UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended June 30, 2003
Commission file number 0-24061
US LEC Corp.
(Exact name of registrant as specified in its charter)
| Delaware | 56-2065535 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Morrocroft III, 6801 Morrison Boulevard
Charlotte, North Carolina 28211
(Address of principal executive offices) (Zip Code)
(704) 319-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No x
As of August 7, 2003, there were 27,169,717 shares of Class A Common Stock outstanding.
US LEC Corp.
| Page | ||||
| PART I. |
FINANCIAL INFORMATION | |||
| ITEM 1 |
FINANCIAL STATEMENTS | |||
| Condensed Consolidated Statements of Operations – Three and six months ended June 30, 2003 and 2002 | 3 | |||
| Condensed Consolidated Balance Sheets – June 30, 2003 and December 31, 2002 | 4 | |||
| Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2003 and 2002 | 5 | |||
| Condensed Consolidated Statement of Stockholders’ Deficiency – Six months ended June 30, 2003 | 6 | |||
| Notes to Condensed Consolidated Financial Statements | 7 | |||
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 14 | ||
| ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 18 | ||
| ITEM 4. |
CONTROLS AND PROCEDURES | 18 | ||
| PART II. |
OTHER INFORMATION | |||
| ITEM 1. |
LEGAL PROCEEDINGS | 19 | ||
| ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 19 | ||
| ITEM 6. |
EXHIBITS AND REPORTS ON FORM 8-K | 21 | ||
| 22 | ||||
2
ITEM 1. FINANCIAL STATEMENTS
US LEC Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
(Unaudited)
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
| 2003 |
2002 |
2003 |
2002 |
|||||||||||||
| Revenue, Net |
$ | 78,298 | $ | 58,801 | $ | 151,406 | $ | 112,739 | ||||||||
| Network Expenses (excluding depreciation and amortization shown below) |
36,736 | 28,851 | 71,678 | 56,134 | ||||||||||||
| Depreciation and Amortization |
12,365 | 11,068 | 23,806 | 21,622 | ||||||||||||
| Selling, General and Administrative Expenses |
31,263 | 37,396 | 60,870 | 63,323 | ||||||||||||
| Loss from Operations |
(2,066 | ) | (18,514 | ) | (4,948 | ) | (28,340 | ) | ||||||||
| Other (Income) Expense |
||||||||||||||||
| Interest Income |
(113 | ) | (242 | ) | (188 | ) | (574 | ) | ||||||||
| Interest Expense |
2,189 | 2,188 | 4,180 | 4,421 | ||||||||||||
| Net Loss |
(4,142 | ) | (20,460 | ) | (8,940 | ) | (32,187 | ) | ||||||||
| Less: Preferred Stock Dividends |
3,580 | 3,373 | 7,108 | 6,697 | ||||||||||||
| Less: Preferred Stock Accretion of Issuance Costs |
137 | 129 | 272 | 256 | ||||||||||||
| Net Loss Attributable to Common Stockholders |
$ | (7,859 | ) | $ | (23,962 | ) | $ | (16,320 | ) | $ | (39,140 | ) | ||||
| Net Loss Attributable to Common Stockholders Per Common Share |
||||||||||||||||
| Basic and Diluted |
$ | (0.29 | ) | $ | (0.91 | ) | $ | (0.61 | ) | $ | (1.48 | ) | ||||
| Weighted Average Number of Shares Outstanding |
||||||||||||||||
| Basic and Diluted |
26,933 | 26,392 | 26,914 | 26,390 | ||||||||||||
See notes to condensed consolidated financial statements
3
Condensed Consolidated Balance Sheets
(In Thousands)
| (Unaudited) June 30, 2003 |
December 31, 2002 |
|||||||
| Assets |
||||||||
| Current Assets |
||||||||
| Cash and cash equivalents |
$ | 35,999 | $ | 25,715 | ||||
| Restricted cash |
561 | 1,080 | ||||||
| Accounts receivable (net of allowance of $7,564 and $23,180 at June 30, 2003 and December 31, 2002, respectively) |
44,741 | 57,989 | ||||||
| Deferred income taxes |
876 | 2,805 | ||||||
| Prepaid expenses and other assets |
10,436 | 8,441 | ||||||
| Total current assets |
92,613 | 96,030 | ||||||
| Property and Equipment, Net |
166,666 | 178,810 | ||||||
| Other Assets (net of allowance of $16,776 at June 30, 2003) |
13,213 | 10,474 | ||||||
| Total Assets |
$ | 272,492 | $ | 285,314 | ||||
| Liabilities and Stockholders’ Deficiency |
||||||||
| Current Liabilities |
||||||||
| Accounts payable |
$ | 5,675 | $ | 10,203 | ||||
| Accrued network costs |
20,713 | 26,952 | ||||||
| Commissions payable |
13,482 | 7,886 | ||||||
| Accrued expenses—other |
16,472 | 16,015 | ||||||
| Deferred revenue |
8,907 | 8,048 | ||||||
| Long-term debt—current portion |
1,338 | 306 | ||||||
| Total current liabilities |
66,587 | 69,410 | ||||||
| Long-Term Debt |
130,386 | 130,311 | ||||||
| Deferred Income Taxes |
876 | 2,805 | ||||||
| Other Liabilities |
6,058 | 6,507 | ||||||
| Commitments and Contingencies (Note 6) |
||||||||
| Series A Mandatorily Redeemable Convertible Preferred Stock |
237,652 | 230,272 | ||||||
| Stockholders’ Deficiency |
||||||||
| Common stock-Class A, $.01 par value (122,925 authorized shares, 27,170 and 26,895 shares outstanding at June 30, 2003 and December 31, 2002) |
272 | 269 | ||||||
| Additional paid-in capital |
79,767 | 78,526 | ||||||
| Accumulated deficit |
(249,106 | ) | (232,786 | ) | ||||
| Total stockholders’ deficiency |
(169,067 | ) | (153,991 | ) | ||||
| Total Liabilities, Convertiable Preferred Stock and Stockholders’ Deficiency |
$ | 272,492 | $ | 285,314 | ||||
See notes to condensed consolidated financial statements
4
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
| Six Months Ended June 30, |
||||||||
| 2003 |
2002 |
|||||||
| Operating Activities |
||||||||
| Net Loss |
$ | (8,940 | ) | $ | (32,187 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
23,805 | 21,622 | ||||||
| Accretion of subordinated debt |
314 | — | ||||||
| Deferred compensation |
— | 239 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
10,470 | (4,079 | ) | |||||
| Prepaid expenses and other assets |
(1,730 | ) | 467 | |||||
| Other assets |
23 | (95 | ) | |||||
| Accounts payable |
(1,745 | ) | 2,106 | |||||
| Deferred revenue |
859 | 174 | ||||||
| Accrued network costs |
(6,238 | ) | 8,531 | |||||
| Customer commissions payable |
8,718 | (1,647 | ) | |||||
| Other liabilities—non-current |
(450 | ) | 735 | |||||
| Accrued expenses—other |
2,136 | (3,591 | ) | |||||
| Total adjustments |
36,162 | 24,462 | ||||||
| Net cash provided by (used in) operating activities |
27,222 | (7,725 | ) | |||||
| Investing Activities |
||||||||
| Purchase of property and equipment |
(16,567 | ) | (18,910 | ) | ||||
| Assets acquired |
(1,300 | ) | — | |||||
| Advance from insurance claim |
1,000 | — | ||||||
| Increase in restricted cash |
(421 | ) | 21 | |||||
| Net cash used in investing activities |
(17,288 | ) | (18,889 | ) | ||||
| Financing Activities |
||||||||
| Proceeds from issuance of debentures and warrants |
350 | — | ||||||
| Payments on long-term debt |
(138 | ) | (4,688 | ) | ||||
| Payment of loan fees |
(285 | ) | (127 | ) | ||||
| Issuance of common shares |
423 | 632 | ||||||
| Net cash provided by (used in) financing activities |
350 | (4,183 | ) | |||||
| Net Increase (Decrease) in Cash and Cash Equivalents |
10,284 | (30,797 | ) | |||||
| Cash and Cash Equivalents, Beginning of Period |
25,715 | 80,502 | ||||||
| Cash and Cash Equivalents, End of Period |
$ | 35,999 | $ | 49,705 | ||||
| Supplemental Cash Flow Disclosures |
||||||||
| Cash Paid for Interest |
$ | 5,286 | $ | 4,675 | ||||
See notes to condensed consolidated financial statements
5
Condensed Consolidated Statement of Stockholders’ Deficiency
For the Six Months Ended June 30, 2003
(In Thousands)
(Unaudited)
| Class A Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Total |
|||||||||||||
| Shares |
Amount |
|||||||||||||||
| Balance, December 31, 2002 |
26,895 | $ | 269 | $ | 78,526 | |||||||||||