SEC Company Response from ESCHELON TELECOM INC (CIK 0001110507) — Jun 14, 2005
ESCHELON TELECOM INC (CIK 0001110507)
Date: June 14, 2005 · CIK: 0001110507 · Accession: 0001104659-05-028258
AI Filing Summary & Sentiment
File numbers found in text: 000-50706, 333-124703
Letter
VIA EDGAR AND HAND DELIVERY United States Securities and Exchange Commission File No. 333-124703 Form 10-K for the fiscal year ended Dec. 31, 2004, filed March 31, 2005 Form 10-Q for the fiscal quarter ended March 31, 2005, filed May 16, 2005 File No. 000-50706
Dear Mr. Spirgel:
This letter is submitted on behalf of Eschelon Telecom, Inc. (“Eschelon” or the “Company”) in response to the comments set forth in your letter to Richard A. Smith, President and Chief Executive Officer, dated June 3, 2005, regarding the Company’s Registration Statement on Form S-1 (File No. 333-124703) (the “Registration Statement”). This letter should be read in conjunction with Amendment No. 1 to the Registration Statement (“Amendment No. 1”), which was filed today with the SEC via EDGAR.
Certain responses set forth below reflect discussions between Eschelon representatives and its independent auditors and legal counsel and representatives of the underwriters and their legal counsel. However, Eschelon has reviewed and approved all of the responses set forth below. The supplemental information referred to in this letter will be forwarded separately to Mr. Daniel Zimmerman at the SEC.
For your convenience, we have set forth below each of your numbered comments, followed by the response of Eschelon.
Serving clients globally
Form S-1
General
1. We note a number of blank spaces throughout your registration statement for information that you are not entitled to omit under Rule 430A, such as the anticipated price range. Please note that we may have additional comments once you have provided this disclosure. Therefore, please allow us sufficient time to review your complete disclosure prior to any distribution of preliminary prospectuses.
Eschelon Response: The Company notes the Staff’s comment and will provide all information not omitted in reliance on Rule 430A in a subsequent amendment to the Registration Statement, including the anticipated price range and number of shares to be offered. The Company confirms that any preliminary prospectus it circulates will include this information. The Company acknowledges the Staff’s comment regarding needing sufficient time to review the complete disclosure prior to the Company distributing the preliminary prospectus. At present, the Company does not have an estimated price range but the Company will include a price range prior to printing preliminary prospectuses.
2. We encourage you to file all exhibits with your next amendment or otherwise furnish us drafts of your legality opinion and underwriting agreement. We must review these documents before the registration statement is declared effective, and we may have additional comments.
Eschelon Response: The Company respectfully acknowledges the Staff’s comment. The underwriting agreement will be filed with the next amendment and the legality opinion will be filed with the subsequent amendment in which the Company sets forth the number of shares anticipated to be included in the offering.
3. Please provide us with copies of your prospectus artwork prior to circulating your preliminary prospectus. Since we may have comments that could result in material revisions to your artwork, please provide us with sufficient time to comment on your artwork prior to circulating your preliminary prospectus. See Item VIII of the March 31, 2001 quarterly update to the Division of Corporation Finance’s Current Issues and Rulemaking Projects outline, which is available on our website at http://www.sec.gov/divisions/corpfin/cfcrq032001.htm.
Eschelon Response: The Company will supplementally provide the artwork to the Staff.
Front Cover of Prospectus
4. Please revise to disclose any selling shareholder’s net proceeds. See Item 501(b)(3) of Regulation S-K.
Eschelon Response: Please refer to the Company’s response to Comment No. 1. Once the number of shares to be sold by the selling stockholders has been determined, the Company will provide the net proceeds to such selling stockholders. The Company has included a sentence into which this amount will be inserted.
Prospectus Summary, page 1
5. As currently drafted, the summary section is too long. The summary should provide a brief, non-repetitive discussion of the most material aspects of you and your offering. Consider eliminating much of the detail. For example, consider significantly reducing or deleting the subsections entitled Our Business Strengths, Our Strategy and Our Financial Sponsors. This disclosure is too detailed for the summary and is more appropriate for your Business discussion.
Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment.
6. In portions of your prospectus, your use of business jargon, industry and defined terms makes your disclosure difficult to understand. We encourage you to make your disclosure understandable from its context to people who are not experts in your industry. Examples of terms and phrases that you should replace or explain with everyday language are:
• “We are a leading facilities-based provider of voice and data services and business telephone systems.”
• “Internet transit and peering”
• “on-switch”
• acronyms and abbreviations such as “BTS,” “TRO,” “TRRO” and “PUC”
• “vertical features”
• “colocation” and “colocators”
• “non-dominant IXCs”
• statements such as “we do use DS1 loops and transport, DS3 transport, and a de minimis amount of dark fiber transport”
Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment.
7. We note your description of revenue growth in your Overview. Please revise here, in your Management’s Discussion and Analysis at page 31 and in your Business discussion at page 44 to balance these statements by disclosing, as you do in your first risk factor on page 10, that you have a history of operating losses, net losses, and you expect to continue to incur losses. Additionally, please revise to clarify that, apart from one-time
extraordinary gains on cancellation of debt, you have had net losses in each of the last five years. Further, disclose that you have significant debt.
Also, in connection with your presentation of 2004 pro forma revenue, gross profit and Adjusted EBITDA, balance the disclosure by presenting the corresponding net income and historical results.
Similarly revise elsewhere as appropriate.
Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment.
8. We note that you refer to Adjusted EBITDA on page 1 of the summary and provide a cross-reference to the definition and reconciliation of Adjusted EBITDA under “Summary Consolidated Historical and Pro Forma Financial and Other Data” on pages 8-9 and under “Selected Consolidated Financial and Other Data” on pages 26-27. Since you refer to Adjusted EBITDA for the fist time on page 1, your cross-references to the disclosure required by Regulation G and Item 10(e) of Regulation S-K are not sufficient. If you believe that presenting Adjusted EBITDA information in the summary is material, please locate your first reference to Adjusted EBITDA in an appropriate place, such as with the summary financial data, where all the required disclosure will not overwhelm the presentation of information. In addition, please clarify why you believe the extinguishment of indebtedness is a non-recurring item when you continue to have significant amount of indebtedness following this offering.
Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comments. The Company believes that the gain on extinguishment of indebtedness is non-recurring in accordance with Item 10 of Regulation S-K and therefore is appropriately included in calculating Adjusted EBITDA. The gain on extinguishment of indebtedness recorded in 2004 was related to the gain recorded in 2002. Because the terms of the debt restructuring in 2002 contained a variable interest rate, the Company treated the changes in the underlying interest rate as a change in estimate in calculating its remaining future cash payments. Due to the uncertainty regarding the variable interest rate, the gain was required to be deferred until the debt was repaid in 2004. The Company does not believe that a similar gain is likely to occur within the next two years.
The Offering, page 5
9. Disclose that the number of shares being offered represents % of your shares outstanding.
Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment.
Summary Consolidated Historical and Pro Forma Financial and Other Data, page 6
10. Please refer to the pro forma as adjusted column. Delete the pro forma Adjusted EBITDA and cash flows.
Eschelon Response: The Company believes that the presentation of pro forma Adjusted EBITDA and cash flows are necessary to assist investors in understanding the operating performance and liquidity of the Company on a comparable basis to the pro forma financial data presented for the year ended December 31, 2004 to reflect the significant acquisition of ATI, which occurred in December 2004.
11. Please present the ratio of earnings to fixed charges here and on page 25. Also provide Exhibit 12.
Eschelon Response: The Company notes the Staff’s comment but does not believe that this disclosure in the Registration Statement for equity securities is required by Item 503 of Regulation S-K.
12. Please refer to footnote (2). Delete the pro forma Adjusted EBITDA here and in all applicable sections of the filing.
Eschelon Response: Please refer to the Company’s response to Comment No. 10.
Risk Factors, page 10
We have a history of operating losses ..., page 10
13. Please present the related historical data with your pro forma data.
Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment.
14. Please present the historical and pro forma net income (loss) per share and the weighted average number of shares outstanding.
Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment.
We are subject to substantial government regulations ..., page 12
15. This risk factor builds together multiple distinct risks. In order to give the proper prominence to each risk you present, please assign each risk its own descriptive subheading. In revising this risk factor, consider whether risk factor disclosure is necessary regarding the investigations in Arizona, Oregon and Colorado that you disclose on page 57.
Eschelon Response: The Company has revised the disclosure to include the subheadings in accordance with the Staff’s comment. The Company does not believe that the investigations are so material as to warrant additional risk factor disclosure.
We depend on a limited number of third party service providers …, page 14
16. Please revise this risk factor to explain more clearly the risks related to your relationship with Global Crossing. We note your disclosure elsewhere that Global Crossing has filed a lawsuit against you, that they are your largest customer and one of your most significant suppliers. Consider whether a separate risk factor is necessary to appropriately highlight the risk to investors regarding your relationship with Global Crossing.
Eschelon Response: The Company will reply to this comment by supplemental letter.
The communications market in which we operate is highly competitive …, page 14
17. Address whether the growing wireless market also poses competition to your business.
Eschelon Response: While wireless providers are competing with residential wireline carriers today, due to the inferior quality and poor service levels of such wireless providers, the Company does not believe such wireless providers are a competitive threat in the business market today nor are they likely to be in the near future.
Notes to Unaudited Pro Forma Combined Financial Statements, page 30
18. Please refer to footnote (2). Disclose and tell us the nature of the ATI’s network costs reclassified.
Eschelon Response: The nature of ATI’s network costs reclassified represent expenses related to building rent, network maintenance and repair, vehicles, and network monitoring. The Company records these costs in sales, general and administrative expenses. The Company made a pro forma reclassification to conform ATI’s presentation to the Company’s. The Company has also provided additional disclosures regarding the nature of the network costs reclassified in its amended filing.
19. Please refer to footnote (6). Tell us how you determined the amount of the interest income.
Eschelon Response: The Company estimated the cash remaining from this offering after redeeming a portion of the 8 3/8% second secured notes due 2010 and paying all offering related fees and expenses. The Company assumed that cash was received at the beginning of the period presented and applied an annual interest rate of 2.5%, which represents the average return on the Company’s short term money market investments during 2004.
20. Please refer to footnote (8). Tell us why there is no income tax adjustment related to the pro forma adjustments. Refer to Instruction #7 to Rule 11-02(b) of Regulation S-X.
Eschelon Response: The Company believes that its current net operating losses would offset any taxable income related to the pro forma adjustments.
Management’s Discussion and Analysis, page 31
21. In your Regulation discussion from page 59 through 71, you disclose a number of trends, expectations and uncertainties. To the extent material, please revise your Management’s Discussion and Analysis to discuss and analyze these trends, expectations and uncertainties. Sec SEC Release No. 33-8350 (December 19, 2003), which is available on our web site at http://www.sec.gov/rules/interp/33-8350.htm. In this regard, we note your disclosure on page 62 regarding your estimated increased costs due to the Triennial Review Remand Order.
Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment.
Revenue, page 32
22. Please tell us why it is appropriate to recognize non-recurring network services revenue over the average life of the customer.
Eschelon Response: The Company currently has over 50,000 customers. As a result, it would be impractical to attempt to recognize non-recurring revenue over the actual life of each individual customer’s contract. Therefore, the Company uses an average customer life based on historical attrition rates
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CORRESP 1 filename1.htm DLA Piper Rudnick Gray Cary US LLP 1200 Nineteenth Street, N.W. Washington, D.C. 20036-2412 T 202.861.3900 F 202.223.2085 W www.dlapiper.com Tami J. Howie tami.howie@dlapiper.com T 202.861.3851 F 202.223.2085 June 15, 2005 VIA EDGAR AND HAND DELIVERY United States Securities and Exchange Commission 450 Fifth Street, N.W. Judiciary Plaza Washington, D.C. 20549-0305 Attn: Larry Spirgel, Assistant Director Re: Eschelon Telecom, Inc. Registration Statement on Form S-1 Filed May 6, 2005 File No. 333-124703 Form 10-K for the fiscal year ended Dec. 31, 2004, filed March 31, 2005 Form 10-Q for the fiscal quarter ended March 31, 2005, filed May 16, 2005 File No. 000-50706 Dear Mr. Spirgel: This letter is submitted on behalf of Eschelon Telecom, Inc. (“Eschelon” or the “Company”) in response to the comments set forth in your letter to Richard A. Smith, President and Chief Executive Officer, dated June 3, 2005, regarding the Company’s Registration Statement on Form S-1 (File No. 333-124703) (the “Registration Statement”). This letter should be read in conjunction with Amendment No. 1 to the Registration Statement (“Amendment No. 1”), which was filed today with the SEC via EDGAR. Certain responses set forth below reflect discussions between Eschelon representatives and its independent auditors and legal counsel and representatives of the underwriters and their legal counsel. However, Eschelon has reviewed and approved all of the responses set forth below. The supplemental information referred to in this letter will be forwarded separately to Mr. Daniel Zimmerman at the SEC. For your convenience, we have set forth below each of your numbered comments, followed by the response of Eschelon. Serving clients globally Form S-1 General 1. We note a number of blank spaces throughout your registration statement for information that you are not entitled to omit under Rule 430A, such as the anticipated price range. Please note that we may have additional comments once you have provided this disclosure. Therefore, please allow us sufficient time to review your complete disclosure prior to any distribution of preliminary prospectuses. Eschelon Response: The Company notes the Staff’s comment and will provide all information not omitted in reliance on Rule 430A in a subsequent amendment to the Registration Statement, including the anticipated price range and number of shares to be offered. The Company confirms that any preliminary prospectus it circulates will include this information. The Company acknowledges the Staff’s comment regarding needing sufficient time to review the complete disclosure prior to the Company distributing the preliminary prospectus. At present, the Company does not have an estimated price range but the Company will include a price range prior to printing preliminary prospectuses. 2. We encourage you to file all exhibits with your next amendment or otherwise furnish us drafts of your legality opinion and underwriting agreement. We must review these documents before the registration statement is declared effective, and we may have additional comments. Eschelon Response: The Company respectfully acknowledges the Staff’s comment. The underwriting agreement will be filed with the next amendment and the legality opinion will be filed with the subsequent amendment in which the Company sets forth the number of shares anticipated to be included in the offering. 3. Please provide us with copies of your prospectus artwork prior to circulating your preliminary prospectus. Since we may have comments that could result in material revisions to your artwork, please provide us with sufficient time to comment on your artwork prior to circulating your preliminary prospectus. See Item VIII of the March 31, 2001 quarterly update to the Division of Corporation Finance’s Current Issues and Rulemaking Projects outline, which is available on our website at http://www.sec.gov/divisions/corpfin/cfcrq032001.htm. Eschelon Response: The Company will supplementally provide the artwork to the Staff. 2 Front Cover of Prospectus 4. Please revise to disclose any selling shareholder’s net proceeds. See Item 501(b)(3) of Regulation S-K. Eschelon Response: Please refer to the Company’s response to Comment No. 1. Once the number of shares to be sold by the selling stockholders has been determined, the Company will provide the net proceeds to such selling stockholders. The Company has included a sentence into which this amount will be inserted. Prospectus Summary, page 1 5. As currently drafted, the summary section is too long. The summary should provide a brief, non-repetitive discussion of the most material aspects of you and your offering. Consider eliminating much of the detail. For example, consider significantly reducing or deleting the subsections entitled Our Business Strengths, Our Strategy and Our Financial Sponsors. This disclosure is too detailed for the summary and is more appropriate for your Business discussion. Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment. 6. In portions of your prospectus, your use of business jargon, industry and defined terms makes your disclosure difficult to understand. We encourage you to make your disclosure understandable from its context to people who are not experts in your industry. Examples of terms and phrases that you should replace or explain with everyday language are: • “We are a leading facilities-based provider of voice and data services and business telephone systems.” • “Internet transit and peering” • “on-switch” • acronyms and abbreviations such as “BTS,” “TRO,” “TRRO” and “PUC” • “vertical features” • “colocation” and “colocators” • “non-dominant IXCs” • statements such as “we do use DS1 loops and transport, DS3 transport, and a de minimis amount of dark fiber transport” Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment. 7. We note your description of revenue growth in your Overview. Please revise here, in your Management’s Discussion and Analysis at page 31 and in your Business discussion at page 44 to balance these statements by disclosing, as you do in your first risk factor on page 10, that you have a history of operating losses, net losses, and you expect to continue to incur losses. Additionally, please revise to clarify that, apart from one-time 3 extraordinary gains on cancellation of debt, you have had net losses in each of the last five years. Further, disclose that you have significant debt. Also, in connection with your presentation of 2004 pro forma revenue, gross profit and Adjusted EBITDA, balance the disclosure by presenting the corresponding net income and historical results. Similarly revise elsewhere as appropriate. Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment. 8. We note that you refer to Adjusted EBITDA on page 1 of the summary and provide a cross-reference to the definition and reconciliation of Adjusted EBITDA under “Summary Consolidated Historical and Pro Forma Financial and Other Data” on pages 8-9 and under “Selected Consolidated Financial and Other Data” on pages 26-27. Since you refer to Adjusted EBITDA for the fist time on page 1, your cross-references to the disclosure required by Regulation G and Item 10(e) of Regulation S-K are not sufficient. If you believe that presenting Adjusted EBITDA information in the summary is material, please locate your first reference to Adjusted EBITDA in an appropriate place, such as with the summary financial data, where all the required disclosure will not overwhelm the presentation of information. In addition, please clarify why you believe the extinguishment of indebtedness is a non-recurring item when you continue to have significant amount of indebtedness following this offering. Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comments. The Company believes that the gain on extinguishment of indebtedness is non-recurring in accordance with Item 10 of Regulation S-K and therefore is appropriately included in calculating Adjusted EBITDA. The gain on extinguishment of indebtedness recorded in 2004 was related to the gain recorded in 2002. Because the terms of the debt restructuring in 2002 contained a variable interest rate, the Company treated the changes in the underlying interest rate as a change in estimate in calculating its remaining future cash payments. Due to the uncertainty regarding the variable interest rate, the gain was required to be deferred until the debt was repaid in 2004. The Company does not believe that a similar gain is likely to occur within the next two years. 4 The Offering, page 5 9. Disclose that the number of shares being offered represents % of your shares outstanding. Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment. Summary Consolidated Historical and Pro Forma Financial and Other Data, page 6 10. Please refer to the pro forma as adjusted column. Delete the pro forma Adjusted EBITDA and cash flows. Eschelon Response: The Company believes that the presentation of pro forma Adjusted EBITDA and cash flows are necessary to assist investors in understanding the operating performance and liquidity of the Company on a comparable basis to the pro forma financial data presented for the year ended December 31, 2004 to reflect the significant acquisition of ATI, which occurred in December 2004. 11. Please present the ratio of earnings to fixed charges here and on page 25. Also provide Exhibit 12. Eschelon Response: The Company notes the Staff’s comment but does not believe that this disclosure in the Registration Statement for equity securities is required by Item 503 of Regulation S-K. 12. Please refer to footnote (2). Delete the pro forma Adjusted EBITDA here and in all applicable sections of the filing. Eschelon Response: Please refer to the Company’s response to Comment No. 10. Risk Factors, page 10 We have a history of operating losses ..., page 10 13. Please present the related historical data with your pro forma data. Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment. 14. Please present the historical and pro forma net income (loss) per share and the weighted average number of shares outstanding. Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment. 5 We are subject to substantial government regulations ..., page 12 15. This risk factor builds together multiple distinct risks. In order to give the proper prominence to each risk you present, please assign each risk its own descriptive subheading. In revising this risk factor, consider whether risk factor disclosure is necessary regarding the investigations in Arizona, Oregon and Colorado that you disclose on page 57. Eschelon Response: The Company has revised the disclosure to include the subheadings in accordance with the Staff’s comment. The Company does not believe that the investigations are so material as to warrant additional risk factor disclosure. We depend on a limited number of third party service providers …, page 14 16. Please revise this risk factor to explain more clearly the risks related to your relationship with Global Crossing. We note your disclosure elsewhere that Global Crossing has filed a lawsuit against you, that they are your largest customer and one of your most significant suppliers. Consider whether a separate risk factor is necessary to appropriately highlight the risk to investors regarding your relationship with Global Crossing. Eschelon Response: The Company will reply to this comment by supplemental letter. The communications market in which we operate is highly competitive …, page 14 17. Address whether the growing wireless market also poses competition to your business. Eschelon Response: While wireless providers are competing with residential wireline carriers today, due to the inferior quality and poor service levels of such wireless providers, the Company does not believe such wireless providers are a competitive threat in the business market today nor are they likely to be in the near future. Notes to Unaudited Pro Forma Combined Financial Statements, page 30 18. Please refer to footnote (2). Disclose and tell us the nature of the ATI’s network costs reclassified. Eschelon Response: The nature of ATI’s network costs reclassified represent expenses related to building rent, network maintenance and repair, vehicles, and network monitoring. The Company records these costs in sales, general and administrative expenses. The Company made a pro forma reclassification to conform ATI’s presentation to the Company’s. The Company has also provided additional disclosures regarding the nature of the network costs reclassified in its amended filing. 6 19. Please refer to footnote (6). Tell us how you determined the amount of the interest income. Eschelon Response: The Company estimated the cash remaining from this offering after redeeming a portion of the 8 3/8% second secured notes due 2010 and paying all offering related fees and expenses. The Company assumed that cash was received at the beginning of the period presented and applied an annual interest rate of 2.5%, which represents the average return on the Company’s short term money market investments during 2004. 20. Please refer to footnote (8). Tell us why there is no income tax adjustment related to the pro forma adjustments. Refer to Instruction #7 to Rule 11-02(b) of Regulation S-X. Eschelon Response: The Company believes that its current net operating losses would offset any taxable income related to the pro forma adjustments. Management’s Discussion and Analysis, page 31 21. In your Regulation discussion from page 59 through 71, you disclose a number of trends, expectations and uncertainties. To the extent material, please revise your Management’s Discussion and Analysis to discuss and analyze these trends, expectations and uncertainties. Sec SEC Release No. 33-8350 (December 19, 2003), which is available on our web site at http://www.sec.gov/rules/interp/33-8350.htm. In this regard, we note your disclosure on page 62 regarding your estimated increased costs due to the Triennial Review Remand Order. Eschelon Response: The Company has revised the disclosure in accordance with the Staff’s comment. Revenue, page 32 22. Please tell us why it is appropriate to recognize non-recurring network services revenue over the average life of the customer. Eschelon Response: The Company currently has over 50,000 customers. As a result, it would be impractical to attempt to recognize non-recurring revenue over the actual life of each individual customer’s contract. Therefore, the Company uses an average customer life based on historical attrition rates