ESCH Eschelon Telecom (MM)

(NASDAQ:ESCH): Eschelon Telecom, Inc., a provider of integrated communications services to small and medium sized businesses in the western United States, today announced results for the quarter ended June 30, 2007. Richard A. Smith, Eschelon�s President and Chief Executive Officer, said, �Once again we are reporting very strong revenue and EBITDA growth in addition to record line sales and installations. Additionally, we completed the acquisition of Oregon-based UNICOM on May 1st and laid the ground work for future organic growth by opening two additional markets: Fort Collins, Colorado and Tucson, Arizona. �We committed that we would continue to execute our business plan despite the pending acquisition of Eschelon by Integra Telecom, Inc. I am proud to say that we have done that well.� The following table highlights financial and operating results (dollars in thousands, except per unit amounts): For the six months ended June 30, 2Q 2007 1Q 2007 2Q 2006 � 2007 � 2006 Total Revenue $ 86,356 $ 80,307 $ 68,250 $ 166,663 $ 127,976 Total Gross Profit * $ 49,932 $ 47,142 $ 39,056 $ 97,074 $ 73,466 Total Gross Margin (%) * 58% 59% 57% 58% 57% Adjusted EBITDA $ 19,502 $ 17,793 $ 13,376 $ 37,295 $ 25,433 Net Income (Loss) $ 1,131 $ 22 $ (599) $ 1,153 $ (2,182) Capital Expenditures $ 12,472 $ 17,707 $ 11,603 $ 30,179 $ 20,623 Cash and Investments (at end of period) $ 18,546 $ 26,503 $ 91,876 $ 18,546 $ 91,876 � Voice Lines In Service (at end of period) 395,678 370,525 318,138 395,678 318,138 Data Lines In Service (at end of period) 283,132 256,972 177,913 283,132 177,913 Total Lines In Service (at end of period) 678,810 627,497 496,051 678,810 496,051 Lines On-Net (%) (at end of period) 85.3% 86.0% 82.2% 85.3% 82.2% Lines Sold 45,640 45,582 36,343 91,221 67,083 Average Monthly Line Churn (%) 1.32% 1.27% 1.43% 1.29% 1.49% Average Network Revenue per Line per Month $ 39.32 $ 39.24 $ 41.36 $ 39.28 $ 41.48 � Total Employees (at end of period) 1,431 1,393 1,269 1,431 1,269 Quota-Carrying Network Service Salespeople (at end of period) � 258 277 273 258 273 � * Gross profit is defined as revenue less network services expense (excluding depreciation and amortization) and business telephone systems cost of revenue. Total revenues for the second quarter of 2007 were $86.4 million, an increase of $6.0 million from the first quarter of 2007 and an increase of $18.1 million from the second quarter of 2006. The increases were primarily due to the inclusion of the companies recently acquired and access line growth. Gross profit for the second quarter of 2007 was $49.9 million, an increase of $2.8 million from the first quarter of 2007 and an increase of $10.9 million from the second quarter of 2006. The increases were primarily due to the inclusion of the companies recently acquired and access line growth. Gross profit as presented is defined as revenue less network services expense (excluding depreciation and amortization) and business telephone systems cost of revenue. Gross profit is not intended to replace operating income (loss), net income (loss), cash flow and other measures of financial performance reported in accordance with generally accepted accounting principles (�GAAP�) in the United States. Management uses this definition of gross profit as a measure of operating performance. Below is a schedule reconciling reported GAAP operating income to gross profit as presented. Eschelon Telecom, Inc. Consolidated Operating Income to Gross Profit Reconciliation (In Thousands) � For the six months ended June 30, 2Q 2007 � 1Q 2007 � 2Q 2006 � 2007 � 2006 Operating Income $ 6,685 $ 5,407 $ 3,288 $ 12,092 $ 4,823 Sales, general and administrative expense 30,854 29,899 25,973 60,753 48,672 Depreciation and amortization expense � 12,393 � � 11,836 � � 9,795 � � 24,229 � � 19,971 Gross Profit $ 49,932 � $ 47,142 � $ 39,056 � $ 97,074 � $ 73,466 Sales, general and administrative expenses for the second quarter of 2007 were $30.9 million, an increase of $1.0 million from the first quarter of 2007 and an increase of $4.9 million from the second quarter of 2006. The increases were primarily due to the inclusion of companies recently acquired. Adjusted EBITDA for the second quarter of 2007 was $19.5 million, an increase of $1.7 million from the first quarter of 2007 and an increase of $6.1 million from the second quarter of 2006. Adjusted EBITDA is a non-GAAP measure. Below is a schedule reconciling reported GAAP net income (loss) to EBITDA and Adjusted EBITDA. Eschelon Telecom, Inc. Consolidated Net Income (Loss) to EBITDA and Adjusted EBITDA Reconciliation (In Thousands) � For the six months ended June 30, 2Q 2007 � 1Q 2007 � 2Q 2006 � 2007 � 2006 Net Income (Loss) $ 1,131 $ 22 $ (599) $ 1,153 $ (2,182) Interest expense, net 4,514 4,382 3,895 8,896 7,062 Income taxes 463 - - 463 - Depreciation and amortization � 12,393 � � 11,836 � � 9,795 � � 24,229 � � 19,971 EBITDA 18,501 16,240 13,091 34,741 24,851 Share-based compensation expense 424 550 292 974 638 Loss (gain) on disposal of assets (13) (5) 19 (18) 48 Gain on sale of available-for-sale securities - - (18) - (96) Other (income) expense, net � 590 � � 1,008 � � (8) � � 1,598 � � (8) Adjusted EBITDA $ 19,502 � $ 17,793 � $ 13,376 � $ 37,295 � $ 25,433 Capital expenditures for the second quarter of 2007 were $12.5 million, a decrease of $5.2 million from the first quarter of 2007 and an increase of $0.9 million from the second quarter of 2006. Capital expenditures typically fluctuate by quarter depending upon timing of major equipment purchases. Net income for the second quarter of 2007 was $1.1 million, an increase of $1.1 million from the first quarter of 2007 and an increase of $1.7 million from the second quarter of 2006. The increases were primarily due to the inclusion of the companies recently acquired and higher access lines in service. Cash, restricted cash and available-for-sale securities at June 30, 2007 were $18.5 million, a decrease of $8.0 million from March 31, 2007. The decrease is primarily due to funding the acquisition of UNICOM on May 1, 2007. Investor Call As previously announced, the transaction between Integra Telecom and Eschelon is expected to close the evening of Friday, August 31, 2007. Given the proximity to the closing, Eschelon does not plan to hold a conference call to review second quarter results. Questions regarding the information in this release should be directed to Geoff Boyd, Eschelon�s Chief Financial Officer, at 612-436-6486. About Eschelon Telecom, Inc. Eschelon Telecom, Inc. is a facilities-based competitive communications services provider of voice and data services and business telephone systems in 53 markets in the western United States. Headquartered in Minneapolis, Minnesota, the company currently employs approximately 1,430 telecommunications/Internet professionals, serves over 65,000 business customers and has approximately 679,000 access lines in service throughout its markets in Arizona, California, Colorado, Minnesota, Montana, Nevada, Oregon, Utah and Washington. For more information, please visit our web site at www.eschelon.com. Forward Looking Statements This announcement contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are based on Eschelon Telecom�s current intent, belief and expectations. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Actual results may differ materially from these forward-looking statements because of the company�s history of losses, ability to maintain relationships with RBOCs, substantial indebtedness, intense competition, dependence on key management, changes in government regulations, and other risks that may be described in the company�s filings with the Securities and Exchange Commission. In particular, statements regarding the consummation of the merger are subject to risks that the conditions to the transaction will not be satisfied. In addition, our results of operations, financial condition and cash flows also may be adversely impacted by the recent announcement of the proposed transaction, which may impact our ability to attract and retain customers, management and employees. We have incurred and will continue to incur significant advisory fees and other expenses relating to the transaction. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today�s date. Eschelon Telecom undertakes no obligation to update or revise the information contained in this announcement, whether as a result of new information, future events or circumstances or otherwise. Eschelon Telecom, Inc. Consolidated Statement of Operations (Dollars In Thousands, Except per Share Amounts) � For the six monthsended June 30, 2Q 2007 � 1Q 2007 � 2Q 2006 � 2007 � 2006 Revenue: Network services $ 78,251 $ 72,754 $ 60,920 $ 151,005 $ 113,705 Business telephone systems � 8,105 � � 7,553 � � 7,330 � � 15,658 � � 14,271 Total revenue 86,356 80,307 68,250 166,663 127,976 � Costs and expenses: Network services expense (excluding depreciation and amortization) 31,321 28,541 24,780 59,862 45,543 Business telephone systems cost of revenue 5,103 4,624 4,414 9,727 8,967 Sales, general and administrative 30,854 29,899 25,973 60,753 48,672 Depreciation and amortization � 12,393 � � 11,836 � � 9,795 � � 24,229 � � 19,971 Operating income 6,685 5,407 3,288 12,092 4,823 � Other income (expense): Interest income 247 391 759 638 992 Interest expense (4,761) (4,773) (4,654) (9,534) (8,054) Other income (expense), net � (577) � � (1,003) � � 8 � � (1,580) � � 57 Income (loss) before taxes 1,594 22 (599) 1,616 (2,182) Income taxes � (463) � � - � � - � � (463) � � - Net income (loss) $ 1,131 � $ 22 � $ (599) � $ 1,153 � $ (2,182) � Net income (loss) per share: Basic $ 0.06 � $ 0.00 � $ (0.04) � $ 0.07 � $ (0.14) Diluted $ 0.06 � $ 0.00 � $ (0.04) � $ 0.06 � $ (0.14) � Weighted average shares outstanding: Basic � 17,706,348 � � 17,648,167 � � 16,065,330 � � 17,677,418 � � 15,376,909 Diluted � 18,445,798 � � 18,320,919 � � 16,065,330 � � 18,395,816 � � 15,376,909 Eschelon Telecom, Inc. Consolidated Balance Sheets (In Thousands) � June 30, December 31, 2007 � 2006 � Assets Current assets: Cash and cash equivalents $ 17,986 $ 21,146 Restricted cash 560 1,224 Available-for-sale securities - 17,097 Accounts receivable, net 29,573 27,592 Other receivables 5,161 4,025 Inventories 3,689 3,552 Prepaid expenses � 3,081 � � 2,314 Total current assets 60,050 76,950 � Property and equipment, net 151,752 145,785 � Other assets 1,522 2,185 Goodwill 72,398 59,670 Intangible assets, net � 47,483 � � 45,931 Total assets $ 333,205 � $ 330,521 � Liabilities and stockholders' equity Current liabilities: Accounts payable $ 11,950 $ 17,641 Accrued telecommunication costs 5,508 5,730 Accrued office rent 2,489 2,521 Accrued interest expense 3,851 3,829 Other accrued expenses 9,193 7,433 Deferred revenue 10,943 10,109 Accrued compensation expenses 6,649 4,174 Capital lease obligations, current maturities � 1,572 � � 3,131 Total current liabilities 52,155 54,568 � Long-term liabilities: Other long-term liabilities 1,713 1,262 Capital lease obligations, less current maturities 2,556 2,201 Notes payable � 142,909 � � 141,040 Total liabilities 199,333 199,071 � Stockholders' equity: Common stock 177 176 Additional paid-in capital 290,369 289,101 Accumulated other comprehensive income - - Accumulated deficit � (156,674) � � (157,827) Total stockholders' equity � 133,872 � � 131,450 Total liabilities and stockholders' equity $ 333,205 � $ 330,521 Eschelon Telecom, Inc. Consolidated Statements of Cash Flows (In Thousands) Six months ended June 30, 2007 � 2006 Operating activities Net income (loss) $ 1,153 $ (2,182) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense 24,229 19,971 Provision for bad debt expense 836 814 Non-cash interest expense, net of non-cash interest income 2,508 2,043 Non-cash shared-based compensation expense 974 638 Other non-cash items (18) (48) Changes in operating assets and liabilities: Accounts receivable (1,345) 1,004 Inventories 20 (415) Prepaid expenses and other assets (1,004) (893) Accounts payable and accrued expenses (5,702) (5,024) Deferred revenue 280 215 Accrued compensation expense � 2,469 � � 181 Net cash provided by operating activities 24,400 16,304 � Investing activities Purchases of subsidiaries, net of cash acquired (13,879) (19,956) Purchases of available-for-sale securities (3,750) (68,268) Proceeds from sales of available-for-sale securities 20,850 8,800 Purchases of property and equipment (19,167) (12,023) Cash paid for customer installation costs (10,709) (7,579) Decrease in restricted cash 664 316 Proceeds from sales of assets � 53 � � 72 Net cash used in investing activities (25,938) (98,638) � Financing activities Proceeds from issuance of notes payable - 45,600 Payments made on notes and capital lease obligations (1,673) (1,278) Proceeds from issuance of stock, net of fees 295 40,267 Increase in debt issuance costs � (244) � � (1,311) Net cash (used in) provided by financing activities � (1,622) � � 83,278 � Net increase (decrease) in cash and cash equivalents (3,160) 944 Cash and cash equivalents at beginning of period � 21,146 � � 26,062 Cash and cash equivalents at end of period $ 17,986 � $ 27,006 � Supplemental cash flow information Cash paid for interest $ 7,025 � $ 6,010 � Supplemental non-cash activities Equipment purchases under capital leases $ 303 � $ 1,021 Share-based compensation $ - � $ 6,045