
pursuant to which consulting agreement Mr. Battista will provide consulting
services to us in exchange for monthly compensation of $25,000.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
During
our fiscal years ended December 31, 2004 and 2003, PricewaterhouseCoopers LLP
provided services to us in the following categories and amounts:
Description |
|
2004 |
|
2003 |
Audit Fees |
|
$ |
715,900 |
|
$ |
358,600 |
|
Audit-Related Fees |
|
$ |
0 |
|
$ |
0 |
|
Tax Fees |
|
$ |
8,696 |
|
$ |
2,440 |
|
All Other Fees |
|
$ |
1,500 |
|
$ |
6580 |
|
In the
above table, “audit fees” are fees we paid to PricewaterhouseCoopers LLP for
professional services for the audit of our consolidated financial statements
included in our Form 10-K and review of financial statements included in our
Form 10-Qs, or for services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements; “audit related
fees” are fees billed by PricewaterhouseCoopers LLP for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements that are not reported under “audit fees;” “tax fees”
are fees billed by PricewaterhouseCoopers LLP for tax compliance, tax advice,
and tax planning services; and “all other fees” are fees billed by
PricewaterhouseCoopers LLP to us for any services not included in the first
three categories, including the annual subscription fee for an online
information service.
The Audit
Committee has determined that the services provided by PricewaterhouseCoopers
LLP to us that were not related to its audit of our financial statements were at
all relevant times compatible with that firm's independence and approved all
such services.
The Audit
Committee pre-approves all audit and permissible non-audit services provided by
our independent registered public accounting firm. The Audit Committee may
delegate pre-approval of audit and non-audit services to a subcommittee of the
Audit Committee, provided that any decisions made by such subcommittee shall be
presented to the full Audit Committee at its next scheduled
meeting.
In 2004,
the Audit Committee pre-approved 100% of the services provided by our
independent auditors.
PART
IV
ITEM
15. EXHIBITS
(3)
EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
3.1
|
Our
composite form of Amended and Restated Certificate of Incorporation, as
amended through October 15, 2002 (incorporated by reference to Exhibit 3.2
to our Current Report on Form 8-K, dated October 16, 2002).
|
3.2 |
Our
Bylaws (incorporated by reference to Exhibit 3.2 to our registration
statement on Form S-1 (File No. 33-94940)).
|
3.3
|
Certificate
of Designation of Series A Junior Participating Preferred Stock dated
August 27, 1999 (incorporated by reference to Exhibit A to Exhibit 1 to
our registration statement on Form 8-A (File No. 000-26728)).
|
4.1
|
Specimen
of Talk America Holdings, Inc. common stock certificate (incorporated by
reference to Exhibit 4.1 to our Annual Report on Form 10-K for the year
ended December 31, 2002). |
4.2
|
Form
of Warrant Agreement for Elec Communications, Kenneth Baritz, Joel Dupre,
Keith Minella, Rafael Scolari, and William Rogers dated August 9, 2000
(incorporated by reference to Exhibit 4.2 to our Annual Report on Form
10-K for the year ended December 31, 2000).
|
4.3
|
Form
of Warrant Agreement for MCG Credit Corporation dated August 9, 2000
(incorporated by reference to Exhibit 4.3 to our Annual Report on Form
10-K for the year ended December 31, 2000).
|
4.4
|
Form
of Warrant Agreement for MCG Credit Corporation dated October 20, 2000
(incorporated by reference to Exhibit 4.4 to our Annual Report on Form
10-K for the year ended December 31, 2000).
|
4.5
|
Form
of Warrant Agreement for MCG Finance Corporation dated October 20, 2000
(incorporated by reference to Exhibit 4.5 to our Annual Report on Form
10-K for the year ended December 31, 2000).
|
10.1 |
Employment
Agreement with Aloysius T. Lawn, IV dated July 30, 2004 (incorporated by
reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004).* |
10.2
|
Employment
Agreement with Edward B. Meyercord, III dated January 1, 2004
(incorporated by reference to Exhibit 10.2 to our Annual Report on Form
10-K for the year ended December 31, 2003).*
|
10.3
|
Tel-Save
Holdings, Inc. 1995 Employee Stock Option Plan (incorporated by reference
to Exhibit 10.15 to our registration statement on Form S-1 (File No.
33-94940)).* |
10.4 |
Stock
Option Agreement, dated as of November 13, 1998, with Gabriel Battista
(incorporated by reference to Exhibit 10.4 to our Current Report on Form
8-K dated January 20, 1999).* |
10.5
|
1998
Long-Term Incentive Plan (incorporated by reference to Exhibit 10.14 to
our Current Report on Form 8-K dated January 20, 1999).*
|
10.6
|
2000
Long-Term Incentive Plan (incorporated by reference to Exhibit 10.31 to
our Registration Statement on Form S-4 (No. 333-40980)). *
|
10.7 |
Form
of Non-Qualified Stock Option Agreement, dated December 12, 2000, for each
of Gabriel Battista, Aloysius T. Lawn IV and Edward B. Meyercord, III
(incorporated by reference to Exhibit 10.40 to our Annual Report on Form
10-K for the year ended December 31, 2000).*
|
10.8
|
Rights
Agreement dated as of August 19, 1999 by and between the Talk.com Inc. and
First City Transfer Company, as Rights Agent (incorporated by reference to
Exhibit 1 to our registration statement on Form 8-A (File No. 000-26728)).
|
10.9
|
Employment
Agreement with Thomas M. Walsh dated as of August 7, 2000 (incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q dated
November 14, 2000).* |
10.10
|
Indemnification
Agreement with Thomas M. Walsh dated as of August 7, 2000 (incorporated by
reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q dated
November 14, 2000).* |
10.11
|
Non-Qualified
Stock Option Agreement with Thomas M. Walsh dated as of August 7, 2000
(incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form
10-Q dated November 14, 2000).* |
10.12
|
Lease
by and between Talk.com Holding Corp. and University Science Center, Inc.
dated April 10, 2000 (incorporated by reference to Exhibit 10.54 to our
Annual Report on Form 10-K for the year ended December 31, 2000).
|
10.13
|
Lease
by and between The Other Phone Company, dba Access One Communications and
University Science Center, Inc. dated December 8, 1999 (incorporated by
reference to Exhibit 10.55 to our Annual Report on Form 10-K for the year
ended December 31, 2000). |
10.14
|
Restated
Access One Communications Corp. 1997 Stock Option Plan (incorporated by
reference to Exhibit 4.2 to our registration statement on Form S-8 (File
No. 333-52166).* |
10.15
|
Restated
Access One Communications Corp. 1999 Stock Option Plan (incorporated by
reference to Exhibit 4.3 to our registration statement on Form S-8 (File
No. 333-52166).* |
10.16
|
Employment
Agreement with Jeffrey Earhart dated July 30, 2004 (incorporated by
reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004). * |
10.17 |
Employment
Agreement with Warren Brasselle dated July 30, 2004 (incorporated by
reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004). * |
10.18 |
Employment
Agreement with Timothy Leonard dated March 15, 2005 (filed
herewith).* |
10.19 |
Sublease
Agreement by and between Talk America Inc. and Food Lion, LLC, dated as of
November 26, 2003 (incorporated by reference to Exhibit 10.23 to our
annual Report on Form 10-K for the year ended December 31,
2003). |
10.20 |
Lease
by and between Talk America Inc. and BTS Owners LLC, dated as of July 1,
2003 (incorporated by reference to Exhibit 10.24 to our annual Report on
Form 10-K for the year ended December 31,
2003). |
10.21
|
First
Amendment, dated as of September 19, 2001, to the Rights Agreement dated
as of August 19, 1999, by and between Talk America Holdings, Inc. and
First City Transfer Company, as Rights Agent (incorporated by reference to
Exhibit 10.9 to our Current Report on Form 8-K filed on September 24,
2001). |
10.22
|
Employment Agreement with David G. Zahka dated July 30,
2004 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on
Form 10-Q for the quarter ended September 30,
2004).* |
10.23
|
Our
2001 Non-Officer Long Term Incentive Plan (incorporated by reference to
Exhibit 4.1 to our registration statement on Form S-8 (File No.
333-74820).* |
10.24 |
Second
Amendment to Office Lease by and between TMT Reston Plaza and II,
Inc. and Talk America Inc., dated November 3, 2004 (filed
herewith). |
10.25 |
Office
Lease by and between Reston Plaza I and II, LLC and Talk.com, Inc. dated
as of April 28, 2000 (incorporated by reference to Exhibit 10.68 to our
Annual Report on Form 10-K for the year ended December 31, 2001).
|
10.26 |
Our
2003 Long Term Incentive Plan (incorporated by reference to Exhibit B of
our Definitive Proxy Statement filed on May 6,
2003).* |
10.27 |
Second
Amendment to Rights Agreement, dated as of December 13, 2002, to the
Rights Agreement dated as of August 19, 1999, by and between Talk America
Holdings, Inc., First City Transfer Company and Stocktrans, Inc.
(incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K filed on December 13, 2002). |
10.28 |
Lease
Agreement by and between Jeffrey M. Baumrucker and Monique M. Baumrucker
and Talk America Inc. dated as of July 7, 2003 (incorporated by reference
to Exhibit 10.36 to our Annual Report on Form 10-K for the year ended
December 31, 2003). |
10.29 |
Summary
Description of 2004 Supplemental Incentive Compensation Plan (filed
herewith). * |
10.30 |
2004
Bonus Program Summary Description (incorporated by reference to Exhibit
10.1 to our Current Report on Form 8-K, dated February 23, 2005).
* |
10.31 |
Consulting
Agreement between Talk America Holdings, Inc. and Gabriel Battista, dated
as of January 1, 2005 (incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K dated January 1, 2005).
|
10.32 |
Office
Lease by and between TMT Reston I & II, Inc. and Talk America Inc.
dated as of November 3, 2004 (filed
herewith). |
10.33 |
Indemnification
Agreement with Edward B. Meyercord, III dated January 1, 2004
(incorporated by reference to Exhibit 10.4 to our Annual Report on Form
10-K for the year ended December 31, 2003). |
10.34
|
Employment
Agreement with Gabriel Battista dated January 1, 2004 (incorporated by
reference to Exhibit 10.6 to our Annual Report on Form 10-K for the year
ended December 31, 2003).* |
14.1 |
Code
of Ethics (incorporated by reference to Exhibit 14.1 to our Annual Report
on Form 10-K for the year ended December 31,
2003). |
21.1
|
Our
Subsidiaries (filed herewith). |
*
Management contract or compensatory plan or arrangement.
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.
Date:
March 16, 2005
TALK
AMERICA HOLDINGS, INC.
By:
/s/
Edward B. Meyercord, III
Edward B. Meyercord,
III
Chief Executive
Officer, President
and
Director
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities
and on the dates indicated.
SIGNATURE TITLE
DATE
______/s/
Edward B. Meyercord III Chief
Executive
Officer,
March 16,
2005
Edward B. Meyercord,
III
President and Director
(Principal Executive Officer)
____ /s/ David G.
Zahka_______ Chief
Financial
Officer
March 16,
2005
David G.
Zahka (Principal
Financial Officer)
___/s/
Thomas M. Walsh _____ Senior
Vice President -
Finance March 16,
2005
Thomas M.
Walsh and
Treasurer
(Principal Accounting Officer)
____/s/
Gabriel Battista________ Chairman
of the
Board March 16,
2005
Gabriel
Battista of
Directors
____/s/
Mark S. Fowler________ Director
March 16,
2005
Mark S.
Fowler
____/s/
Robert J. Korzeniewski__
Director March 16,
2005
Robert J.
Korzeniewski
/s/ Ronald R.
Thoma
Director
March 16,
2005
Ronald R.
Thoma