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 March 31, 2004
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 April 28, 2004, there were 29,884,820 shares of Class A Common Stock outstanding.
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US LEC Corp.
| Page | ||||
| PART I. | FINANCIAL INFORMATION | |||
| ITEM 1. | FINANCIAL STATEMENTS | |||
| Condensed Consolidated Statements of Operations – Three months ended March 31, 2004 and 2003 | 3 | |||
| Condensed Consolidated Balance Sheets – March 31, 2004 and December 31, 2003 | 4 | |||
| Condensed Consolidated Statements of Cash Flows – Three months ended March 31, 2004 and 2003 | 5 | |||
| Condensed Consolidated Statement of Stockholders’ Deficiency – Three months ended March 31, 2004 and 2003 | 6 | |||
| Notes to Condensed Consolidated Financial Statements | 7 | |||
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 15 | ||
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 21 | ||
| ITEM 4. | CONTROLS AND PROCEDURES | 21 | ||
| PART II. | OTHER INFORMATION | |||
| ITEM 1. | LEGAL PROCEEDINGS | 22 | ||
| ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K | 22 | ||
| SIGNATURES | 23 | |||
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
(Unaudited)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenue |
$ | 85,186 | $ | 73,108 | ||||
| Network Expenses |
41,450 | 34,943 | ||||||
| Depreciation and Amortization |
12,485 | 11,439 | ||||||
| Selling, General and Administrative Expenses |
32,416 | 29,607 | ||||||
| Loss from Operations |
(1,165 | ) | (2,881 | ) | ||||
| Other (Income) Expense |
||||||||
| Interest Income |
(106 | ) | (75 | ) | ||||
| Interest Expense |
2,258 | 1,992 | ||||||
| Net Loss |
(3,317 | ) | (4,798 | ) | ||||
| Preferred Stock Dividends |
3,744 | 3,527 | ||||||
| Preferred Stock Accretion of Issuance Cost |
143 | 135 | ||||||
| Net Loss Attributable to Common Stockholders |
$ | (7,204 | ) | $ | (8,460 | ) | ||
| Net Loss Attributable to Common Stockholders Per Common Share |
||||||||
| Basic and Diluted |
$ | (0.24 | ) | $ | (0.31 | ) | ||
| Weighted Average Number of Shares Outstanding |
||||||||
| Basic and Diluted |
29,751 | 26,895 | ||||||
See notes to condensed consolidated financial statements
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US LEC Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)
| March 31, 2004 |
December 31, 2003 |
|||||||
| Assets |
||||||||
| Current Assets |
||||||||
| Cash and cash equivalents |
$ | 43,609 | $ | 43,126 | ||||
| Restricted cash |
61 | 61 | ||||||
| Accounts receivable (net of allowance of $11,558 and $10,998 at March 31, 2004 and December 31, 2003, respectively) |
49,439 | 48,294 | ||||||
| Deferred income taxes |
637 | 346 | ||||||
| Prepaid expenses and other assets |
9,499 | 9,795 | ||||||
| Total current assets |
103,245 | 101,622 | ||||||
| Property and Equipment, Net |
161,426 | 165,793 | ||||||
| Other Assets |
16,905 | 17,884 | ||||||
| Total Assets |
$ | 281,576 | $ | 285,299 | ||||
| Liabilities and Stockholders’ Deficiency |
||||||||
| Current Liabilities |
||||||||
| Accounts payable |
$ | 6,962 | $ | 4,884 | ||||
| Notes payable |
325 | 1,300 | ||||||
| Accrued network costs |
23,250 | 25,088 | ||||||
| Commissions payable |
15,595 | 15,459 | ||||||
| Accrued expenses – other |
17,929 | 17,495 | ||||||
| Deferred revenue |
14,322 | 14,046 | ||||||
| Long-term debt – current portion |
21,720 | 10,776 | ||||||
| Total current liabilities |
100,103 | 89,048 | ||||||
| Long-Term Debt |
103,670 | 115,042 | ||||||
| Deferred Income Taxes |
637 | 346 | ||||||
| Other Liabilities |
6,218 | 6,769 | ||||||
| Commitments and Contingencies (Note 4) |
||||||||
| Series A Mandatorily Redeemable Convertible Preferred Stock |
249,142 | 245,255 | ||||||
| Stockholders’ Deficiency |
||||||||
| Common stock-Class A, $.01 par value (122,925 authorized shares, 29,861 and 29,677 shares outstanding at March 31, 2004 and December 31, 2003) |
299 | 297 | ||||||
| Additional paid-in capital |
91,021 | 90,852 | ||||||
| Accumulated deficit |
(269,514 | ) | (262,310 | ) | ||||
| Total stockholders’ deficiency |
(178,194 | ) | (171,161 | ) | ||||
| Total Liabilities, Convertible Preferred Stock and Stockholders’ Deficiency |
$ | 281,576 | $ | 285,299 | ||||
See notes to condensed consolidated financial statements
4
US LEC Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Operating Activities |
||||||||
| Net Loss |
$ | (3,317 | ) | $ | (4,798 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
12,485 | 11,439 | ||||||
| Accretion of subordinated debt |
157 | 71 | ||||||
| Other income |
(22 | ) | — | |||||
| Deferred compensation |
— | — | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
(1,145 | ) | 6,139 | |||||
| Prepaid expenses and other assets |
312 | (434 | ) | |||||
| Other assets |
291 | (9 | ) | |||||
| Accounts payable |
224 | (775 | ) | |||||
| Deferred revenue |
276 | 551 | ||||||
| Accrued network costs |
(1,838 | ) | (4,249 | ) | ||||
| Customer commissions payable |
136 | 4,308 | ||||||
| Other liabilities – non-current |
(551 | ) | (21 | ) | ||||
| Accrued expenses – other |
(134 | ) | 1,033 | |||||
| Total adjustments |
10,191 | 18,053 | ||||||
| Net cash provided by operating activities |
6,874 | 13,255 | ||||||
| Investing Activities |
||||||||
| Purchase of property and equipment |
(4,870 | ) | (9,187 | ) | ||||
| Sale of property and equipment |
33 | — | ||||||
| Net assets acquired |
(166 | ) | (1,299 | ) | ||||
| Proceeds from insurance claim |
— | 1,000 | ||||||
| Increase in restricted cash |
— | (500 | ) | |||||
| Net cash used in investing activities |
(5,003 | ) | (9,986 | ) | ||||
| Financing Activities |
||||||||
| Proceeds from issuance of subordinated notes and related warrants |
— | 350 | ||||||
| Payments on long-term debt |
(584 | ) | (54 | ) | ||||
| Payments on notes payable |
(975 | ) | — | |||||
| Payment of deferred loan fees |
— | (138 | ) | |||||
| Proceeds from issuance of stock options and warrants |
171 | — | ||||||
| Net cash provided by (used in) financing activities |
(1,388 | ) | 158 | |||||
| Net Increase in Cash and Cash Equivalents |
483 | 3,427 | ||||||
| Cash and Cash Equivalents, Beginning of Period |
43,126 | 25,715 | ||||||
| Cash and Cash Equivalents, End of Period |
$ | 43,609 | $ | 29,142 | ||||
| Supplemental Cash Flow Disclosures |
||||||||
| Cash Paid for Interest |
$ | 1,778 | $ | 3,375 | ||||
See notes to condensed consolidated financial statements
5
US LEC Corp. and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Deficiency
For the Three Months Ended March 31, 2004
(In Thousands)
(Unaudited)
| Class A Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Total |
|||||||||||||
| Shares |
Amount |
|||||||||||||||
| Balance, December 31, 2003 |
29,677 | $ | 297 | $ | 90,852 | $ | (262,310 | ) | $ | (171,161 | ) | |||||
| Exercise of Stock Options and Warrants |
184 | 2 | 169 | 171 | ||||||||||||
| Preferred Stock Dividends |
(3,744 | ) | (3,744 | ) | ||||||||||||
| Accretion of Preferred Stock Issuance Costs |
(143 | ) | (143 | ) | ||||||||||||
| Net Loss |
(3,317 | ) | (3,317 | ) | ||||||||||||
| Balance, March 31, 2004 |
29,861 | $ | 299 | $ | 91,021 | $ | (269,514 | ) | $ | (178,194 | ) | |||||
See notes to condensed consolidated financial statements
6
US LEC Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(In Thousands, Except Per Share Data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of US LEC Corp. and its subsidiaries (“US LEC” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation for the periods indicated have been included. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, which is on file with the SEC.
2. Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies as set forth in Note 2 to the audited consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2003.
Recent Accounting Pronouncements – In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” which, among other things, provides guidance on identifying variable interest entities (“VIE”) and determining when assets, liabilities, non-controlling interests, and operating results of a VIE should be included in a company’s consolidated financial statements, and also requires additional disclosures by primary beneficiaries and other significant variable interest holders. In December 2003, the FASB issued a revision to FIN 46 to clarify some of the provisions of the original interpretation and to exempt certain entities from its requirements. The additional guidance explains how to identify VIEs and how an enterprise should assess its interest in an entity to decide whether to consolidate that entity. Application of revised FIN 46 is required for public companies with interests in “special-purpose entities” for periods ending after March 15, 2004. The adoption of FIN 46 did not impact the Company’s financial statements or disclosures.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Significant estimates relate to the allowance for doubtful accounts receivable, estimated end-customer contract life, accrual of network expenses payable to other telecommunications entities, income tax valuation allowance, and estimated useful lives of fixed assets. Any difference between the amounts recorded and amounts ultimately realized or paid will be adjusted prospectively as new facts become known.
Stock Based Compensation – The Company measures the compensation cost of its stock option plan under the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, as permitted under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”. Under the provisions of APB No. 25, compensation cost is measured based on
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the intrinsic value of the equity instrument awarded. Under the provisions of SFAS No. 123, compensation cost is measured based on the fair value of the equity instrument awarded.
Had compensation cost for the employee stock options been determined consistent with SFAS No. 123, the Company’s net loss and net loss per share would approximate the following pro forma amounts:
| Three months ended March 31, |
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| 2004< | ||||||||