ESCHELON TELECOM INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-0001

FORM 10-Q

(MARK ONE)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-50706

ESCHELON TELECOM, INC.

(Exact name of registrant as specified in its charter)

Delaware		41-1843131
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

730 Second Avenue Minneapolis, MN		55402
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (612) 376-4400

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 the filing requirements for the past 90 days. Yes ý 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 ý

As of November 9, 2004, the number of outstanding shares of the Registrant’s Common Stock, par value $.01 per share, was 4,734,419 shares and the number of outstanding shares of the Registrant’s Preferred Stock, par value $.01 per share, was 84,306,677 shares, convertible into 101,432,459 shares of Common Stock.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Eschelon Telecom, Inc.

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Amounts)

	December 31, 2003					September 30, 2004
						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$			8,606		$	14,408
Restricted cash	—					651
Marketable securities	—					4,362
Accounts receivable, net of allowance for doubtful accounts of $739 and $246, respectively	13,537					12,866
Other receivables	2,097					3,047
Inventories	3,169					3,154
Prepaid expenses	2,046					922
Total current assets	29,455					39,410

Property and equipment, net	86,777					85,137

Other assets	1,269					1,396
Goodwill	7,168					7,168
Intangible assets, net	29,052					29,727
Total assets	$	153,721				$		162,838

Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	4,582				$	4,869
Accrued telecommunication costs	6,939					7,521
Accrued expenses	3,240					4,796
Deferred revenue	3,000					3,762
Accrued compensation expenses	4,261					3,312
Capital lease obligation, current maturities	1,020					311
Total current liabilities	23,042					24,571

Long-term liabilities:
Commitments and contingencies (Note 3)
Capital lease obligation	576					1,979
Notes payable	86,226					85,789
Total liabilities	109,844					112,339

Series A convertible preferred stock, $0.01 par value; 100,000,000 shares authorized; 84,306,677 shares outstanding at December 31, 2003 and September 30, 2004	48,948					51,520

Stockholders’ deficit:
Common stock, $0.01 par value; 160,000,000 shares authorized; 4,457,579 shares issued and outstanding at December 31, 2003; and 4,730,919 shares issued and outstanding at September 30, 2004	45					47
Additional paid-in capital	120,105					117,550
Accumulated other comprehensive income	—					5
Accumulated deficit	(125,167				)	(118,589			)
Deferred compensation	(54				)	(34			)
Total stockholders’ deficit	(5,071				)	(1,021			)
Total liabilities and stockholders’ deficit	$		153,721			$	162,838

See accompanying notes.

Eschelon Telecom, Inc.

Unaudited Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Amounts)

	Three months ended September 30,				Nine months ended September 30,
	2003		2004		2003		2004
Revenue:
Network services	$	29,632	$	33,476	$	84,474	$	98,333
Business telephone systems	6,941		7,086		19,418		19,575
Total revenue	36,573		40,562		103,892		117,908

Cost of revenue:

PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements:	3
	Consolidated Balance Sheets — December 31, 2003 and September 30, 2004 (Unaudited)	4
	Unaudited Consolidated Statements of Operations — Three months and nine months ended September 30, 2003 and 2004	4
	Unaudited Consolidated Statements of Cash Flows — Nine months ended September 30, 2003 and 2004	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II. OTHER INFORMATION		25
Item 1.	Legal Proceedings	25
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchase of Equity Securities	25
Item 3.	Defaults Upon Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits and Reports on Form 8-K	26
	Signature	29