Trinsic, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-28467
TRINSIC, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE
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59-3501119 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
601 SOUTH HARBOUR ISLAND BOULEVARD, SUITE 220
TAMPA, FLORIDA 33602
(813) 273-6261
(Address, including zip code, and
telephone number including area code, of
Registrants principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER
SHARE, PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of
the Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-2 of the
Exchange Act).
Yes o No þ
The number of shares of the Registrants Common Stock outstanding as of November 8, 2005 was
approximately 17,531,889
TRINSIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
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(Unaudited) |
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September 30, |
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December 31, |
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2005 |
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2004 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
200 |
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$ |
1,363 |
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Accounts receivable, net of allowance for doubtful
accounts of $11,883 and $10,967 |
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24,924 |
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27,242 |
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Prepaid expenses and other current assets |
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2,391 |
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836 |
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Total current assets |
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27,515 |
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29,441 |
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Property and equipment, net |
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20,587 |
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27,829 |
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Intangible assets, net |
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457 |
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Other assets |
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5,295 |
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3,609 |
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Total assets |
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$ |
53,397 |
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$ |
61,336 |
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Liabilities and Stockholders Deficit |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
48,147 |
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$ |
55,605 |
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Deferred revenue |
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6,244 |
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6,264 |
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Current portion of long-term debt and capital lease obligations |
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401 |
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7,536 |
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Asset based loan |
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12,934 |
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Total current liabilities |
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54,792 |
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82,339 |
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Long-term deferred revenue |
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46 |
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Long-term debt and capital lease obligations |
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33 |
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Total liabilities |
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54,792 |
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82,418 |
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Commitments and contingencies (Notes 8 and 11) |
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Stockholders deficit: |
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Common stock, $0.01 par value; 150,000,000
shares authorized; 17,756,994 and 5,525,361 shares issued;
17,525,058 and 5,518,530 shares outstanding |
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175 |
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553 |
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Notes receivable from stockholders |
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(870 |
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(3,685 |
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Unearned stock compensation |
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(435 |
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(466 |
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Additional paid-in capital |
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417,005 |
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392,488 |
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Accumulated deficit |
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(417,264 |
) |
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(409,894 |
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Treasury stock, 231,936 shares at cost |
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(6 |
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(78 |
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Total stockholders deficit |
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(1,395 |
) |
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(21,082 |
) |
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Total liabilities and stockholders deficit |
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$ |
53,397 |
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$ |
61,336 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
TRINSIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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For the Three Months Ended |
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For the Nine Months Ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenues |
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$ |
44,030 |
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$ |
60,912 |
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$ |
151,958 |
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$ |
193,176 |
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Operating expenses: |
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Network operations, exclusive of depreciation
and amortization shown below |
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23,864 |
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30,427 |
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80,697 |
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95,693 |
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Sales and marketing |
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2,596 |
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4,788 |
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11,508 |
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14,803 |
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General and administrative |
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17,014 |
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27,175 |
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58,100 |
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92,297 |
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Restructuring charge |
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3,223 |
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451 |
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4,030 |
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Depreciation and amortization |
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2,398 |
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5,032 |
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9,531 |
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15,452 |
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Total operating expenses |
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45,872 |
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70,645 |
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160,287 |
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222,275 |
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Operating loss |
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(1,842 |
) |
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(9,733 |
) |
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(8,329 |
) |
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(29,099 |
) |
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Nonoperating income (expense): |
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Interest and other income |
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806 |
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712 |
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8,100 |
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1,993 |
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Interest and other expense |
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(3,514 |
) |
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(1,321 |
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(7,140 |
) |
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(4,729 |
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Total nonoperating income (expense) |
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(2,708 |
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(609 |
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960 |
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(2,736 |
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Net loss |
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(4,550 |
) |
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(10,342 |
) |
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(7,369 |
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(31,835 |
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Less mandatorily redeemable convertible
preferred stock dividends and accretion |
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(5,198 |
) |
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(13,189 |
) |
Less deemed dividend related to beneficial
conversion feature |
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(90 |
) |
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(183 |
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Net loss attributable to common stockholders |
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$ |
(4,550 |
) |
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$ |
(15,630 |
) |
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$ |
(7,369 |
) |
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$ |
(45,207 |
) |
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Weighted average common shares outstanding |
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5,520,137 |
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753,005 |
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5,493,993 |
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735,570 |
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Basic and diluted net loss per common share |
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$ |
(0.82 |
) |
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$ |
(20.76 |
) |
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$ |
(1.34 |
) |
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$ |
(61.46 |
) |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
TRINSIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
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Nine Months Ended |
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September 30, |
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2005 |
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2004 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(7,369 |
) |
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$ |
(31,835 |
) |
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Adjustments to reconcile net loss to net cash used in
operating activities: |
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Depreciation and amortization |
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9,531 |
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15,452 |
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Provision for bad debts |
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9,306 |
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5,017 |
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Expense charged for granting of stock options |
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157 |
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1,255 |
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Change in operating assets and liabilities: |
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Increase in accounts receivable |
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(4,423 |
) |
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(4,549 |
) |
(Increase) decrease in prepaid expenses |
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(1,555 |
) |
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5,059 |
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Increase in other assets |
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(1,686 |
) |
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(167 |
) |
Decrease in accounts payable and accrued liabilities |
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(5,977 |
) |
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(1,925 |
) |
Decrease in deferred revenue |
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(66 |
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(3,546 |
) |
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Total adjustments |
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5,287 |
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16,596 |
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Net cash used in operating activities |
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(2,082 |
) |
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(15,239 |
) |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(2,206 |
) |
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(6,258 |
) |
Principal repayments received on notes receivable |
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40 |
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Net cash used in investing activities |
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(2,206 |
) |
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(6,218 |
) |
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Cash flows from financing activities: |
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Payments on long-term debt and capital lease obligations |
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(668 |
) |
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(4,047 |
) |
Principal repayments received on notes receivable issued for stock |
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250 |
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191 |
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Payment of preferred stock dividends |
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(3 |
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Proceeds from (payoff of) asset based loan |
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(12,934 |
) |
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12,539 |
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Proceeds from stand by credit facility |
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13,977 |
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5,000 |
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Proceeds
from issuance of preferred stock |
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2,500 |
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Proceeds from exercise of stock options and warrants |
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503 |
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Net cash provided by financing activities |
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3,125 |
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14,183 |
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Net decrease in cash and cash equivalents |
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(1,163 |
) |
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(7,274 |
) |
Cash and cash equivalents, beginning of period |
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1,363 |
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12,013 |
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Cash and cash equivalents, end of period |
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$ |
200 |
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$ |
4,739 |
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Non-cash financing activities: |
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Conversion of stand by credit facility and accrued interest into preferred stock |
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$ |
21,585 |
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$ |
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Conversion of preferred stock into common stock |
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$ |
24,085 |
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$ |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
TRINSIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL TABLES ARE IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS
DESCRIPTION OF BUSINESS
Trinsic, Inc. and subsidiaries (we or us) is an emerging provider of advanced, integrated
telecommunications services targeted to residential and business subscribers. We provide local and
long distance telephone services in combination with enhanced communication features accessible
through the telephone, the Internet and certain personal digital assistants. We provide these
services in forty-nine states, but our customers are primarily concentrated in six states. We
recently began providing services utilizing Internet protocol, often referred to as IP telephony,
voice over Internet protocol or VoIP. We provide long-distance telecommunications services
nationwide.
We introduced our services on a wholesale basis during the first quarter of 2002. This provides
other companies with the opportunity to provide local, long-distance and enhanced telephone service
to their own residential and business end user customers on a private label basis by utilizing our
telephone exchange services, enhanced services platform, infrastructure and back-office operations.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying unaudited consolidated financial statements were prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. The realization of assets and the satisfaction of liabilities in the
normal course of business is dependent on, among other things, the companys ability to operate
profitably, to generate cash flow from operations and to obtain funding adequate to fund its
business.
We have a limited operating history and our operations are subject to material risks and
uncertainties, particularly related to the evolution of the regulatory environment, which impacts
our access to and cost of the network elements that we utilize to provide services to our
customers.
We have incurred significant losses since our inception as a result of developing our business,
performing ongoing research and development, building and maintaining our network infrastructure
and technology, the sale and promotion of our services, and ongoing administrative expenditures.
As of September 30, 2005, we had an accumulated deficit of approximately $417.3 million and $0.2
million in cash and cash equivalents. We have funded our expenditures primarily through operating
revenues, private securities offerings, various working capital facilities, our standby credit
facility and an initial public offering.
The companys inability to operate profitably and to consistently generate cash flows from
operations, its reliance therefore on external funding either from loans or equity raise
substantial doubt about the companys ability to continue as a going concern.
For the nine months ended September 30, 2005, net cash used in operating activities was $2.1
million as compared to $15.2 million in the prior year period.
In April 2004, the company secured an asset based loan facility with Textron Financial Corporation
(Textron), which provided up to $25 million to fund operations. Effective January 27, 2005, we
entered into a Modification and Termination Agreement with Textron. Among other things the
Modification and Termination Agreement provided that Textron would forbear from exercising default
rights and remedies until May 31, 2005, would waive the early termination fee and modify the annual
facility fee. We agreed to pay a modification fee of $150,000.
On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo). The agreement provides for the sale of up to $22 million of our accounts
receivable on a continuous basis to Thermo, subject to selection criteria as defined in the
contract. On May 6, 2005, we used proceeds from this accounts receivable financing facility to pay
off our loan balance with Textron.
By letter dated May 6, 2005, the Nasdaq Stock Market notified us that the market value of our
common stock remained below the minimum of $35 million required by Marketplace Rule
4310(c)(2)(B)(ii) and accordingly our shares would be delisted from the Nasdaq SmallCap Market at
the opening of business on May 17, 2005. We appealed the decision and presented a definitive plan
for regaining compliance to a hearing panel. A Nasdaq Listing Qualifications Hearing Panel
granted the company a temporary exception from these requirements subject to the following
conditions:
6
(1) The companys Form 10-Q for the quarter ended June 30, 2005 must evidence pro forma
stockholders equity of at least $2,500,000 at June 30, 2005.
(2) The companys Form 10-Q for the quarter ended September 30, 2005 must report actual
stockholders equity at September 30, 2005 of at least $2,500,000.
(3) On or before September 30, 2005, the company must evidence a closing bid price of at least
$1.00 per share and immediately thereafter a closing bid price of at least $1.00 per share for a
minimum of 10 consecutive trading days.
While we satisfied conditions (1) and (3), our stockholders equity as of September 30,2005 as
indicated by this report was less than $2,500,000. Accordingly, we may be delisted from the
NASDAQ SmallCap Market. This report will serve as notice to the NASDAQ Stock Market, Inc. of our
material noncompliance with NASDAQs rules for continued listing on the NASDAQ SmallCap Market. In
that event we expect our shares will begin trading on the OTC Bulletin Board.
On September 23, 2005, our shareholders approved a one-for-ten reverse stock split of our common
stock. The reverse stock split was effected on September 26, 2005. Fractional shares were not
issued in connection with the reverse stock split. All share and per share amounts have been
restated herein to reflect the one-for-ten reverse stock split. A roll-forward of our Stockholders
Deficit from December 31, 2004 to September 30, 2005 follows:
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|
|
|
Notes Receivable |
|
|
Unearned |
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
from |
|
|
Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Treasury |
|
|
Stockholders |
|
|
|
Shares |
|
|
Par Value |
|
|
Stockholders |
|
|
Compensation |
|
|
Capital |
|
|
Deficit |
|
|
Stock |
|
|
Deficit |
|
Balance, December 31, 2004 |
|
|
5,518,530 |
|
|
$ |
55 |
|
|
$ |
(3,685 |
) |
|
$ |
(466 |
) |
|
$ |
392,488 |
|
|
$ |
(409,895 |
) |
|
$ |
(78 |
) |
|
$ |
(21,581 |
) |
Reverse stock split |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
427 |
|
|
|
|
|
|
|
|
|
|
$ |
427 |
|
Forfeiture of stock options |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
54 |
|
|
|
(68 |
) |
|
|
|
|
|
|
70 |
|
|
$ |
54 |
|
Cash received for notes receivable |
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
250 |
|
Impairment on note receivable |
|
|
(225,000 |
) |
|
|
|
|
|
|
2,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
$ |
2,567 |
|
Restricted Stock Awards |
|
|
189,144 |
|
|
|
2 |
|
|
|
|
|
|
|
(23 |
) |
|
|
194 |
|
|
|
|
|
|
|
|
|
|
$ |
173 |
|
Conversion of Preferred Stock
to Common |
|
|
12,042,384 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
23,964 |
|
|
|
|
|
|
|
|
|
|
$ |
24,084 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,369 |
) |
|
|
|
|
|
$ |
(7,369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005 |
|
|
17,525,058 |
|
|
$ |
175 |
|
|
$ |
(870 |
) |
|
$ |
(435 |
) |
|
$ |
417,005 |
|
|
$ |
(417,264 |
) |
|
$ |
(6 |
) |
|
$ |
(1,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective September 30, 2005, our chief operating officer, Frank Grillo has resigned to pursue
other opportunities. No replacement chief operating officer has been appointed. Instead our chief
executive officer, Horace J. Trey Davis, III, will take over Mr. Grillos duties.
Our net cash used in investing activities decreased by $4.0 million to $2.2 million for the nine
months ended September 30, 2005, compared to $6.2 million the prior year period. The reduction was
attributable to the purchasing of less property and equipment during the nine months ended
September 30, 2005 as compared to the same period in the prior year.
For the nine months ended September 30, 2005, net cash provided by financing activities was $3.1
million as compared to $14.2 million for the prior year period. This change is primarily the
result of using proceeds from our accounts receivable financing facility to payoff our asset based
loan with Textron.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared by us in accordance
with accounting principles generally accepted in the United States of America for interim financial
information and are in the form prescribed by the Securities and Exchange Commissions (SEC)
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes for complete financial statements as required by accounting
principles generally accepted in the United States of America. The interim unaudited financial
statements should be read in conjunction with our audited financial statements as of and for the
year ended December 31, 2004, included in our Annual Report on Form 10-K filed with the SEC on
April 15, 2005. The balance sheet at December 31, 2004 was derived from audited financial statements
for the year ended December 31,2004. In the opinion of management, all adjustments considered
necessary for a fair statement have been included. Operating results for the three and nine month
periods ended September 30, 2005 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2005.
RECLASSIFICATION
Certain amounts in the consolidated statements of operations for the three and nine months ended
September 30, 2004 have been reclassified to conform to the presentation for the three and nine
months ended September 30, 2005.
3. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
7
(a) Significant Accounting Policies
Our significant accounting policies are included in the Notes to Consolidated Financial Statements
in our Annual Report on Form 10-K for the year ended December 31, 2004.
Effective January 1, 2005, we have deferred the fee charged to us by the Incumbent Local
Exchange Carriers (ILECs) in the activation of our business VoIP customers. This fee and any
acquisition revenue received from the customers are being deferred and amortized over the life of
each customers signed contract At September 30, 2005, unamortized deferred set up fees amounted
to $0.6 million.
Property and equipment are recorded at historical cost and depreciation and amortization are
calculated on a straight-line basis over the assets useful lives. If all other factors were to
remain unchanged, we expect that a one-year change (increase or decrease) in the useful lives of
the three largest categories of our property and equipment (which accounts for approximately 72% of
our total property and equipment in service) would result in a increase or decrease of between $1.4
million and $1.6 million in our year to date 2005 depreciation expense.
(b) Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, Accounting
Changes and Error Corrections, which is effective beginning on January 1, 2006. SFAS No. 154
requires that all voluntary changes in accounting principles are retrospectively applied to prior
financial statements as if that principle had always been used, unless it is impracticable to do
so. When it is impracticable to calculate the effects on all prior periods, SFAS No. 154 requires
that the new principle be applied to the earliest period practicable. The adoption of SFAS No. 154
is not anticipated to have a material effect on our financial position or results of operations.
In March 2005, the FASB issued Interpretation Number 47, Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies
the term conditional asset retirement obligation as used in Statement of Financial Accounting
Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, and also clarifies when
an entity would have sufficient information to reasonably estimate the fair value of an asset
retirement. FIN 47 is effective no later than the end of fiscal years ending after December 15,
2005. We do not anticipate that the implementation of FIN 47 will have a material impact on our
financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payments (SFAS No.
123R). SFAS No. 123R requires the recognition of the cost of employee services received in
exchange for an award of equity instruments in the financial statements and measurement based on
the grant-date fair value of the award. It requires the cost to be recognized over the period
during which an employee is required to provide service in exchange for the award. Additionally,
compensation expense will be recognized over the remaining employee service period for the
outstanding portion of any awards for which compensation expense had not been previously recognized
or disclosed under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS
No. 123R replaces SFAS No. 123 and supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), and its related interpretations.
SFAS No. 123R was originally required to be adopted beginning no later than the third quarter of
2005. However, in April 2005, the Securities and Exchange Commission announced the adoption of a
new staff accounting bulletin that amends the compliance dates for SFAS No. 123R. Accordingly, we
are required to adopt SFAS No. 123R no later than January 1, 2006. We are currently assessing the
timing and impact of adopting SFAS No. 123R.
4. STANDBY CREDIT FACILITY
During the first quarter of 2005, we received advances of $3.5 million, $2.5 million and $1.2
million on February 14, 2005, March 4, 2005 and March 24, 2005, respectively, from our standby
credit facility with The 1818 Fund III, LP. (the Fund). During the second quarter of 2005, we
received advances of $1.3 million, $2.5 million and $2.5 million on May 9, 2005, May 24, 2005 and
June 10, 2005, respectively.
On July 15, 2005, we entered into an Exchange and Purchase Agreement with the Fund. In the Exchange
and Purchase Agreement, we agreed to issue to the Fund 24,084,769 shares of Series H Convertible
Preferred Stock in exchange for all (approximately $21.6 million) outstanding indebtedness
(including principal, interest and premium) owing to the Fund under a promissory note due in March
2006 and $2.5 million in cash. We consummated the exchange and purchase immediately after executing
the agreement. We sold the Series H Convertible Preferred Stock in private placement pursuant to
the exemption from registration afforded by Section 4(2) of the Securities Act of 1933. All of the
Series H Convertible Preferred Stock was converted into 12,042,384 shares of common stock on
September 30, 2005.
8
5. ACCOUNTS RECEIVABLE AGREEMENT
On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo) to replace our Textron credit facility. The agreement provides for the sale of up
to $22 million of our accounts receivable on a continuous basis to Thermo, subject to selection
criteria as defined in the contract. The discount rate is 2.5%. Purchase of the receivables is at
the option of Thermo. On May 6, 2005, we used proceeds from this accounts receivable financing
facility to pay off our loan balance with Textron.
6. RESTRUCTURING CHARGE
On April 6, 2005, we initiated a reduction in force which terminated the employment of
approximately 107 of our employees. We incurred a one-time charge during April of approximately
$450,000 consisting primarily of post termination wages, salaries and the associated payroll taxes,
net of vacation expense already accrued for these employees. Substantially all of these post
termination wages were paid within 30 days following the reduction in force.
All restructuring charges have been paid as of September 30, 2005. The following table shows the
restructuring charges and related accruals recognized under the restructuring plan described above
and in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the
year ended December 31, 2004 and the effect on our consolidated financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Lease |
|
|
|
|
|
|
|
|
|
Termination |
|
|
Abandonment |
|
|
Asset |
|
|
|
|
|
|
Benefits |
|
|
Costs |
|
|
Retirement |
|
|
Total |
|
Balance at December 31, 2002 |
|
$ |
|
|
|
$ |
551 |
|
|
$ |
|
|
|
$ |
551 |
|
Cash paid |
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
|
|
|
|
351 |
|
|
|
|
|
|
|
351 |
|
Plan Charges |
|
|
4,527 |
|
|
|
234 |
|
|
|
40 |
|
|
|
4,801 |
|
Cash paid |
|
|
(3,646 |
) |
|
|
(262 |
) |
|
|
|
|
|
|
(3,908 |
) |
Asset disposal |
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
(40 |
) |
Converted to note payable |
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
(40 |
) |
Lease termination settlement reversal |
|
|
|
|
|
|
(210 |
) |
|
|
|
|
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
881 |
|
|
|
73 |
|
|
|
|
|
|
|
954 |
|
Plan Charges |
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
451 |
|
Vacation Accrual |
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
91 |
|
Cash paid |
|
|
(1,423 |
) |
|
|
(73 |
) |
|
|
|
|
|
|
(1,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. STOCK BASED COMPENSATION
For employee stock options, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation
requiring entities to recognize as an expense, over the vesting period, the fair value of the
options or utilize the accounting for employee stock options used under APB 25. We apply the
provisions of APB 25 and consequently recognize compensation expense over the vesting period for
grants made to employees and directors only if, on the measurement date, the market price of the
underlying stock exceeds the exercise price. We provide the pro forma net income and earnings per
share disclosures as required under SFAS No. 123 for grants made as if the fair value method
defined in SFAS No. 123 had been applied. We recognize expense over the vesting period of the
grants made to non-employees utilizing the Black-Scholes stock valuation model to calculate the
value of the option on the measurement date.
The following table illustrates, in accordance with the provisions of SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure, an Amendment of SFAS 123, Accounting for
Stock-Based Compensation, the effect on net income (loss) and earnings per share if we had applied
the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net loss attributable to common stockholders, as reported |
|
$ |
(4,550 |
) |
|
$ |
(15,630 |
) |
|
$ |
(7,369 |
) |
|
$ |
(45,207 |
) |
Add: Stock based compensation included in net loss |
|
|
64 |
|
|
|
367 |
|
|
|
157 |
|
|
|
1,255 |
|
Deduct: Total stock based employee compensation determined
under the fair value based method for all awards |
|
|
(577 |
) |
|
|
(744 |
) |
|
|
(1,856 |
) |
|
|
(2,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders, pro forma |
|
$ |
(5,063 |
) |
|
$ |
(16,007 |
) |
|
$ |
(9,068 |
) |
|
$ |
(46,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.82 |
) |
|
$ |
(20.76 |
) |
|
$ |
(1.34 |
) |
|
$ |
(61.46 |
) |
Pro forma |
|
$ |
(0.92 |
) |
|
$ |
(21.26 |
) |
|
$ |
(1.65 |
) |
|
$ |
(63.21 |
) |
We calculated the fair value of each grant on the date of grant using the Black-Scholes option
pricing model. In addition to there being no payments of dividends on our common stock, the
following assumptions were used for each respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Discount Rate |
|
|
4.0 |
% |
|
|
N/A |
|
|
|
4.0 |
% |
|
|
3.1 |
% |
Volatility |
|
|
99.1 |
% |
|
|
N/A |
|
|
|
99.1 |
% |
|
|
98.3 |
% |
Average Option Expected Life |
|
5 years |
|
5 years |
|
5 years |
|
5 years |
Incremental shares of common stock equivalents are not included in the calculation of net loss per
share as the inclusion of such equivalents would be anti-dilutive.
8. COMMITMENTS AND CONTINGENCIES
We have disputed billings and access charges from certain inter-exchange carriers (IXCs) and
incumbent local exchange carriers (ILECs). We contend that the invoicing and billings of these
access charges are not in accordance with the interconnection, service level, or tariff agreements
between us and certain IXCs and ILECs. We have not paid these disputed amounts and management
believes that we will prevail in these disputes. At September 30, 2005, the total disputed amounts
was approximately $18.4 million of which we have accrued
$11.4 million. We believe that we have adequately accrued for
our disputes and we believe our maximum exposure for these charges is
$18.4 million. However, we do not believe that all of these
charges are valid and intend to continue our dispute and non-payment
of these charges.
We currently have agreements with two long-distance carriers to provide transmission and
termination services for all of our long distance traffic. These agreements generally provide for
the resale of long distance services on a per-minute basis and contain minimum volume commitments.
As a result of not fulfilling all of our volume commitments as outlined in one of these contracts
we agreed to pay an increased per minute charge for minutes until the achievement of certain
minimum minute requirements. Once we meet the new agreed upon minimum minutes we will revert to
the terms of our original agreement. All other terms of the original agreement continue in full
force.
On April 15, 2005, Trinsic entered into a Wholesale Advantage Services Agreement with Verizon
Services Company on behalf of Verizons Incumbent Local Exchange Carriers (Verizon ILECs). The
Wholesale Advantage Services Agreement will act as a replacement for Trinsics existing
Interconnection Agreements for the provision of UNE-P services in Verizon service areas. As long
as Trinsic meets certain volume commitments, Verizon will continue to provide a UNE-P like
service at gradually increasing rates for a five year period. The contract contains a take-or-pay
clause that is applicable for every month starting in May 2005. The calculation is based on a
snapshot of lines we had in service as of March 31, 2005 the baseline volume. If Trinsic is
unable to replace lines generated by normal churn, this take-or-pay clause may become effective and
significantly raise our cost in the Verizon footprint.
In connection with certain of our wholesale services agreements, a portion of customers are
provisioned using our company code. Therefore, we are the customer of record for the Regional Bell
Operating Companies wholesale billing. It is very likely that the state commissions would require
us to continue providing services to our wholesale customers for at least a 90-day period,
regardless of whether our wholesale relationships continue.
We have agreed to certain service level agreements (SLAs) for providing service under our
wholesale agreements. If we were to not fulfill the SLAs after the phase-in period there are
certain remedies including but not limited to financial compensation. We have not had to pay or
accrue any financial compensation as a result of any SLAs since our inception.
10
9. RELATED PARTY TRANSACTIONS
On September 29, 2004, we signed an agreement with SipStorm, Inc., a company owned by two of our
shareholders and former officers of our company to transfer selected computer hardware, software
and intellectual property rights to SipStorm. Relative to the purchase, SipStorm assumed
responsibility for certain accounts payable, future maintenance payments and provided a promissory
note in the amount of $2.8 million. The promissory note was settled during the second
quarter of 2005 for a cash payment of $250,000 and the assignment to
us of 813,404 shares of Trinsic common stock. The note was collateralized by shares of our common stock owned by the directors
of SipStorm and $250,000 reflected the estimated realizable value of
that portion of the note not secured by our common
stock at the time of the settlement. In anticipation of the settlement, $2.5 million in bad debt
expense was booked during the first quarter of 2005.
10. COMPUTATION OF NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss attributable to common stockholders by
the weighted average number of common shares outstanding during the period. Incremental shares of
common stock equivalents are not included in the calculation of diluted net loss per share as the
inclusion of such equivalents would be anti-dilutive.
Net loss per share is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,550 |
) |
|
$ |
(10,342 |
) |
|
$ |
(7,369 |
) |
|
$ |
(31,835 |
) |
Less mandatorily redeemable convertible preferred
stock dividends and accretion |
|
|
|
|
|
|
(5,198 |
) |
|
|
|
|
|
|
(13,189 |
) |
Less deemed dividend related to beneficial conversion feature |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
(183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(4,550 |
) |
|
$ |
(15,630 |
) |
|
$ |
(7,369 |
) |
|
$ |
(45,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
5,520,137 |
|
|
|
753,005 |
|
|
|
5,493,993 |
|
|
|
735,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.82 |
) |
|
$ |
(20.76 |
) |
|
$ |
(1.34 |
) |
|
$ |
(61.46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share are the same for each of the periods presented. The
following table includes potentially dilutive items that were not included in the computation of
diluted net loss per share for all periods presented because to do so would be anti-dilutive in
each case:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2005 |
|
2004 |
Unexercised stock options |
|
|
102,808 |
|
|
|
232,677 |
|
Unexercised warrants |
|
|
107,878 |
|
|
|
197,426 |
|
Mandatorily redeemable preferred stock
convertible into common shares |
|
|
|
|
|
|
725,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive shares of common
stock equivalents |
|
|
210,686 |
|
|
|
1,155,628 |
|
|
|
|
|
|
|
|
|
|
11. LEGAL AND REGULATORY PROCEEDINGS
During June and July 2001, three separate class action lawsuits were filed against us, certain of
our current and former directors and officers (the D&Os) and firms engaged in the underwriting
(the Underwriters) of our initial public offering of stock (the IPO). The lawsuits, along with
approximately 310 other similar lawsuits filed against other issuers arising out of initial public
offering allocations, have been assigned to a Judge in the United States District Court for the
Southern District of New York for pretrial coordination. The lawsuits against us have been
consolidated into a single action. A consolidated amended complaint was filed on April 20, 2002. A
Second Corrected Amended Complaint (the Amended Complaint), which is the operative complaint, was
filed on July 12, 2002.
The Amended Complaint is based on the allegations that our registration statement on Form S-1,
filed with the Securities and Exchange Commission (SEC) in connection with the IPO, contained
untrue statements of material fact and omitted to state facts necessary to make the statements made
not misleading by failing to disclose that the underwriters allegedly had received additional,
excessive and undisclosed commissions from, and allegedly had entered into unlawful tie-in and
other arrangements with, certain customers to whom they allocated shares in the IPO. The plaintiffs
in the Amended Complaint assert claims against us and the D&Os pursuant to Section 11 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated by the SEC there under. The plaintiffs in the Amended Complaint assert claims against
the D&Os pursuant to Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5
11
promulgated by the SEC there under. The
plaintiffs seek an undisclosed amount of damages, as well as pre-judgment and post-judgment
interest, costs and expenses, including attorneys fees, experts fees and other costs and
disbursements. We believe we are entitled to indemnification from our Underwriters.
A settlement has been reached by the respective lawyers for plaintiffs, the issuers and insurers of
the issuers. The principal terms of the proposed settlement are (i) a release of all claims against
the issuers and their officers and directors, (ii) the assignment by the issuers to the plaintiffs
of certain claims the issuers may have against the Underwriters and (iii) an undertaking by the
insurers to ensure the plaintiffs receive not less than $1 billion in connection with claims
against the Underwriters. Hence, under the terms of the proposed settlement our financial
obligations will likely be covered by insurance. The court has given preliminary approval of the
settlement subject to certain modifications. A revised settlement agreement has been submitted to
the court. To be binding, the settlement must be executed by the parties and thereafter submitted
to and approved by the court. The settlement will not be binding upon any plaintiffs electing to
opt-out of the settlement.
Susan Schad, on behalf of herself and all others similarly situated, filed a class action lawsuit
against us on May 13, 2004. The lawsuit alleges that we engaged in a pattern and practice of
deceiving consumers into paying amounts in excess of their monthly rates by deceptively labeling
certain line-item charges as government-mandated taxes or fees when in fact they were not. The
complaint seeks to certify a class of plaintiffs consisting of all persons or entities who
contracted with us for telecommunications services and were billed for particular taxes or
regulatory fees. The complaint asserts a claim under the Illinois Consumer Fraud and Deceptive
Businesses Practices Act and seeks unspecified damages, attorneys fees and court costs. On June
22, 2004, we filed a notice of removal in the state circuit court action, removing the case to the
federal district court for the Northern District of Illinois, Eastern Division, C.A. No. 4 C 4187.
On July 26, 2004, Plaintiff filed a motion to remand the case to the state circuit court. On
January 12, 2005, the federal court granted the motion and remanded the case to the state court.
On October 17, 2005, the state court heard argument on our motion to dismiss the lawsuit and
granted that motion, in part with prejudice. The court dismissed with prejudice the claims
relating to the E911 Tax, the Utility Users Tax, and the Communications Service Tax. The
court found that those tax charges were specifically authorized by state law or local ordinance,
and thus cannot be the basis of a Consumer Fraud claim. The court also dismissed (but with leave
to replead within 28 days) the claims relating to the Interstate Recovery Fee and the Federal
Regulatory Compliance Fee. The court determined that plaintiff had failed to allege how she was
actually damaged by the allegedly deceptive description of the charges. While the partial
dismissal with prejudice is a positive development, and although we believe the plaintiffs
allegations are without merit and intend to defend the lawsuit vigorously, we cannot predict the
outcome of this litigation with any certainty.
On November 19, 2004, the landlord of our principal Tampa, Florida facility sued us a seeking a
declaration of its rights and obligations under the lease and damages for breach of contract. We
assert that the landlord has failed to provide certain services in accordance with the lease,
including maintenance of air conditioning and emergency electrical generating systems crucial to
our operations. We have taken steps necessary to provide this maintenance and have offset the costs
of these measures against the rent, which we believe we are entitled to do under the lease. Thus
far we have withheld approximately $180,000. We also believe we are entitled to reimbursement from
the landlord for approximately $23,000 in costs associated with improvements to the leased space.
On November 19, 2004, a provider of parking spaces for our Tampa facilities sued us for parking
fees in excess of $334,300. Pursuant to our lease we are entitled to a number of free spaces and we
are obligated to pay for additional usage of parking spaces. We believe the provider has
substantially overstated our use of the spaces. We expect to resolve this dispute.
12. SEGMENT REPORTING
We have two reportable operating segments: Retail Services and Wholesale Services.
The retail services segment includes our residential and business services that offer bundled local
and long-distance telephone services in combination with enhanced communication features
accessible, through the telephone, the Internet and certain personal digital assistants. We provide
these services in forty-nine states, but our customers are concentrated primarily in metropolitan
areas within six states. This segment also includes our Touch 1 residential long-distance offering
that is available on a nation wide basis.
The wholesale services segment allows companies to offer telephone exchange and enhanced services
on a private label basis to residential and small business customers. Sprint is our sole customer
within this segment of our business.
As discussed in Note 13. Subsequent Events, we have entered into an agreement to acquire the
Sprint lines for which we currently provide services on a wholesale basis. Upon the completion of
this transaction on February 1, 2006 we will no longer have a wholesale business and will
discontinue segment reporting.
Management evaluates the performance of each business unit based on segment results, after making
adjustments for unusual items. Special items are transactions or events that are included in our
reported consolidated results but are excluded from segment results
due to their nonrecurring or non-operational nature. It is also important to understand when
viewing our segment results that we only record direct expenses in our wholesale services and,
therefore, all employee benefits, occupancy, insurance, and other indirect or overhead related
expenses are reflected in the retail services segment.
12
The following summarizes the financial information concerning our reportable segments for the three
and nine months ended September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
Retail Services |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Revenues |
|
$ |
34,045 |
|
|
$ |
41,229 |
|
|
$ |
118,378 |
|
|
$ |
129,347 |
|
Depreciation and amortization |
|
$ |
2,374 |
|
|
$ |
4,994 |
|
|
$ |
9,423 |
|
|
$ |
14,744 |
|
Segment results |
|
$ |
(2,873 |
) |
|
$ |
(9,337 |
) |
|
$ |
(9,045 |
) |
|
$ |
(27,468 |
) |
Capital expenditures |
|
$ |
573 |
|
|
$ |
1,567 |
|
|
$ |
2,206 |
|
|
$ |
6,218 |
|
Identifiable assets |
|
|
|
|
|
|
|
|
|
$ |
47,675 |
|
|
$ |
51,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
Wholesale Services |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Revenues |
|
$ |
9,984 |
|
|
$ |
19,683 |
|
|
$ |
33,580 |
|
|
$ |
63,829 |
|
Depreciation and amortization |
|
$ |
24 |
|
|
$ |
38 |
|
|
$ |
108 |
|
|
$ |
708 |
|
Segment results |
|
$ |
3,428 |
|
|
$ |
4,636 |
|
|
$ |
10,247 |
|
|
$ |
13,822 |
|
Capital expenditures |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
40 |
|
Identifiable Assets |
|
|
|
|
|
|
|
|
|
$ |
5,722 |
|
|
$ |
13,225 |
|
The following table reconciles our segment information to the consolidated financial information
for the three and nine months ended September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Segment results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment results |
|
$ |
556 |
|
|
$ |
(4,701 |
) |
|
$ |
1,202 |
|
|
$ |
(13,647 |
) |
Depreciation and amortization |
|
|
(2,398 |
) |
|
|
(5,032 |
) |
|
|
(9,531 |
) |
|
|
(15,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated operating loss |
|
$ |
(1,842 |
) |
|
$ |
(9,733 |
) |
|
$ |
(8,329 |
) |
|
$ |
(29,099 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
13. SUBSEQUENT EVENTS
During October 2005, we signed an amendment to our accounts receivable financing agreement with
Thermo. The amendment increases the amount of accounts receivable that we can sell to Thermo from
$22 million to $26 million, subject to selection criteria as defined in the original contract. The
discount rate also increases from 2.5% to 2.75%.
On October 26, 2005 we entered into a definitive agreement to acquire from Sprint Nextel Corp.
(NYSE:S) substantially all of Sprint Nextels local access lines for which we currently provide
services under a wholesale private-label arrangement. As of November 1, 2005 we
provided wholesale services for approximately 160,000 local lines belonging to Sprint Nextel Corp.
Of these, approximately 145,000 are currently deemed active accounts billable to a retail end-user
while the remainder are in bill suspend status for various reasons such as non-payment, change in
customer premises, etc. We expect the total number of lines will be lower at closing because of
normal attrition. The closing is anticipated for early 2006, pending regulatory approval and the
satisfaction of customary closing conditions. The Agreement sets the purchase price at $100 per
each line that is active and billable to a Sprint Nextel retail end-user (subject to certain
adjustments to account for excess line attrition), of which 25% will be due at closing. The
remainder will be due in 15 equal monthly installments. As of October 31, 2005, we had escrowed
approximately $970,000 of the amount due at closing.
On October 31,2005 we entered into a long-term commercial agreement with the incumbent local
exchange carrier (ILEC) subsidiaries of SBC Communications Inc. The contract will allow Trinsic to
continue providing its traditional local voice services in the SBC telephone companies service
territories for five years. The SBC telephone companies service territories span 13 states in the
Midwest, Southwest and Western U.S., including Illinois, Texas and California. Under the contract,
the SBC companies will provide Trinsic with their Local Wholesale Complete product as a replacement
to todays Unbundled Network Element Platform, often referred to as UNE-P. Local Wholesale
Complete offers Trinsic use of the same network elements, features and functions as Trinsic
purchases today from the SBC telephone companies under the UNE-P regime. The transition from UNE-P
to Local Wholesale
Complete will be seamless for the customer and will result in no material costs for Trinsic. There
are no minimum volume commitments included in the agreement.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion together with the Selected Consolidated Financial Data,
financial statements and related notes included in this document. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results may differ
materially from those projected in the forward-looking statements as a result of certain factors,
including, but not limited to, those discussed in Item 1. Business, as well as Cautionary
Statements Regarding Forward-Looking Statements, and Risks Related to our Financial Condition and
our Business included in our Form 10-K filed with the Securities and Exchange Commission on April
15, 2005, and other factors relating to our business and us that are not historical facts. Factors
that may affect our results of operations include, but are not limited to, our limited operating
history and cumulative losses, uncertainty of customer demand, rapid expansion, potential software
failures and errors, potential network and interconnection failure, dependence on local exchange
carriers, dependence on third party vendors, success and profitability of our wholesale services,
dependence on key personnel, uncertainty of government regulation, legal and regulatory
uncertainties, access to capital markets, and competition. We disclaim any obligation to update
information contained in any forward-looking statement.
OVERVIEW
We are an emerging provider of advanced, integrated telecommunications services targeted to
residential and business customers. We offer local and long distance telephone services in
combination with enhanced communication features accessible through the telephone or the Internet.
These features include Personal Voice Assistant (PVA), Find-Me, Notify-Me, caller
identification, call waiting and speed dialing. PVA allows users to store contacts in a virtual
address book and then access and utilize that information by voice from any telephone. PVA users
can also send voice e-mails.
We have successfully deployed Cisco soft switches in the Tampa and New York City
markets and intend
to target multi-line business customers with our converged IP telephony services. We also intend
to use these soft switches to serve consumers as we continue to deploy broadband loop
concentrators into central offices. We provide our services on both
a retail (i.e. directly to end user customers) and a wholesale
basis. Our wholesale services provide other companies the
ability to utilize our telephone exchange services, enhanced services platform, infrastructure and
back-office operations to provide services to retail and business customers on a private label
basis. For management purposes, we are organized into two reportable operating segments: retail
services and wholesale services. The nature of our business is rapidly evolving, and we have a
limited operating history.
In evaluating our financial condition and operating performance the most important matters on which
we focus are lines under management, revenue per unit, cost per unit, bad debt expense, expenses as
a percentage of revenues and results by segment. These measures and
other analyses are discussed
in detail throughout the following paragraphs and provide insight into how we analyze and review
our business.
RESULTS OF OPERATIONS
The following discussion of results of operations is by business segment. Management evaluates the
performance of each business unit based on segment results, after making adjustments for unusual
items. Unusual items are transactions or events that are included in our reported consolidated
results, but are excluded from segment results due to their non-recurring or non-operational
nature. See our segment footnote to our consolidated financial statements for a reconciliation of
segmented results to the consolidated financial information.
14
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
|
|
|
ended September 30, |
|
|
Percentage of Revenues |
|
Total revenues by segment (in |
|
|
|
|
|
|
|
|
|
|
|
|
millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Retail Segment |
|
$ |
34.0 |
|
|
$ |
41.2 |
|
|
|
77.3 |
% |
|
|
67.7 |
% |
Wholesale segment |
|
|
10.0 |
|
|
|
19.7 |
|
|
|
22.7 |
% |
|
|
32.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
44.0 |
|
|
$ |
60.9 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months |
|
|
|
|
|
|
ended September 30, |
|
|
Percentage of Revenues |
|
Total revenues by segment (in |
|
|
|
|
|
|
|
|
|
|
|
|
millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Retail Segment |
|
$ |
118.4 |
|
|
$ |
129.3 |
|
|
|
77.9 |
% |
|
|
67.0 |
% |
Wholesale segment |
|
|
33.6 |
|
|
|
63.8 |
|
|
|
22.1 |
% |
|
|
33.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
152.0 |
|
|
$ |
193.2 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Two significant drivers impact our revenues: number of lines in service and average (monthly)
revenue per unit (ARPU). The more significant driver impacting our changes in revenue is the
number of lines in service. The table below provides a detailed break-down of our lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average lines in service |
|
Average lines in service |
|
|
for the three months ended |
|
for the nine months ended |
|
|
September 30, |
|
September 30, |
Type of Service |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Bundled residential services |
|
|
132,436 |
|
|
|
172,197 |
|
|
|
154,453 |
|
|
|
183,904 |
|
Bundled business services |
|
|
44,121 |
|
|
|
46,869 |
|
|
|
45,259 |
|
|
|
34,409 |
|
1+ long distance services |
|
|
34,509 |
|
|
|
46,826 |
|
|
|
36,742 |
|
|
|
59,310 |
|
Wholesale services |
|
|
192,942 |
|
|
|
346,165 |
|
|
|
236,552 |
|
|
|
316,621 |
|
VoIP |
|
|
5,288 |
|
|
|
|
|
|
|
3,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lines under management |
|
|
409,294 |
|
|
|
612,057 |
|
|
|
476,461 |
|
|
|
594,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending lines in service |
|
|
as of |
|
|
September 30, |
Type of Service |
|
2005 |
|
2004 |
Bundled residential services |
|
|
120,262 |
|
|
|
163,050 |
|
Bundled business services |
|
|
43,218 |
|
|
|
47,224 |
|
1+ long distance services |
|
|
33,090 |
|
|
|
44,200 |
|
Wholesale services |
|
|
173,460 |
|
|
|
336,418 |
|
VoIP |
|
|
5,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lines under management |
|
|
375,387 |
|
|
|
590,892 |
|
|
|
|
|
|
|
|
|
|
ARPU provides us with a business measure as to the average monthly revenue generation attributable
to each line in service, by business segment. ARPU is calculated by taking total revenues over a
period divided by the number of months in the period to calculate the average revenue per month and
this total is divided by the average lines in service during the period. We use this measure when
analyzing our retail services businesses, but not when assessing our wholesale services business
for the reasons summarized earlier within this section. The following table provides a detail of
our ARPU:
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the nine months |
|
|
ended September 30, |
|
ended September 30, |
Average revenue per unit in |
|
|
|
|
|
|
|
|
service |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Bundled residential services |
|
$ |
70.67 |
|
|
$ |
66.42 |
|
|
$ |
71.62 |
|
|
$ |
66.68 |
|
Bundled business services |
|
$ |
35.10 |
|
|
$ |
36.52 |
|
|
$ |
36.05 |
|
|
$ |
42.84 |
|
1+ long distance services |
|
$ |
12.76 |
|
|
$ |
12.70 |
|
|
$ |
12.52 |
|
|
$ |
10.72 |
|
During the remainder of 2005 we expect to experience some overall reduction in consumer line count.
We will continue to focus the majority of our marketing efforts in the Northeast. We still
anticipate that our consumer base will account for the largest portion of our overall revenue
stream and our operating cash flow over the full year. We will also continue to focus on building
our IP telephony business customer base largely focused on the New York and Tampa
metropolitan market areas as liquidity allows. Our VoIP offerings may provide additional revenues,
but will not contribute meaningfully to positive operations or be of a significant nature until at
least the second half of 2006. Additionally we will continue to deploy facilities aimed at serving
the consumer market segment as resources permit and look to migrate customers to our own network at
a moderate pace.
Retail Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
|
|
|
ended September 30, |
|
|
Percentage of Revenues |
|
Retail segment revenues by type |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Bundled residential services |
|
$ |
28.1 |
|
|
$ |
34.3 |
|
|
|
82.5 |
% |
|
|
83.2 |
% |
Bundled business services |
|
|
4.6 |
|
|
|
5.1 |
|
|
|
13.6 |
% |
|
|
12.5 |
% |
1+ long-distance services |
|
|
1.3 |
|
|
|
1.8 |
|
|
|
3.9 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
34.0 |
|
|
$ |
41.2 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months |
|
|
|
|
|
|
ended September 30, |
|
|
Percentage of Revenues |
|
Retail segment revenues by type |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Bundled residential services |
|
$ |
99.6 |
|
|
$ |
110.4 |
|
|
|
84.1 |
% |
|
|
85.3 |
% |
Bundled business services |
|
|
14.7 |
|
|
|
13.3 |
|
|
|
12.4 |
% |
|
|
10.3 |
% |
1+ long-distance services |
|
|
4.1 |
|
|
|
5.7 |
|
|
|
3.5 |
% |
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
118.4 |
|
|
$ |
129.3 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2005, the decrease in retail
revenue as compared to the same periods in 2004 was primarily the result of the decline in
residential UNE-P lines and 1+ long distance lines. |
16
Wholesale Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
|
|
|
ended September 30, |
|
|
Percentage of Revenues |
|
Wholesale segment revenues by |
|
|
|
|
|
|
|
|
|
|
|
|
type (in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Sprint |
|
$ |
10.0 |
|
|
$ |
18.8 |
|
|
|
100.0 |
% |
|
|
95.4 |
% |
MCI |
|
|
|
|
|
|
0.1 |
|
|
|
0.0 |
% |
|
|
0.5 |
% |
Other |
|
|
|
|
|
|
0.8 |
|
|
|
0.0 |
% |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
10.0 |
|
|
$ |
19.7 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months |
|
|
|
|
|
|
ended September 30, |
|
|
Percentage of Revenues |
|
Wholesale segment revenues by |
|
|
|
|
|
|
|
|
|
|
|
|
type (in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Sprint |
|
$ |
33.6 |
|
|
$ |
62.3 |
|
|
|
99.9 |
% |
|
|
97.6 |
% |
MCI |
|
|
0.0 |
|
|
|
0.2 |
|
|
|
0.1 |
% |
|
|
0.4 |
% |
Other |
|
|
|
|
|
|
1.3 |
|
|
|
0.0 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
33.6 |
|
|
$ |
63.8 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sprint lines have decreased significantly from September 30, 2004 to 2005, resulting in
a decline in wholesale revenue. |
We expect that our wholesale lines in service will continue to decline over the balance of 2005.
While revenues are expected to decline as well over this period, the amount of decline may not
directly correspond to the reduction in line count. The degree of revenue attrition will be
directly tied to the number of departing Sprint end users whose ILEC local service arrangements
were billed through Trinsic versus the number of departing Sprint end users whose ILEC local
service arrangements were billed directly to Sprint by the ILEC.
We employ the gross accounting method for recognizing revenue within the wholesale service business
segment; therefore, where ILEC billings are passed through Trinsic, we record revenue for certain
services that we provide to Sprint at our cost and record the off-setting expense in one of the
respective operating cost lines within our income statement when we are the primary obligor. These
revenues (and cost pass-through items) result in no contribution to operating profit. The largest
revenue component that is treated in this manner is the charge from
the ILECs, which we record in network operations and general and
administrative expense. If the number of our wholesale lines in service
declines then the stated accounts payable associated with those lines
will decline as well. Therefore, to the extent that
departing Sprint end users are concentrated among the base billed for ILEC services through
Trinsic, the amount of revenue loss per departing end user will be greater than for departing
Sprint end users who are direct billed by the ILEC to Sprint. The direct impact of the loss of
Sprint end users upon profitability to Trinsic has no relationship to whether the ILEC bills are
passed through Trinsic or direct billed to Sprint.
On October 26, 2005 we entered into a definitive agreement to acquire from Sprint Nextel Corp.
(NYSE:S) substantially all of Sprint Nextels local access lines for which we currently provide
services under a wholesale private-label arrangement. As of November 1, 2005 we
provided wholesale services for approximately 160,000 local lines belonging to Sprint Nextel Corp.
Of these, approximately 145,000 are currently deemed active accounts billable to a retail end-user
while the remainder are in bill suspend status for various reasons such as non-payment, change in
customer premises, etc. We expect the total number of lines will be lower at closing because of
normal attrition. The closing is anticipated for early 2006, pending regulatory approval and the
satisfaction of customary closing conditions. The Agreement sets the purchase price at $100 per
each line that is active and billable to a Sprint Nextel retail end-user (subject to certain
adjustments to account for excess line attrition), of which 25% will be due at closing. The
remainder will be due in 15 equal monthly installments. As of October 31, 2005, we had escrowed
approximately $970,000 of the amount due at closing.
17
Network Operations
Our network operations expense primarily consists of fixed and variable transmission expenses for
the leasing of the UNE-P components from the ILECs, domestic and international charges from service
level agreements with IXCs, and the USF and certain other regulatory charges to be consistent with
industry practice. The following table shows the break-down by segment of network operations
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
Percentage of |
|
|
|
ended September 30, |
|
|
Segment Revenues |
|
Network operations expense, exclusive of |
|
|
|
|
|
|
|
|
|
|
|
|
depreciation and amortization expense, by |
|
|
|
|
|
|
|
|
|
|
|
|
segment (in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Retail Segment |
|
$ |
18.7 |
|
|
$ |
21.5 |
|
|
|
54.9 |
% |
|
|
52.2 |
% |
Wholesale Segment |
|
|
5.2 |
|
|
|
8.9 |
|
|
|
51.7 |
% |
|
|
45.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Network Operations Expense |
|
$ |
23.9 |
|
|
$ |
30.4 |
|
|
|
54.2 |
% |
|
|
50.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months |
|
|
Percentage of |
|
|
|
ended September 30, |
|
|
Segment Revenues |
|
Network operations expense, exclusive of |
|
|
|
|
|
|
|
|
|
|
|
|
depreciation and amortization expense, by |
|
|
|
|
|
|
|
|
|
|
|
|
segment (in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Retail Segment |
|
$ |
63.0 |
|
|
$ |
65.8 |
|
|
|
53.3 |
% |
|
|
50.9 |
% |
Wholesale Segment |
|
|
17.7 |
|
|
|
29.9 |
|
|
|
52.6 |
% |
|
|
46.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Network Operations Expense |
|
$ |
80.7 |
|
|
$ |
95.7 |
|
|
|
53.1 |
% |
|
|
49.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the break-down by type of network operations expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
Percentage of |
|
|
|
ended September 30, |
|
|
Network Operations |
|
Network operations expense, exclusive of |
|
|
|
|
|
|
|
|
|
|
|
|
depreciation and amortization, by type (in |
|
|
|
|
|
|
|
|
|
|
|
|
millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Bundled residential services |
|
$ |
15.2 |
|
|
$ |
18.1 |
|
|
|
63.8 |
% |
|
|
59.5 |
% |
Bundled business services |
|
|
3.3 |
|
|
|
3.1 |
|
|
|
13.7 |
% |
|
|
10.2 |
% |
1+ long distance services |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.9 |
% |
|
|
1.0 |
% |
Wholesale services |
|
|
5.2 |
|
|
|
8.9 |
|
|
|
21.7 |
% |
|
|
29.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23.9 |
|
|
$ |
30.4 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months |
|
|
Percentage of |
|
|
|
ended September 30, |
|
|
Network Operations |
|
Network operations expense, exclusive of |
|
|
|
|
|
|
|
|
|
|
|
|
depreciation and amortization, by type (in |
|
|
|
|
|
|
|
|
|
|
|
|
millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Bundled residential services |
|
$ |
52.1 |
|
|
$ |
57.8 |
|
|
|
64.6 |
% |
|
|
60.5 |
% |
Bundled business services |
|
|
10.2 |
|
|
|
6.9 |
|
|
|
12.7 |
% |
|
|
7.2 |
% |
1+ long distance services |
|
|
0.7 |
|
|
|
1.1 |
|
|
|
0.8 |
% |
|
|
1.1 |
% |
Wholesale services |
|
|
17.7 |
|
|
|
29.9 |
|
|
|
21.9 |
% |
|
|
31.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
80.7 |
|
|
$ |
95.7 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
During the three and nine months ended September 30, 2005, network operations expense
decreased as compared to the same periods in 2004 for residential, 1+ long distance
services and wholesale services primarily because lines in service have also decreased.
Network operations expense increased for bundled business services during the three and
nine months ended September 30, 2005 as compared to the same periods in 2004 due to
increases in ILEC fees. |
We also analyze the average expense per unit (AEPU) for network operations, similar to the ARPU
calculation for revenues. AEPU is calculated by taking total network operations expense over a
period divided by the number of months in the period to calculate the average expense per month and
this total is divided by the average lines in service during the period. The following details
AEPU for network operations expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the nine months |
|
|
ended September 30, |
|
ended September 30, |
Average network operations expense per |
|
|
|
|
|
|
|
|
unit |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Bundled residential services |
|
$ |
38.32 |
|
|
$ |
34.99 |
|
|
$ |
37.51 |
|
|
$ |
34.95 |
|
Bundled business services |
|
$ |
24.64 |
|
|
$ |
22.11 |
|
|
$ |
25.12 |
|
|
$ |
22.24 |
|
1+ long distance services |
|
$ |
2.04 |
|
|
$ |
2.25 |
|
|
$ |
2.04 |
|
|
$ |
1.99 |
|
Fluctuations in AEPU are the net result of four offsetting factors: (1) increased usage as a result
of our customers choosing our unlimited product which generally results in increased domestic
long-distance charges; (2) changes in per line costs as our customer base continues to become more
geographically diverse resulting in some changes to the average cost experienced as a result of
having more lines in higher or lower priced UNE-P states and zones; (3) our auditing and analysis
of network operations and improving the synchronization of our billing systems to help reduce
network costs on a per unit basis; and (4) changes in ILEC rates.
We expect
AEPU to increase during the remainder of 2005 due to rate increases
agreed upon within the commercial services agreements that we have
with Verizon, Qwest and SBC. We may be subject to similar rate
increases should we enter into additional commercial agreements with
other ILECs.
Effective January 1, 2005, we have deferred the fee charged to us by the Incumbent Local Exchange
Carriers (ILECs) in the activation of our business VoIP customers. This fee and any acquisition
revenue received from the customers are being deferred and amortized over the life of each
customers signed contract At September 30, 2005, unamortized deferred set up fees amounted to
$0.6 million.
Retail Segment
The following table provides a detail of network operations expense as a percentage of revenues by
the respective revenue types. This table excludes an analysis of the wholesale services business
segment because management does not evaluate this measure, given that network expenses related to
wholesale services are intended to be zero-margin direct cost pass-through in nature.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the nine months |
|
|
ended September 30, |
|
ended September 30, |
Network operations expense as a |
|
|
|
|
|
|
|
|
percentage of revenues |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Bundled residential services |
|
|
54.2 |
% |
|
|
52.7 |
% |
|
|
52.4 |
% |
|
|
52.4 |
% |
Bundled business services |
|
|
70.2 |
% |
|
|
60.5 |
% |
|
|
69.7 |
% |
|
|
51.9 |
% |
1+ long distance services |
|
|
16.0 |
% |
|
|
17.7 |
% |
|
|
16.3 |
% |
|
|
18.6 |
% |
|
|
|
During the three and nine months ended September 30, 2005, network operations expense
related to bundled residential and bundled business services increased as a percentage of
revenues as compared to the same prior year periods due to increased usage, increased ILEC
rates, changes in geographic distribution of our customer base and
incremental fixed cost structures associated with roll out of our
VOIP offering. 1+ long distance
services decreased as a percentage of revenues primarily as a result of our auditing and
analysis of network operations. |
19
Wholesale Segment
|
|
|
Network operations expense from the wholesale segment decreased for the three and nine
months ended September 30, 2005 as compared to the same periods in 2004. Sprint elected to
become the customer of record for billing purposes from the ILECs for a significant portion
of their total wholesale lines in service. This caused a decrease in network operations
expense which was further reduced by the drop in wholesale lines in service for the three
and nine months ended September 30, 2005 as compared to the same periods in 2004. |
Sales and Marketing
The sales and marketing expense primarily consists of telemarketing, direct mail, brand awareness
advertising and independent sales representative commissions and salaries and benefits paid to
employees engaged in sales and marketing activities. The following table shows the break-down by
segment of sales and marketing expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
Percentage of |
|
|
|
ended September 30, |
|
|
Segment Revenues |
|
Sales & marketing expense by segment (in |
|
|
|
|
|
|
|
|
|
|
|
|
millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Retail Segment |
|
$ |
2.6 |
|
|
$ |
4.8 |
|
|
|
7.6 |
% |
|
|
11.5 |
% |
Wholesale segment |
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales & Marketing Expense |
|
$ |
2.6 |
|
|
$ |
4.8 |
|
|
|
5.9 |
% |
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months |
|
|
Percentage of |
|
|
|
ended September 30, |
|
|
Segment Revenues |
|
Sales & marketing expense by segment (in |
|
|
|
|
|
|
|
|
|
|
|
|
millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Retail Segment |
|
$ |
11.5 |
|
|
$ |
14.6 |
|
|
|
9.7 |
% |
|
|
11.3 |
% |
Wholesale segment |
|
|
|
|
|
|
0.2 |
|
|
|
0.0 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales & Marketing Expense |
|
$ |
11.5 |
|
|
$ |
14.8 |
|
|
|
7.6 |
% |
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Segment
|
|
|
The decrease in sales and marketing expense during the three months and nine months
ended September 30, 2005 as compared to the same periods in 2004 was primarily due to
commissions paid to independent sales representatives. A portion of the commission
payments is directly related to the number of new lines brought in by the sales
representatives. Since line counts have decreased, the corresponding commission payments
have decreased as well. |
Wholesale Segment
We are not actively seeking any new wholesale relationships at this time, therefore we are not
currently expending any effort in this regard.
20
General and Administrative
General and administrative expense primarily consists of employee salaries and benefits, outsourced
services, bad debt expense, billing and collection costs, occupancy costs, legal and provisioning
costs. The following table shows the break-down by segment of general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
Percentage of |
|
|
|
ended September 30, |
|
|
Segment Revenues |
|
General & administrative expense by |
|
|
|
|
|
|
|
|
|
|
|
|
segment (in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Retail Segment |
|
$ |
15.6 |
|
|
$ |
21.1 |
|
|
|
45.9 |
% |
|
|
51.1 |
% |
Wholesale segment |
|
|
1.4 |
|
|
|
6.1 |
|
|
|
13.9 |
% |
|
|
31.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total General & Administrative Expense |
|
$ |
17.0 |
|
|
$ |
27.2 |
|
|
|
38.6 |
% |
|
|
44.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months |
|
|
Percentage of |
|
|
|
ended September 30, |
|
|
Segment Revenues |
|
General & administrative expense by |
|
|
|
|
|
|
|
|
|
|
|
|
segment (in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Retail Segment |
|
$ |
52.4 |
|
|
$ |
72.3 |
|
|
|
44.3 |
% |
|
|
55.9 |
% |
Wholesale segment |
|
|
5.7 |
|
|
|
20.0 |
|
|
|
16.9 |
% |
|
|
31.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total General & Administrative Expense |
|
$ |
58.1 |
|
|
$ |
92.3 |
|
|
|
38.2 |
% |
|
|
47.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in general and administrative expenses during the three and nine months
ended September 30, 2005 as compared to the same periods in 2004 is explained by decreases
in payroll and payroll related expenses, contract development, legal expenses, billing,
collections, professional and consulting fees and ILEC setup fees to establish service for
new customers. These decreases were slightly offset by increases in bad debt expense and
ILEC performance credits. |
We have improved our operating costs and overall operations, which has contributed to improved per
line administrative cost factors. We anticipate general and administrative expenditures will
decrease in total as management continues to rationalize operating costs. However, this will be
offset to some extent by our expected increase in VoIP during 2006. We will continue to evaluate
our operations for efficiencies and our employee staffing requirements as they relate to increased
efficiencies or needs to expand or outsource services. We expect to see continued improvements to
the reductions of general and administrative expense as a percentage of total reported revenue in
2005 relative to 2004.
Retail Segment
|
|
|
General and administrative expense decreased $5.5 million and $19.9 million for the
three and nine months ended September 30, 2005, respectively, as compared to the same
periods in the prior year. The largest decreases occurred in payroll and payroll related
expenses, legal expenses, billing expenses and contract development expenses. |
|
|
|
|
These decreases were slightly offset by an increase in ILEC performance credits for
failure to meet certain service levels and an increase in bad debt expense due to the $2.5
million reserve that we booked against the SipStorm note, as mentioned in footnote 9 in the
Notes to Consolidated Financial Statements Related Party Transactions. |
Included in the retail services general and administrative expense are all employee benefits
expenses, occupancy, insurance, and other indirect or overhead-related expenses as only direct
costs are recorded within our wholesale services business segment.
Wholesale Segment
|
|
|
The decrease in general and administrative expense for the three and nine months ended
September 30, 2005 as compared to the same periods in 2004 is a direct result of decreased
wholesale lines in service. The expense line items that decreased most significantly are
payroll and payroll related expenses, billing expenses, outsourced collection expenses and
ILEC setup fees to establish service for new customers. |
We expect to steadily decrease headcount related to supporting the subscriber lines of our existing
wholesale customers. We have not recorded
any bad debt expense for our wholesale services and have not had any material write-offs of
receivables. We will continue to monitor our wholesale services and determine the appropriate bad
debt methodology based on each individual wholesale contract, but we do not expect any material
changes to our current approach.
21
Depreciation and Amortization
|
|
|
Depreciation and amortization expense decreased $2.6 million and $5.9 million for the
three and nine months ended September 30, 2005, respectively, as compared to the same
periods in the prior year. The decrease was the result of decreased capital spending, asset
disposals and an increase in the number of assets which became fully depreciated during the
later part of 2004 and the first nine months of 2005. |
Interest and Other Income
|
|
|
Interest and other income primarily consists of interest charged to our bundled
residential and business customers for not paying their bills on time and income from
interest earned on our cash balances. |
|
|
|
|
During the nine months ended September 30, 2005, interest and other income also includes
$6 million of lawsuit proceeds from our settlement with SBC Communications, Inc. and
several of its subsidiaries, as described in the Notes to Consolidated Financial Statements
in our Annual Report on Form 10-K for the year ended December 31, 2004. |
Interest and Other Expense
Interest and other expense includes late fees for vendor payments, discount fees related to our
accounts receivable financing facility with Thermo, interest related to the asset based loan with
Textron and our standby credit facility, capital leases and our other debt obligations.
|
|
|
The increase in interest and other expense during the three and nine months ended
September 30, 2005 as compared to the same periods in 2004 was primarily attributable to
the discount fees paid to Thermo, increase in balance of standby credit facility and
increase in late fees for vendor payments during 2005. |
Net Loss Attributable to Common Stockholders
|
|
|
Net loss attributable to common stockholders decreased by $11.1 million and $37.8
million during the three and nine months ended September 30, 2005, respectively, as
compared to the same periods in 2004. In addition to the decreases in our operating losses
and the income from the legal settlement discussed above, an additional $5.3 million and
$13.4 million for the three and nine months, respectively, was attributable to the
preferred stock conversion that occurred at the end of 2004. |
LIQUIDITY AND CAPITAL RESOURCES
The accompanying unaudited consolidated financial statements were prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. The realization of assets and the satisfaction of liabilities in the
normal course of business is dependent on, among other things, the companys ability to operate
profitably, to generate cash flow from operations and to obtain funding adequate to fund its
business.
We have a limited operating history and our operations are subject to material risks and
uncertainties, particularly related to the evolution of the regulatory environment, which impacts
our access to and cost of the network elements that we utilize to provide services to our
customers.
We have incurred significant losses since our inception as a result of developing our business,
performing ongoing research and development, building and maintaining our network infrastructure
and technology, the sale and promotion of our services, and ongoing administrative expenditures.
As of September 30, 2005, we had an accumulated deficit of approximately $417.3 million and $0.2
million in cash and cash equivalents. We have funded our expenditures primarily through operating
revenues, private securities offerings, various working capital facilities, our standby credit
facility and an initial public offering.
The companys inability to operate profitably and to consistently generate cash flows from
operations, its reliance therefore on external funding either from loans or equity raise
substantial doubt about the companys ability to continue as a going concern.
For the nine months ended September 30, 2005, net cash used in operating activities was $2.1
million as compared to $15.2 million in the prior year period.
In April 2004, the company secured an asset based loan facility with Textron Financial Corporation
(Textron), which provided up to $25 million to fund operations. Effective January 27, 2005, we
entered into a Modification and Termination Agreement with Textron. Among other things the
Modification and Termination Agreement provided that Textron would forbear from exercising default
rights and remedies until May 31, 2005, would waive the early termination fee and modify the annual
facility fee. We agreed to pay a modification fee of $150,000.
22
On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo). The agreement provides for the sale of up to $22 million of our accounts
receivable on a continuous basis to Thermo, subject to selection criteria as defined in the
contract. On May 6, 2005, we used proceeds from this accounts receivable financing facility to pay
off our loan balance with Textron.
By letter dated May 6, 2005, the Nasdaq Stock Market notified us that the market value of our
common stock remained below the minimum of $35 million required by Marketplace Rule
4310(c)(2)(B)(ii) and accordingly our shares would be delisted from the Nasdaq SmallCap Market at
the opening of business on May 17, 2005. We appealed the decision and presented a definitive plan
for regaining compliance to a hearing panel. A Nasdaq Listing Qualifications Hearing Panel
granted the company a temporary exception from these requirements subject to the following
conditions:
(1) The companys Form 10-Q for the quarter ended June 30, 2005 must evidence pro forma
stockholders equity of at least $2,500,000 at June 30, 2005.
(2) The companys Form 10-Q for the quarter ended September 30, 2005 must report actual
stockholders equity at September 30, 2005 of at least $2,500,000.
(3) On or before September 30, 2005, the company must evidence a closing bid price of at least
$1.00 per share and immediately thereafter a closing bid price of at least $1.00 per share for a
minimum of 10 consecutive trading days.
While we satisfied conditions (1) and (3),
our stockholders equity as of September30,2005 as
indicated by this report was less than $2,500,000. Accordingly, we
may be delisted from the
NASDAQ SmallCap Market. This report will serve as notice to the NASDAQ Stock Market, Inc. of our
material noncompliance with NASDAQs rules for continued listing
on the NASDAQ SmallCap Market. In
that event we expect our shares will begin trading on the OTC Bulletin Board.
On September 23, 2005, our shareholders approved a one-for-ten reverse stock split of our common
stock. The reverse stock split was affected on September 26, 2005. Fractional shares were not
issued in connection with the reverse stock split. All share and per share amounts have been
restated herein to reflect the one-for-ten reverse stock split.
Effective September 30, 2005, our chief operating officer, Frank Grillo has resigned to pursue
other opportunities. No replacement chief operating officer has been appointed. Instead our chief
executive officer, Horace J. Trey Davis, III, will take over Mr. Grillos duties.
Our net cash used in investing activities decreased by $4.0 million to $2.2 million for the nine
months ended September 30, 2005, compared to $6.2 million the prior year period. The reduction was
attributable to the purchasing of less property and equipment during the nine months ended
September 30, 2005 as compared to the same period in the prior year.
For the nine months ended September 30, 2005, net cash provided by financing activities was $3.1
million as compared to $14.2 million for the prior year period. This change is primarily the
result of using proceeds from our accounts receivable financing facility to payoff our asset based
loan with Textron.
DEBT INSTRUMENTS
Working Capital Financing
On April 4, 2005, we entered into an accounts receivable financing agreement with Thermo Credit,
LLC (Thermo) to replace our Textron credit facility. The agreement provides for the sale of up
to $22 million of our accounts receivable on a continuous basis to Thermo, subject to selection
criteria as defined in the contract. The discount rate is 2.5%. Purchase of the receivables is at
the option of Thermo. On May 6, 2005, we used proceeds from this accounts receivable financing
facility to pay off our loan balance with Textron.
During October 2005, we signed an amendment to our accounts receivable financing agreement with
Thermo. The amendment increases the amount of accounts receivable that we can sell to Thermo from
$22 million to $26 million, subject to selection criteria as defined in the original contract. The
discount rate is increased from 2.5% to 2.75%.
ILEC, IXC AND RELATED DISPUTED CHARGES
Since our existence we have disputed and continue to dispute significant charges from the various
ILECs, IXCs, and certain other carriers providing us services. We have a policy of treating all
charges that we believe are without merit, but are still being presented on a bill to us as
disputes, regardless of the age of the dispute. Our outstanding disputes at September 30,
2005 are summarized in the following table:
23
|
|
|
|
|
|
|
Outstanding Disputes |
|
|
|
at September 30, 2005 |
|
|
|
(in millions) |
|
Alternatively billed services |
|
$ |
6.0 |
|
Late fees for non-payment of disputed charges |
|
|
5.8 |
|
Billing errors |
|
|
4.8 |
|
All others |
|
|
1.8 |
|
|
|
|
|
|
|
$ |
18.4 |
|
Alternatively billed services are primarily charges for certain 1-800, collect and information
service calls. These disputes are largely historic in nature. We settled certain of these
disputes in Texas with Southwestern Bell Telephone Company. We remit all monies collected
associated with these services but do not pay the charges unless we collect from our customers. We
believe that our liability related to these charges should be capped at the amount remitted by our
end users; however, some of our settlements have included payments in excess of payments from our
customers.
The late fees are accumulating from all of our disputes as we do not pay for disputed items and
therefore incur and accumulate late fees for these disputed billings.
We believe that we have adequately accrued for our disputes and we believe our maximum exposure for
these charges is $18.4 million. However, we do not believe that all of these charges are valid
and intend to continue our dispute and non-payment of these charges.
RELATED PARTY TRANSACTIONS
On September 29, 2004, we signed an agreement with SipStorm, Inc., a company owned by two of our
shareholders and former officers of our company; we transferred selected computer hardware,
software and intellectual property rights to SipStorm. Relative to the purchase, SipStorm assumed
responsibility for certain accounts payable, future maintenance payments and provided a promissory
note in the amount of $2.8 million. The promissory note was settled for $250,000 during the second
quarter of 2005. The note was collateralized by shares of our common stock owned by the directors
of SipStorm and $250,000 reflected the estimated realizable value of that portion of our common
stock at the time of the settlement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into financial instruments for trading or speculative purposes and do not currently
utilize derivative financial instruments. Our operations are conducted primarily in the United
States and as such are not subject to material foreign currency exchange rate risk.
The fair value of our investment portfolio or related income would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature
of the major portion of our investment portfolio.
We have no material future earnings or cash flow exposures from changes in interest rates on our
long-term debt obligations, as substantially all of our long-term debt obligations are fixed rate
obligations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that material information
related to us, including our consolidated subsidiaries, is recorded, processed, summarized and
reported in accordance with SEC rules and forms. Our management, with the participation of Chief
Executive Officer, Horace J. Davis, III and Acting Chief Financial Officer, J. Michael Morgan, has
evaluated the effectiveness of our disclosure controls and procedures as of the end of the period
covered by this report. Based upon that evaluation, Messrs. Davis and Morgan have concluded that
our disclosure controls and procedures are effective in causing material information to be
recorded, processed, summarized, and reported so as to ensure the quality and timeliness of our
public disclosures in compliance with SEC rules and forms.
Changes in Internal Control over Financial Reporting
We also maintain a system of internal control over financial reporting. Our internal control over
financial reporting is a process designed under the supervision of our chief executive officer and
our chief financial officer and effected by our board of directors, management and other personnel
to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that (1) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets and (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors. There was no change in our
internal control over financial reporting that occurred during our most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect our internal control over
financial reporting.
24
Part II
ITEM 1. LEGAL PROCEEDINGS
1. |
|
Master File Number 21 MC 92; In re Initial Public Offering Securities
Litigation., in the United States District Court for the Southern
District of New York (filed June 7, 2001) |
During June and July 2001, three separate class action lawsuits were filed against us, certain of
our current and former directors and officers (the D&Os) and firms engaged in the underwriting
(the Underwriters) of our initial public offering of stock (the IPO).
The lawsuits, along with approximately 310 other similar lawsuits filed against other issuers
arising out of initial public offering allocations, have been assigned to a Judge in the United
States District Court for the Southern District of New York for pretrial coordination. The lawsuits
against us have been consolidated into a single action. A consolidated amended complaint was filed
on April 20, 2002. A Second Corrected Amended Complaint (the Amended Complaint), which is the
operative complaint, was filed on July 12, 2002.
The Amended Complaint is based on the allegations that our registration statement on Form S-1,
filed with the Securities and Exchange Commission (SEC) in connection with the IPO, contained
untrue statements of material fact and omitted to state facts necessary to make the statements made
not misleading by failing to disclose that the underwriters allegedly had received additional,
excessive and undisclosed commissions from, and allegedly had entered into unlawful tie-in and
other arrangements with, certain customers to whom they allocated shares in the IPO. The plaintiffs
in the Amended Complaint assert claims against us and the D&Os pursuant to Section 11 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated by the SEC there under. The plaintiffs in the Amended Complaint assert claims against
the D&Os pursuant to Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the SEC there under. The
plaintiffs seek an undisclosed amount of damages, as well as pre-judgment and post-judgment
interest, costs and expenses, including attorneys fees, experts fees and other costs and
disbursements. We believe we are entitled to indemnification from our Underwriters.
A settlement has been reached by the respective lawyers for plaintiffs, the issuers and insurers of
the issuers. The principal terms of the proposed settlement are (i) a release of all claims against
the issuers and their officers and directors, (ii) the assignment by the issuers to the plaintiffs
of certain claims the issuers may have against the Underwriters and (iii) an undertaking by the
insurers to ensure the plaintiffs receive not less than $1 billion in connection with claims
against the Underwriters. Hence, under the terms of the proposed settlement our financial
obligations will likely be covered by insurance. The court has given preliminary approval of the
settlement subject to certain modifications. A revised settlement agreement has been submitted to
the court. To be binding, the settlement must be executed by the parties and thereafter submitted
to and approved by the court. The settlement will not be binding upon any plaintiffs electing to
opt-out of the settlement.
2. |
|
C.A. No. 04CH07882, Susan Schad, on behalf of herself and all others
similarly situated, v. Z-Tel Communications, Inc., In the Circuit
Court of Cook County, Illinois, Illinois County Department, Chancery
Division, filed May 13, 2004; |
Susan Schad, on behalf of herself and all others similarly situated, filed a class action lawsuit
against Trinsic Communications, Inc. (formerly known as Z-Tel Communications, Inc.), our
wholly-owned subsidiary corporation, on May 13, 2004. The lawsuit alleges that our subsidiary has
engaged in a pattern and practice of deceiving consumers into paying amounts in excess of their
monthly rates by deceptively labeling certain line-item charges as government-mandated taxes or
fees when in fact they were not. The complaint seeks to certify a class of plaintiffs consisting of
all persons or entities who contracted with Trinsic for telecommunications services and were billed
for particular taxes or regulatory fees. The complaint asserts a claim under the Illinois Consumer
Fraud and Deceptive Businesses Practices Act and seeks unspecified damages, attorneys fees and
court costs. On June 22, 2004, we filed a notice of removal in the state circuit court action,
removing the case to the federal district court for the Northern District of Illinois, Eastern
Division, C.A. No. 4 C 4187. On July 26, 2004, Plaintiff filed a motion to remand the case to the
state circuit court. On January 12, 2005, the federal court granted the motion and remanded the
case to the state court. On October 17, 2005, the state court heard argument on Trinsics motion
to dismiss the lawsuit and granted that motion, in part with prejudice. The court dismissed with
prejudice the claims relating to the E911 Tax, the Utility Users Tax, and the Communications
Service Tax. The court found that those tax charges were specifically authorized by state law or
local ordinance, and thus cannot be the basis of a Consumer Fraud claim. The court also dismissed
(but with leave to replead within 28 days) the claims relating to the Interstate Recovery Fee and
the Federal Regulatory Compliance Fee. The court determined that plaintiff had failed to allege
how she was actually damaged by the allegedly deceptive description of the charges. While the
partial dismissal with prejudice is a positive development, and although we
believe the plaintiffs allegations are without merit and intend to defend the lawsuit vigorously,
we cannot predict the outcome of this litigation with any certainty.
25
3. |
|
Case. No. 0410453, Wilder Corporation of Delaware, Inc. v. Trinsic
Communications, Inc., In the Circuit Court of the Thirteenth Judicial
Circuit in and for Hillsborough County, Florida, Civil Division,
Division G, filed November 19, 2004 |
On November 19, 2004, the landlord of our principal Tampa, Florida facility sued us a seeking a
declaration of its rights and obligations under the lease and damages for breach of contract. We
assert that the landlord has failed to provide certain services in accordance with the lease,
including maintenance of air conditioning and emergency electrical generating systems crucial to
our operations. We have taken steps necessary to provide this maintenance and have offset the costs
of these measures against the rent, which we believe we are entitled to do under the lease. Thus
far we have withheld approximately $[ ]. We also believe we are entitled to reimbursement from
the landlord for approximately $23,000 in costs associated with improvements to the leased space.
4. |
|
Case. No. 0410441, Beneficial Management Corporation of America. v.
Trinsic Communications, Inc., In the Circuit Court of the Thirteenth
Judicial Circuit in and for Hillsborough County, Florida, Civil
Division, Division F, filed November 19, 2004 |
On November 19, 2004, a provider of parking spaces for our Tampa facilities sued us for parking
fees in excess of $334,300. Pursuant to our lease we are entitled to a number of free spaces and we
are obligated to pay for additional usage of parking spaces. We believe the provider has
substantially overstated our use of the spaces. We expect to resolve this dispute
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on July 1, 2005, the following proposal was adopted by
the margins indicated:
1. To elect the following individuals to the Board of Directors to hold office until their
successors are elected and qualified:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
Nominee |
|
For |
|
Withheld |
Andrew C. Cowen |
|
|
42,725,167 |
|
|
|
54,374 |
|
Raymond L. Golden |
|
|
42,724,352 |
|
|
|
55,189 |
|
The terms of office of the following other directors continued after the meeting:
W. Andrew Krusen
Lawrence C. Tucker
Richard F. LaRoche, Jr.
Roy Neel
On September 23, 2005, we held a special meeting of the stockholders at which the following
proposals were approved:
I. To permit the conversion (the Conversion) of Trinsics approximately $24.1 million aggregate
liquidation preference of Series H Preferred Stock into common stock at a conversion price equal to
$0.39, per share, subject to antidilution adjustments; provided, however, that if on or prior to
September 29, 2005, Trinsic shall not have entered into a definitive agreement(s) to acquire no
less than 150,000 UNE-P subscriber lines (tested as of September 29, 2005), then the
permitted conversion price shall reduce to $0.20 per share, subject to antidilution adjustments;
and
II. To approve an amendment of Trinsics certificate of incorporation to effect a reverse
stock split of the common stock in the ratio of an integral number between and including three and
twelve to one, as determined at the discretion of the board of directors, which reverse stock split
at any ratio may be abandoned at any time prior to effectiveness at the discretion of the board of
directors, notwithstanding Stockholders authorization thereof.
The proposals are more fully described in our definitive proxy statement filed with the Securities
and Exchange Commission on September 2, 2005.
The votes cast for and against each proposal are set forth below.
Proposal I
|
|
|
|
|
For |
|
Against |
|
Abstention |
34,946,454
|
|
890,643
|
|
78,391 |
Proposal II
|
|
|
|
|
For |
|
Against |
|
Abstention |
34,926,806
|
|
977,194
|
|
11,488 |
26
ITEM 6. EXHIBITS
(a) The following exhibits are filed as part of this report:
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION |
3.1
|
|
Amended and Restated Certificate of Incorporation of Trinsic, Inc. as
amended. Incorporated by reference to the correspondingly numbered exhibit
to our Annual Report on Form 10-K for the year ended December 31, 2004 filed
April 15, 2005. |
|
|
|
3.2
|
|
Amended and Restated Bylaws of Trinsic, as amended. Incorporated by
reference to the correspondingly numbered exhibit to our Quarterly report on
Form 10-Q for the quarter ended September 30, 2004 filed November 15, 2004. |
|
|
|
3.3
|
|
Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Trinsic, Inc. Incorporated by reference to Exhibit 3.3 to
our Form 8-K filed September 28, 2005. |
|
|
|
4.1
|
|
Form of Common Stock Certificate. Incorporated by reference to the
correspondingly numbered exhibit to our Annual Report on Form 10-K for the
year ended December 31, 2004 filed April 15, 2005. |
|
|
|
4.2
|
|
See Exhibits 3.1, 3.2 and 3.3. of this report for provisions of the Amended
and Restated Certificate of Incorporation, as amended, and our Bylaws, as
amended, defining rights of security holders. |
|
|
|
4.6
|
|
Form of Warrant for the purchase of shares of our common stock by each of
the purchasers of our Series D Convertible Preferred Stock. Incorporated by
reference to the correspondingly numbered exhibit to our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, filed on August 14, 2000. |
|
|
|
4.7
|
|
Stock and Warrant Purchase Agreement, dated October 19, 2000, by and among
us and The 1818 Fund III, L.P. Incorporated by reference to the
correspondingly numbered exhibit to our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000, filed on November 14, 2000. |
|
|
|
4.9
|
|
Registration Rights Agreement between and among us and The 1818 Fund III,
L.P. Incorporated by reference to the correspondingly numbered exhibit to
our Quarterly Report on Form 10-Q for the quarter ended September 30, 2000,
filed on November 14, 2000. |
|
|
|
4.10
|
|
Warrant issued to The 1818 Fund III, L.P. for the purchase of shares of our
common stock. Incorporated by reference to the correspondingly numbered
exhibit to our Quarterly Report on Form 10-Q for the quarter ended September
30, 2000, filed on November 14, 2000. |
|
|
|
4.11
|
|
Certificate of Designation of Series F Junior Participating Preferred Stock.
Incorporated by reference to the correspondingly numbered exhibit to our
Annual Report on Form 10-K for the year ended December 31, 2000, filed on
March 30, 2001. |
|
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4.12
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|
Rights Agreement dated as of February 19, 2001 between Z-Tel Technologies,
Inc. and American Stock Transfer & Trust Company, as Rights Agent, as
amended July 2, 2001. Incorporated be reference to the correspondingly
numbered exhibit to our quarterly report on Form 10-Q for the quarter ended
June 30, 2001 |
|
|
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4.13
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|
Amendment No. 1 to Rights Agreement dated as of November 19, 2004 between
Z-Tel Technologies, Inc. and American Stock Transfer & Trust Company, as
Rights Agent. Incorporated by reference to Exhibit 4.1 to our registration
statement on form 8-A/A filed on December 6, 2004. |
27
|
|
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EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION |
4.14
|
|
Amendment No. 2 to Rights Agreement dated as of July 19, 2005, between
Trinsic, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
Incorporated by reference to Exhibit 4.1 to our registration statement on
form 8-A/A filed on July 21, 2005. |
|
|
|
4.15
|
|
Stock and Warrant Purchase Agreement, dated as of July 2, 2001, by and
between us, D. Gregory Smith, and others. Incorporated by reference to
Exhibit 1 to Amendment No. 1 of the Schedule 13D filed July 12, 2001 with
respect to our common stock by, among other persons, The 1818 Fund III, L.P. |
|
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4.16
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|
Warrant for the Purchase of Shares of Common Stock of Trinsic, dated as of
July 2, 2001. Incorporated by reference to Exhibit 2 to Amendment No. 1 of
the Schedule 13D filed July 12, 2001 with respect to our common stock by,
among other persons, The 1818 Fund III, L.P. |
|
|
|
4.17
|
|
Backup Purchase Agreement, dated as of July 2, 2001, by and among Z-Tel
Communications, Inc., a Delaware corporation and our wholly owned
subsidiary, Touch 1 Communications, Inc., an Alabama corporation and our
wholly owned subsidiary, D. Gregory Smith and others. Incorporated by
reference to Exhibit 4 to Amendment No. 1 of the Schedule 13D filed July 12,
2001 with respect to our common stock by, among other persons, The 1818 Fund
III, L.P. |
|
|
|
4.18
|
|
Additional Investor Registration Rights Agreement, dated as of July 2, 2001,
between Z-Tel, D. Gregory Smith and others. Incorporated by reference to
Exhibit 5 to the Schedule 13D filed July 24, 2001 with respect to our common
stock by, among other persons, D. Gregory Smith. |
|
|
|
4.19
|
|
Voting Agreement, dated as of June 29, 2001, between us and certain of our
stockholders. Incorporated by reference to Exhibit 5 to Amendment No. 1 of
the Schedule 13D filed July 12, 2001 with respect to our common stock by,
among other persons, The 1818 Fund III, L.P. |
|
|
|
4.20
|
|
Exchange and Purchase Agreement dated July 15, 2005 between Trinsic, Inc.
and The 1818 Fund III, L.P. Incorporated by reference to Exhibit A to our
Form 8-K filed July 20, 2005. |
|
|
|
4.21
|
|
Certificate of Designation of Convertible Preferred Stock, Series H.
Incorporated by reference to Exhibit B to our Form 8-K filed July 20, 2005. |
|
|
|
4.22
|
|
Voting Agreement, dated August 31, 2005, between us and The 1818 Fund III,
L.P. Incorporated by reference to Exhibit B to our Form 8-K filed September
7, 2005. |
|
|
|
10.1.1
|
|
Standby Credit Facility Agreement, dated August 24, 2004, by and among
Trinsic, Inc. and The 1818 Fund III, L.P. Incorporated by reference to Form
8-K filed on August 26, 2004 |
|
|
|
10.1.2
|
|
Amendment No. 1, dated May 24, 2005, to Standby Credit Facility Agreement,
dated August 24, 2004 by and between Trinsic, Inc. and The 1818 Fund III,
L.P. |
|
|
|
10.1.3
|
|
Amended and Restated Senior Unsecured Promissory Note dated August 24, 2004
from Trinsic, Inc. to The 1818 Fund III, L.P. |
|
|
|
10.2.1
|
|
1998 Equity Participation Plan. Incorporated by reference to the
correspondingly numbered exhibit to our Registration Statement on Form S-1
(File No. 333-89063), originally filed October 14, 1999, as amended and as
effective December 14, 1999. |
|
|
|
10.2.2
|
|
2000 Equity Participation Plan, as amended. Incorporated by reference to the
correspondingly numbered exhibit to our Annual Report on Form 10-K for the
year ended December 31, 2004 filed April 15, 2005. |
|
|
|
10.2.3
|
|
2004 Stock Incentive Plan. Incorporated by reference to Exhibit 4.1 to our
Registration Statement on Form S-8 filed May 8, 2005. |
|
|
|
10.3
|
|
Loan and Security Agreement, dated April 22, 2004, by and between Textron
Financial Corporation and Z-Tel. Incorporated by reference to Exhibit 10.2
of our Registration Statement on Form S-3 (File No. 333-116747), originally
filed June 22, 2004, as amended and as effective July 15, 2004. |
|
|
|
10.4
|
|
Receivables Sales Agreement dated as of July 27, 2000 by and between Z-Tel
Communications, Inc., as seller and subservicer, Touch 1 Communications,
Inc., as seller and subservicer, and RFC Capital Corporation, as purchaser.
Incorporated by reference to the correspondingly numbered exhibit to our
Quarterly Report on Form 10- Q for the quarter ended June 30, 2000, filed on
August 14, 2000, with an amendment extending the agreement until July 27,
2004. |
28
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION |
10.5
|
|
Form of Indemnification Agreement for our executive officers and directors.
Incorporated by reference to the correspondingly numbered exhibit to our
Annual Report on Form 10-K for the year ended December 31, 2000, filed on
March 30, 2001. |
|
|
|
10.6
|
|
Employment Agreement of Horace J. Trey Davis III, dated August 14, 2002.
Incorporated by reference to the correspondingly numbered exhibit to our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, filed on
May 17, 2004. By amendment dated October 5, 2004, the annual salary was
increased to $300,000. The amendment is incorporated by reference to Exhibit
99.1 to Form 8-K filed October 12, 2004. |
|
|
|
10.7
|
|
Modification and Termination Agreement dated January 27, 2005 with Textron
Financial Corporation modifying our Loan and Security Agreement dated April
22, 2004. Incorporated by reference to Exhibit 10.4 to Form 8-K filed
February 2, 2005. |
|
|
|
10.8
|
|
Asset Sale and Purchase Agreement dated September 29, 2004, between and
among Sipstorm, Inc. and us. Incorporated by reference to Exhibit 99.1 to
October 6, 2004. |
|
|
|
10.11
|
|
Promissory Note, dated September 10, 1999, from Touch 1 Communications, Inc.
to William F. Corman (First Revocable Trust). Incorporated by reference to
the correspondingly numbered exhibits to our Annual Report on Form 10-K for
the year ended December 31, 2000, filed on March 30, 2001. |
|
|
|
10.12
|
|
Promissory Note, dated September 10, 1999, from Touch 1 Communications, Inc.
to James F. Corman. Incorporated by reference to the correspondingly
numbered exhibits to our Annual Report on Form 10-K for the year ended
December 31, 2000, filed on March 30, 2001. |
|
|
|
10.13
|
|
Agreement for Resale of Local Wireline Telecommunications Services and
Provision of Ancillary Services, dated February 4, 2003, between Z-Tel
Communications Inc. and Sprint Communications L.P. Incorporated by reference
to Exhibit 10.14 of our Annual Report on Form 10-K for the year ended
December 31, 2003, filed March 30, 2004. Portions of this exhibit have been
omitted pursuant to a request for confidential treatment |
|
|
|
10.14
|
|
Receivables Sales Agreement, dated as of March 28, 2005, by and between
Trinsic Communications Inc. and Touch 1 Communications s Inc., collectively
as Seller and Subservicer, and Thermo Credit, LLC, as Purchaser and Master
Servicer. Incorporated by reference to Exhibit 10.1 to our o Form 8-K filed
i April 5, 2005. |
|
|
|
31.1
|
|
Certification , of the Chief Executive Officer |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer |
|
|
|
32.1
|
|
Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.ss.1350 |
|
|
|
32.2
|
|
Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.ss.1350 |
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized, as of the 14th day of November 2005.
TRINSIC, INC.
|
|
|
|
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By:
|
|
/s/ HORACE J. DAVIS, III
|
|
|
|
|
|
|
|
|
|
Horace J. Davis, III |
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
By:
|
|
/s/ J. MICHAEL MORGAN |
|
|
|
|
|
|
|
|
|
J. Michael Morgan |
|
|
|
|
Acting Chief Financial Officer |
|
|
A signed original of this report has been provided to Trinsic, Inc. and will be retained by the
Trinsic, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
30