-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LnNb3pJ8QyBk1n1USYpLxFdDBQ9L1m4aEJoJ8RaKlvp7d0vpCeB+jna2+arMWnVH 6ibq782DCqu28/hz4zGjXQ== 0001021408-02-010974.txt : 20020814 0001021408-02-010974.hdr.sgml : 20020814 20020814155841 ACCESSION NUMBER: 0001021408-02-010974 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: US LEC CORP CENTRAL INDEX KEY: 0001054290 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 562065535 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24061 FILM NUMBER: 02736408 BUSINESS ADDRESS: STREET 1: 401 N TRYON ST STREET 2: STE 1000 CITY: CHARLOTTE STATE: NC ZIP: 28251 MAIL ADDRESS: STREET 1: 401 N. TRYON STREET STREET 2: SUITE 1000 CITY: CHARLOTTE STATE: NC ZIP: 28202 10-Q 1 d10q.txt US LEC FORM 10-Q 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, 2002 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 (I.R.S. Employer incorporation or organization) 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 (___) --- - -------------------------------------------------------------------------------- As of August 14, 2002, there were 26,698,221 shares of Class A Common Stock outstanding. 1 US LEC Corp. Table of Contents -----------------
Page ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Operations - Three and six months ended June 30, 2002 and 2001 3 Condensed Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 4 Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2002 and 2001 5 Condensed Consolidated Statement of Stockholders' Deficiency - Six months ended June 30, 2002 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 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 19 SIGNATURES 21
2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS US LEC Corp. and Subsidiaries Condensed Consolidated Statements of Operations (In Thousands, Except Per Share Data) (Unaudited)
Three months ended Six months ended June 30, June 30, 2002 2001 2002 2001 -------------- ------------- ------------ ------------- Revenue, Net $ 58,801 $ 43,051 $ 112,739 $ 81,106 Cost of Services 28,851 21,911 56,134 41,082 -------------- ------------- ------------ ------------- Gross Margin 29,950 21,140 56,605 40,024 Selling, General and Administrative Expenses (Note 5) 37,396 26,017 63,323 50,245 Depreciation and Amortization 11,068 7,992 21,622 15,767 -------------- ------------- ------------ ------------- Loss from Operations (18,514) (12,869) (28,340) (25,988) Other (Income) Expense Interest Income (242) (712) (574) (1,960) Interest Expense 2,188 2,901 4,421 6,129 -------------- ------------- ------------ ------------- Loss Before Income Taxes (20,460) (15,058) (32,187) (30,157) Income Tax Benefit - - - - -------------- ------------- ------------ ------------- Net Loss (20,460) (15,058) (32,187) (30,157) Preferred Stock Dividends 3,373 3,178 6,697 6,309 Preferred Stock Accretion of Issuance Costs 129 122 256 242 -------------- ------------- ------------ ------------- Net Loss Attributable to Common Stockholders $ (23,962) $ (18,358) $ (39,140) $ (36,708) ============== ============= ============ ============= Net Loss Per Common Share: Basic and Diluted $ (0.91) $ (0.66) $ (1.48) $ (1.32) ============== ============= ============ ============= Weighted Average Number of Shares Outstanding: Basic and Diluted 26,392 27,771 26,390 27,770 ============== ============= ============ =============
See notes to condensed consolidated financial statements 3 US LEC Corp. and Subsidiaries Condensed Consolidated Balance Sheets (In Thousands, Except Per Share Data)
(Unaudited) June 30, December 31, 2002 2001 ------------------- ------------------- Assets Current Assets Cash and cash equivalents $ 49,702 $ 80,502 Restricted cash 1,279 1,300 Accounts receivable (net of allowance of $22,375 and $12,263 at June 30, 2002 and December 31, 2001, respectively) 47,051 42,972 Deferred income taxes 3,013 1,840 Prepaid expenses and other assets 8,563 9,030 ------------------- ------------------- Total current assets 109,608 135,644 Property and Equipment, Net 186,531 188,436 Other Assets 9,070 9,233 ------------------- ------------------- Total Assets $ 305,209 $ 333,313 =================== =================== Liabilities and Stockholders' Deficiency Current Liabilities Accounts payable $ 12,261 $ 10,747 Accrued network costs 26,407 17,877 Commissions payable 5,032 6,679 Accrued expenses - other 12,350 14,928 Deferred revenue 6,865 6,691 Current portion of long-term debt 23,438 18,750 ------------------- ------------------- Total current liabilities 86,353 75,672 ------------------- ------------------- Long-Term Debt 121,875 131,250 Deferred income taxes 3,013 1,840 Other Liabilities - Noncurrent 6,456 5,721 Series A Redeemable Convertible Preferred Stock (see Note 6) 223,108 216,155 Stockholders' Deficiency Common stock-Class A, $.01 par value (122,925 authorized shares, 26,698 and 26,388 outstanding at June 30, 2002 and December 31, 2001, respectively) 267 264 Additional paid-in capital 77,048 76,421 Accumulated Deficit (211,917) (172,777) Unearned compensation - stock options (994) (1,233) ------------------- ------------------- Total stockholders' deficiency (135,596) (97,325) ------------------- ------------------- Total Liabilities and Stockholders' Deficiency $ 305,209 $ 333,313 =================== ===================
See notes to condensed consolidated financial statements 4 US LEC Corp. and Subsidiaries Condensed Consolidated Statements of Cash Flows (In Thousands) (Unaudited)
Six Months Ended June 30, 2002 2001 ------------- ------------- Operating Activities Net Loss $ (32,187) $ (30,157) ------------- ------------ Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 21,622 15,767 Accounts receivable allowance 10,112 1,776 Deferred compensation 239 91 Changes in operating assets and liabilities: Accounts receivable (14,191) (26,795) Prepaid expenses and other assets (706) (3,329) Other assets (95) (1,488) Accounts payable 2,106 3,293 Deferred revenue 174 2,178 Accrued network costs 8,531 4,147 Customer commissions payable (1,647) 1,755 Accrued expenses - other (1,686) 710 ------------- ------------ Total adjustments 24,459 (1,895) ------------- ------------ Net cash used in operating activities (7,728) (32,052) ------------- ------------ Investing Activities Purchase of property and equipment (18,910) (23,727) Redemption of certificate of deposits and restricted cash 21 ------------- ------------ Net cash used in investing activities (18,889) (23,727) ------------- ------------ Financing Activities Proceeds from long-term debt 20,000 Payment on long-term debt (4,688) Payment of loan fees (127) (55) Cost of recapitalization (191) Issuance of common shares 632 677 ------------- ------------ Net cash provided (used) by financing activities (4,183) 20,431 ------------- ------------ Net Decrease in Cash and Cash Equivalents (30,800) (35,348) Cash and Cash Equivalents, Beginning of Period 80,502 105,821 ------------- ------------ Cash and Cash Equivalents, End of Period $ 49,702 $ 70,473 ============= ============ Supplemental Cash Flow Disclosures Cash Paid for Interest $ 4,675 $ 6,234 ============= ============
See notes to condensed consolidated financial statements 5 US LEC Corp. and Subsidiaries Condensed Consolidated Statement of Stockholders' Deficiency For the Six Months Ended June 30, 2002 (In Thousands) (Unaudited)
Class A Additional Accumulated Unearned Common Stock Paid-in Capital Deficit Compensation Total ------------ --------------- ----------- ------------ ---------- Balance, December 31, 2001 $ 264 $ 76,421 $ (172,777) $ (1,233) $ (97,325) Exercise of stock options and warrants - 1 - - 1 Issuance of Employee Stock Purchase Plan Stock 3 626 - - 629 Unearned Compensation - Stock Options - - - 239 239 Preferred Stock Dividends - - (6,697) - (6,697) Accretion of Preferred Stock Issuance Fees (256) - (256) Net Loss - - (32,187) - (32,187) ------------ --------------- ----------- ------------ ---------- Balance, June 30, 2002 $ 267 $ 77,048 $ (211,917) $ (994) $ (135,596) ============ =============== =========== ============ ==========
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 and Significant Accounting Policies 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 and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The balance sheet at December 31, 2001 has been derived from the audited balance sheet at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. 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, 2001, which is on file with the SEC. Revenue Recognition - The Company recognizes revenue on telecommunications, data and enhanced communications services in the period that the service is provided. Revenue is recognized when earned based upon the following specific criteria: (1) persuasive evidence of an arrangement exists, (2) services have been rendered, (3) seller's price to the buyer is fixed or determinable, and (4) collectibility is reasonably assured. Reciprocal compensation that is earned as revenue from other local exchange carriers represents compensation for local telecommunications traffic terminated on our network that originates on another carrier's network. To date, a majority of our reciprocal compensation revenue has been generated from traffic originated by customers of BellSouth Telecommunications, Inc. ("BellSouth") and Verizon Communications Inc. ("Verizon"). The billing, payment and other arrangements for this reciprocal compensation are governed by interconnection agreements the Company has with BellSouth and Verizon as well as orders of the Federal Communications Commission (the "FCC") and the public utility commissions (the "PUCs") of states where we operate. Revenues are recorded net of amounts that are due to a customer or outside sales agent pursuant to each respective telecommunications service contract. Early termination fees and certain other charges are recognized when paid and revenue related to billings in advance of providing services is deferred and recognized when earned. The Company defers installation revenue from contracts with end customers and with other carriers. The Company is amortizing this revenue over the average life of the related contracts. Cost of Services - The Company defers installation charges from incumbent local exchange carriers ("ILECs"), such as BellSouth and Verizon, related to new customer contracts associated with network and end customer facilities. The Company is amortizing these costs over the average life of the related contracts. The Company's cost of services is comprised primarily of two types of charges: leased transport charges, including facility installation, which comprise approximately three-quarters of the Company's cost of services, and usage sensitive charges, which comprise approximately one-quarter of the Company's cost of services. The Company's leased transport charges are the lease payments incurred by US LEC for the transmission facilities used to connect the Company's customers to the Company-owned switch that services that customer and to 7 connect to the ILEC and other carrier networks. US LEC, as part of its "smart-build" strategy, does not currently own any fiber or copper transport facilities. These facilities are leased from various providers including, in many cases, the ILEC. Usage sensitive charges are primarily comprised of usage charges associated with the Company's off-net toll, toll-free services, access and reciprocal compensation owed to other carriers. Cash and Cash Equivalents - Cash equivalents consist of highly liquid investments with original maturities of three months or less at the time of purchase. Property and Equipment - Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, except for leasehold improvements as noted below. The estimated useful lives of the Company's principal classes of property and equipment are as follows: Telecommunications switching and other equipment 5 - 9 years Office equipment, furniture and other 5 years Leasehold improvements The lesser of the estimated useful lives or the lease term The Company capitalizes certain payroll related costs in accordance with AICPA Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Long-Lived Assets - The Company reviews the carrying value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Determination of any impairment would include a comparison of estimated undiscounted future operating cash flows anticipated to be generated during the remaining life of the assets with the net carrying value of the associated asset group. An impairment loss would be recognized as the amount by which the carrying value of the asset group exceeds their fair value. Accrued Network Costs - Accrued network costs include management's estimate of charges for direct access lines, facility charges, outgoing and incoming minutes, reciprocal compensation and other costs of revenue for the period for which vendor invoices have not yet been received by the Company as well as invoices received by the Company for those charges that have not yet been paid. Management's estimate is developed from the number of lines and facilities in service, minutes of use and contractual rates charged by each respective service provider. Subsequent adjustments to this estimate may result when actual costs are billed by the service provider to the Company. However, management does not believe such adjustments will be material to the Company's financial statements. Debt Issuance Cost - The Company capitalizes loan fees associated with securing long-term debt and amortizes such deferred loan fees over the term of the debt agreement. The Company has deferred loan fees recorded in other assets on the accompanying consolidated balance sheets that are being amortized over the life of the related debt agreement. Fair Value of Financial Instruments - Management believes the fair values of the Company's financial instruments, including cash equivalents, restricted cash, accounts receivables, and accounts payable approximate their carrying value. In addition, because the long-term debt consists of variable rate instruments, their carrying values approximate fair values. Concentration of Risk - The Company is exposed to concentration of credit risk principally from trade accounts receivable due from end customers and carriers. The Company's end customers are located primarily in the southeastern and mid-Atlantic United States. The Company performs ongoing credit evaluations of its end customers but does not require collateral deposits from a majority of its end customers. The Company is exposed 8 to additional credit risk due to the fact that the Company's most significant trade receivables are from large telecommunications carriers. See Note 7 for additional discussion of risks and uncertainties. The Company is dependent upon certain suppliers for the provision of telecommunications services to its customers. The Company has executed interconnection agreements for all states in which it operates. 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 costs 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. Effect of Recent Accounting Pronouncements - Statement of Financial Accounting Standards ("SFAS") No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No.121, "Accounting for Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed of," but retains many of its fundamental provisions, expands the scope of discontinued operations to include more disposal transactions. SFAS No. 144 was adopted effective January 1, 2002, the adoption did not have a material effect on the Company's financial statements. 2. Restricted Cash The restricted cash balance as of June 30, 2002 and December 31, 2001 currently serves as collateral for letters of credit related to certain office leases. Restricted cash is utilized to secure the Company's performance of obligations such as letters of credit to support leases or deposits in restricted use accounts. 3. Net Loss Per Common and Common Equivalent Share Net loss per common and common equivalent share are based on net loss, after consideration of preferred stock dividends and the accretion of preferred stock issuance costs, divided by the weighted average number of common shares outstanding during the period. Outstanding options and warrants are included in the calculation of dilutive earnings per common share to the extent they are dilutive. 4. Income Taxes Income taxes are provided for temporary differences between the tax and financial accounting basis of assets and liabilities using the liability method. The tax effects of such differences, as reflected in the balance sheet, are at the enacted tax rates expected to be in effect when the differences reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized and are reversed at such time that realization is believed to be more likely than not. 5. Long-Term Debt The Company's senior secured loan agreement, as amended, is comprised of (i) a $125,000 credit facility that converted into a six-year term loan as of June 30, 2001 and (ii) a $25,000 revolving credit facility that matures in December 2005. The Company made its first amortization payment under the term loan on April 1, 2002 in the amount of $4,688. The interest rate for the facility is a floating rate based, at the Company's option, on a base rate (as defined in the loan agreement) or the London Interbank Offered Rate ("LIBOR"), plus a specified margin. The amount outstanding under the credit facility at June 30, 2002 was $145,313, of which 9 $23,438 is classified as current on the Company's condensed consolidated balance sheet. Advances under the agreement as of June 30, 2002 bear interest at an average annual rate of 5.96%. The Company's credit facility agreement contains certain financial covenants, measured quarterly, the most significant of which relate to the achievement of increasing levels of revenue and earnings and maintenance of specified debt ratios. The Company was in compliance with these covenants as of the quarter ended June 30, 2002 prior to establishing an additional provision of $9,500 for doubtful accounts related to the bankruptcy filing of WorldCom, Inc. and its subsidiaries ("WorldCom"). After recording this additional provision related to WorldCom, the Company was not in compliance with its minimum quarterly earnings before interest, taxes, depreciation and amortization ("EBITDA") covenant. The Company received a waiver of compliance with its quarterly EBITDA financial covenant for the quarter ended June 30, 2002. Management believes that the Company will be in compliance with all quarterly financial covenants during the remainder of 2002 based upon projected operating results and a commitment from its lenders to amend prospective financial covenants consistent with these projected operating results. These projected operating results are dependent upon the Company meeting quarterly targets for new customers, customer retention, customer usage, billing rates, gross margins and selling, general and administrative costs, and as a result involve some degree of uncertainty. Should any of these assumptions not be achieved for a particular quarter, it is possible that a financial covenant will not be met during the remainder of 2002. Although there can be no assurances, management believes if this were to occur, it would be able to obtain the necessary waivers or amendments from its lenders. Should such waivers or amendments not be obtained, the lenders would have the right under the credit facility to certain remedies including acceleration of debt repayment. The credit facility is secured by a pledge of the capital stock of the Company's principal operating subsidiaries and a security interest in a substantial portion of the Company's and its operating subsidiaries' equipment, receivables, leasehold improvements and general intangibles. Proceeds from the credit facility have been and will be used to fund capital expenditures and working capital requirements and for other general corporate purposes. 6. Series A Mandatorily Redeemable Convertible Preferred Stock On April 11, 2000, the Company issued $200,000 of its Series A Mandatorily Redeemable Convertible Preferred Stock (the "Series A Preferred Stock") to affiliates of Bain Capital, Inc. ("Bain") and Thomas H. Lee Partners, L.P. ("THL"). Proceeds to the Company, net of commissions and other transaction costs, were approximately $194,000. The Series A Preferred Stock earns dividends on a cumulative basis at an annual rate of 6%, payable quarterly in shares of Series A Preferred Stock for three years, and at US LEC's option, in cash or shares of Series A Preferred Stock over the next seven years. In addition, the Series A Preferred Stock participates on a pro rata basis in the dividends payable to common stockholders. As of June 30, 2002, the Company had issued and accrued $28,265 in shares of Series A Preferred Stock as dividends. In the event of any liquidation, dissolution or other winding up of the affairs of the Company, the holders of Series A Preferred Stock are entitled to be paid in preference to any distribution to holders of junior securities, an amount in cash, equal to $1,000 per share plus all accrued and unpaid dividends on such shares. The holders of Series A Preferred Stock may convert all or a portion of their shares into shares of Class A Common Stock at a set conversion price prior to April 11, 2010 in the event of a change in control or an acquisition event. Each holder of the Series A Preferred Stock may redeem all or a portion of their Series A Preferred Stock at a price equal to 101% of $1,000 per share plus all accrued dividends on such shares after the occurrence of a change in control and for a period of 60 days following such event. At any time on or after April 11, 2003, the Company may redeem all of the outstanding shares of Series A Preferred Stock, at a price equal to $1,000 per share plus all accrued and unpaid dividends on such shares, only if the market price of a share of common stock for 30 consecutive trading days during the 90 day period immediately preceding the date of the notice of redemption is at least 150% of the then effective conversion price and the market price of a share of common stock on the redemption date is also at least 150% of the then effective conversion price. All outstanding shares of the Series A Preferred Stock are subject to mandatory redemption on April 11, 2010. 10 The Company incurred $6,240 in expenses related to the issuance of the Series A Preferred Stock. The cost will be accreted against retained earnings (deficit) over the life of the agreement. For the six months ended June 30, 2002, the Company accreted $256 of these costs. As of June 30, 2002, the Company had $5,157 in issuance costs netted with Series A Preferred Stock on its condensed consolidated balance sheet. 7. Uncertainties and Contingencies The deregulation of the telecommunications industry, the implementation of the Telecom Act on February 8, 1996 and the distress of many carriers in the wake of the downturn in the telecommunications industry have embroiled numerous industry participants, including the Company, in lawsuits, proceedings and arbitrations before state regulatory commissions, private arbitration organizations such as the American Arbitration Association, and courts over many issues important to the financial and operational success of the Company. These issues include the interpretation and enforcement of interconnection agreements, the terms of interconnection agreements the Company may adopt, operating performance obligations, reciprocal compensation, access rates, rates applicable to different categories of traffic and the jurisdiction of traffic for compensation purposes. The Company anticipates that it will continue to be involved in various lawsuits, arbitrations and proceedings over these and other material issues. The Company anticipates also that further legislative and regulatory rulemaking will occur--on the federal and state level--as the industry deregulates and as the Company enters new markets or offers new products. Rulings adverse to the Company, adverse legislation, or changes in governmental policy on issues material to the Company could have a material adverse effect on the Company's financial condition or results of its operations. Reciprocal Compensation - On April 27, 2001, the Federal Communications Commission ("FCC") released an Order on Remand and Report and Order (the "Remand Order") addressing inter-carrier compensation for traffic terminated to Internet service providers ("ISPs"). The interpretation and enforcement of the Remand Order will likely be the most important factor in the Company's efforts to collect reciprocal compensation for ISP-bound traffic in the future. In the Remand Order, the FCC addressed a number of important issues, including the rules under which carriers are to compensate each other for traffic terminated to ISPs and the rates applicable for ISP-bound traffic as well as traffic bound to other customers. While the Remand Order provides greater certainty about the Company's right to bill for traffic terminated to ISPs, the effect of the Remand Order on the Company will depend on how it is interpreted and enforced. In particular, there are uncertainties as to whether the Remand Order has any effect on the Company's pending arbitral, state regulatory commission and judicial proceedings seeking to collect compensation for traffic terminated to ISPs; whether certain provisions of the Remand Order will be applied state-by-state, market-by-market and/or carrier-by-carrier; whether the limitations on growth of ISP traffic in the Remand Order will survive legal challenge; and whether the incumbent carrier will efficiently trigger the rate reductions and other limitations set forth in the Remand Order. On May 3, 2002, the U.S. Court of Appeals for the District of Columbia (the "D.C. Circuit") rejected the FCC's legal analysis in the Remand Order and remanded the order back to the FCC for further review (the "Second Remand"), but the D.C. Circuit did not vacate the Remand Order. As such, the ISP compensation structure established by the FCC in the Remand Order remains in effect. It is unclear at this time whether, how or when the FCC will respond to the Second Remand, how the Second Remand affects pending disputes over reciprocal compensation for ISP traffic, how the Remand Order will be interpreted or whether affected parties will undertake new challenges to the ISP compensation structure established by the Remand Order. If the Remand Order or the Second Remand were to be interpreted in a manner adverse to the Company on all or any of the issues, or if the Remand Order is modified as a result of the Second Remand or other pending or new legal challenges, it could have a material adverse effect on the Company. For further discussion of the 11 Remand Order, see "Business-Regulation" in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the "Form 10-K"). On October 3, 2001 the Company and BellSouth entered into a settlement agreement (the "Settlement Agreement") by which the Company and BellSouth resolved outstanding reciprocal compensation receivables in the various states in which both of us operate and other past payments. BellSouth agreed to pay US LEC approximately $31,000, in addition to approximately $10,000 it paid in August 2001, to resolve those issues for periods prior to the effective date of the Remand Order. The Settlement Agreement imposed on the parties certain obligations regarding the payment of reciprocal compensation in the future, which are in the process of being implemented. The Settlement Agreement also provides that the payments made for periods prior to the effective date of the Remand Order are not subject to adjustment as a result of subsequent changes in the Remand Order. In September 2001, the Company filed a proceeding with the Virginia State Corporation Commission ("VSCC") and the FCC seeking to collect reciprocal compensation from Verizon payable for traffic bound for ISPs as well as other customers. The VSCC declined jurisdiction over the dispute. In January 2002, the FCC accepted jurisdiction over the dispute. Prior to the Company's filing a complaint against Verizon at the FCC, and in a separate, but related, case, the FCC held that the contract with Verizon (that the Company had adopted) did not obligate the parties to pay reciprocal compensation for traffic bound for ISPs. That decision is on appeal. In June 2002, Verizon filed a complaint against the Company in the United States District Court for the Eastern District of Virginia seeking a declaratory ruling that Verizon is not obligated to pay the Company reciprocal compensation for traffic bound for ISPs under the agreement adopted by the Company. The Company has moved to dismiss Verizon's complaint based on, among other things, that the FCC's reasoning in the prior Virginia case is based on the Remand Order, which subsequently was the subject of the Second Remand. In light of these developments, as well as the Second Remand, the Company cannot predict when this dispute will be resolved or whether the Company will ultimately be successful. Disputed Access Revenues - A number of inter-exchange carriers ("IXCs") have refused to pay access charges to competitive local exchange carriers ("CLECs"), including the Company, alleging that the access charges exceed the rates charged by the ILEC, as well as disputing the rates applicable to different categories of traffic and the jurisdiction of traffic for compensation purposes. Currently there are a number of court cases, regulatory proceedings at the FCC and legislative efforts involving such challenges. The Company cannot predict the outcome of these cases, regulatory proceedings and legislative efforts or their impact on access rates. On April 27, 2001, the FCC released its Seventh Report and Order and Further Notice of Proposed Rulemaking (the "Access Order") in which it established a benchmark rate at which a CLEC's interstate access charges will be presumed to be reasonable and which CLECs may impose on IXCs by tariff. The Access Order addresses a number of issues important to how CLECs charge IXCs for originating and terminating interstate toll and toll free traffic. The Access Order should provide certainty as to the Company's right to bill IXCs for interstate access at rates above those tariffed by the ILECs. Notwithstanding the apparent certainty created by the Access Order, its effect on the Company will depend on how the Access Order is interpreted and enforced and the outcome of appeals currently pending. If the Access Order is interpreted or enforced in a manner adverse to the Company as it relates to periods prior to the effective date, such result could have a material adverse effect on the Company. For a more complete description of the Access Order, please see "Business - Regulation" in the Form 10-K. On May 30, 2001, the FCC issued a decision in AT&T Corp. v. Business Telecom Inc. (the "BTI Decision"), in which the FCC determined that the interstate access rates charged by Business Telecom, Inc. ("BTI") were not just and reasonable. The FCC determined that just and reasonable rates for BTI were properly based upon the lowest band of rates charged by the National Exchange Carriers Association ("NECA"). The FCC based this holding on the limited evidence before it, tending to show that BTI's operations were similar to 12 those of small, urban ILECs, many of whom charge the lowest band NECA rates. Appeals of the BTI Decision were subsequently withdrawn. As with the Access Order described above, the BTI Decision's effect on the Company will depend on how the order is interpreted. If the BTI Decision is interpreted in a manner adverse to the Company, such result could have a material adverse effect on the Company. By settlement dated October 5, 2001, Sprint and the Company resolved their litigated dispute over access charges. Sprint paid the Company approximately $8,000, in addition to approximately $1,500 it paid in the four months preceding the settlement, in payment of past due invoices for periods through July 2001. Due to the recent federal bankruptcy filing by WorldCom, the Company established an additional provision of $9,500 for doubtful accounts for the remaining outstanding receivables owed to the Company by WorldCom. The Company is pursuing its claim for the payment of all outstanding charges in the WorldCom bankruptcy proceeding, but is fully reserved for the amount due from WorldCom as of June 30, 2002. In light of the general conditions prevailing in the telecommunications industry, there is a risk of further delinquencies, nonpayment or bankruptcies by other telecommunications carriers that owe outstanding amounts derived from access and facility revenues billed by the Company. Such events, in the aggregate, could have an adverse effect on the Company's performance in future periods. The Company is unable to predict such events at this time. Legislation - Periodically, legislation has been introduced in the U.S. House of Representatives or the U.S. Senate to alter or amend the Telecom Act. It is the Telecom Act which opened the local telephone markets for competition and outlines many of the ground rules pursuant to which the ILECs and the CLECs operate with respect to each other. The Company anticipates that additional efforts will be made to alter or amend the Telecom Act. The Company cannot predict whether any particular piece of legislation will become law and how the Telecom Act might be modified. The passage of legislation amending the Telecom Act could have a material adverse effect on the Company and its financial results. Interconnection Agreements with ILECs - The Company has agreements for the interconnection of its networks with the networks of the ILECs covering each market in which US LEC has installed a switching platform. US LEC may be required to negotiate new interconnection agreements as it enters new markets in the future. In addition, as its existing interconnection agreements expire, it will be required to negotiate extension or replacement agreements. The Company recently initiated interconnection arbitrations with Verizon in order to obtain new interconnection agreements on terms acceptable to the Company. There can be no assurance that the Company will successfully negotiate, successfully arbitrate or otherwise obtain such additional agreements for interconnection with the ILECs or renewals of existing interconnection agreements on terms and conditions acceptable to the Company. Interconnection with Other Carriers - The Company anticipates that as its interconnections with various carriers increase, the issue of seeking compensation for the termination or origination of traffic whether by reciprocal arrangements, access charges or other charges will become increasingly complex. The Company does not anticipate that it will be cost effective to negotiate agreements with every carrier with which the Company exchanges originating and/or terminating traffic. The Company will make a case-by-case analysis of the cost effectiveness of committing resources to these interconnection agreements or otherwise billing and paying such carriers. 8. Stockholders' Equity Stock Options - The Company adopted the US LEC Corp. Omnibus Stock Plan (the "Plan") in January 1998. The number of Class A Common Stock reserved for issuance under the Plan is 5,000 shares. As of June 30, 2002, the Company had granted stock options, net of forfeitures, to purchase an aggregate of 4,010 shares of Class A Common Stock under the Plan. In addition, in December 2001 the Company granted the Company's 13 Chief Executive Officer an option to purchase 550 shares of Class A Common Stock outside the Plan. Employee Stock Purchase Plan - The Company established an Employee Stock Purchase Plan (the "ESPP") in September 2000. Under the ESPP, employees may elect to invest up to 10% of their compensation in order to purchase shares of the Company's Class A Common Stock at a price equal to 85% of the market value at either the beginning or end of the offering period, whichever is less. The number of Class A Common Stock reserved for issuance under the ESPP is 2,000 shares. As of June 30, 2002, the Company had issued 1,036 shares under the ESPP. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, this report contains forward-looking statements, subject to uncertainties and risks, including the demand for US LEC's services, the ability of the Company to introduce additional products, the ability of the Company to successfully attract and retain personnel, competition in existing and potential additional markets, uncertainties as to the stability of other telecommunication carriers, uncertainties regarding its dealings with ILECs and other telecommunications carriers and facilities providers, regulatory uncertainties, and the possibility of adverse decisions related to reciprocal compensation and access charges owed to the Company by other carriers. These and other applicable risks are summarized in the "Forward-Looking Statements and Risk Factors" section and elsewhere in the Company's Annual Report on Form 10-K for the period ended December 31, 2001, and in other reports which are on file with the Securities and Exchange Commission (the "SEC"). OVERVIEW US LEC is a rapidly growing switch-based competitive local exchange carrier ("CLEC") that provides integrated telecommunications services to its customers, including local and long distance voice services, toll free services, frame relay, high speed Internet, ATM and web hosting. The Company primarily serves telecommunication-intensive business customers including hotels, universities, financial institutions, professional service firms, hospitals, and Internet service providers ("ISPs"). US LEC was founded in June 1996 after passage of the Telecommunications Act of 1996 (the "Telecom Act"), which enhanced the competitive environment for local exchange services. US LEC initiated service in North Carolina in March 1997, becoming one of the first CLECs in North Carolina to provide switched local exchange services. US LEC currently offers service to customers in selected markets in North Carolina, Florida, Georgia, Tennessee, Virginia, Alabama, Washington D.C., Pennsylvania, New Jersey, Mississippi, Maryland, South Carolina, Louisiana and Kentucky. In addition, US LEC is currently certified to provide local and long distance telecommunication services in Indiana, Delaware, New York, Ohio, Texas, Connecticut and Massachusetts and provides selected services in these markets. As of June 30, 2002, US LEC's network was comprised of 26 Lucent 5ESS(R) AnyMedia(TM) digital switches, 25 Lucent CBX500 ATM data switches and four Juniper M20 (TM) Internet Gateway routers that are located throughout the Southeast and mid-Atlantic states, in addition to an Alcatel MegaHub(R) 600ES switch in Charlotte, North Carolina. RESULTS OF OPERATIONS Three and Six Months Ended June 30, 2002 Compared With The Three and Six Months Ended June 30, 2001 Net revenue increased to $58.8 million for the quarter ended June 30, 2002 from $43.1 million for the quarter ended June 30, 2001. For the six months ended June 30, 2002 and 2001, revenue was $112.7 million and $81.1 million, respectively. More than 90% of the Company's net revenue is currently derived from two sources - end users and intercarrier compensation. Less than 10% of the Company's net revenue is derived from other sources, including wholesale customers, installation revenue, and other miscellaneous sources. Wholesale revenue is revenue charged to other telecommunications carriers for the termination of telecommunications traffic, but does not include reciprocal compensation or access charges. End customer revenue represented approximately 60% of total net revenue during the quarter ended June 30, 2002, compared to 58% in the quarter ended March 31, 2002, and 50% in the quarter ended June 30, 2001. This shift is the result of growth in end customer revenue and a reduction of intercarrier rates for reciprocal compensation and access revenue billed to other carriers. See Note 7 to the Company's condensed consolidated financial statements for a further discussion related to disputed amounts of intercarrier compensation and recent settlements regarding intercarrier transactions. 15 Cost of services is comprised primarily of leased transport (including facility installation) and usage charges. Cost of services increased to $28.9 million, or 49% of revenue, for the quarter ended June 30, 2002, from $21.9 million, or 51% of revenue, for the quarter ended June 30, 2001. For the six months ended June 30, 2002, and June 30, 2001, cost of services increased to $56.1 million, or 50% of revenue, from $41.1 million, or 51% of revenue. The decrease in cost of services as a percentage of revenue was primarily a result of continued growth of access and reciprocal compensation revenue and cost reduction efforts completed by the Company. The Company's strategy of leasing rather than building its own fiber transport facilities results in the Company's cost of services being a significant component of total costs. Management believes that this strategy has several benefits, including faster time-to-market, more efficient asset utilization, and diverse interconnection opportunities. The Company has to date been successful in negotiating lease agreements, generally, which either match in the aggregate the duration of its customer contracts or are not circuit specific, thereby allowing the Company to mitigate the risk of incurring charges associated with transmission facilities that are not being utilized by customers. Selling, general and administrative expenses ("SG&A") for the quarter ended June 30, 2002 increased to $37.4 million, or 64% of revenue, compared to $26.0 million, or 60% of revenue, for the quarter ended June 30, 2001. These expenses increased to $63.3 million, or 56% of revenue, for the first six months of 2002, compared to $50.2 million, or 62% of revenue, for the first six months of 2001. The increase in SG&A expenses were primarily a result of an additional provision for doubtful accounts of $9.5 million due to the bankruptcy filing of WorldCom, Inc. and its subsidiaries ("WorldCom") recorded in the second quarter of 2002. Additional increases in costs were for costs associated with developing and expanding the Company's customer base such as personnel, sales and marketing, occupancy, administration and billing, and higher legal expenses associated with litigation and regulatory issues. Excluding the additional provision for doubtful accounts of $9.5 million related to WorldCom's bankruptcy, SG&A for the quarter ended June 30, 2002 was $27.9 million or 47% of revenue compared to 60% in the second quarter of 2001. Depreciation and amortization for the quarter ended June 30, 2002 increased to $11.1 million from $8.0 million for the comparable 2001 period. For the first six months ended June 30, 2002, depreciation and amortization increased to $21.6 million from $15.8 million for the comparable period of 2001. The increase in depreciation and amortization is due to the increase in depreciable assets in service related to US LEC's network. The Company's network build out was completed in 2001. As a result, future capital expenditures will decrease as additions will be determined by the growth of customers. Interest income for the three and six months ended June 30, 2002 was $0.2 million and $0.6 million, respectively, compared to $0.7 million and $2.0 million, respectively, for the three and six months ended June 30, 2001. This decrease was primarily due to declining interest rates as well as a decrease in cash and cash equivalent balances. Interest expense for the three and six months ended June 30, 2002 was $2.2 million and $4.4 million, respectively, compared to interest expense of $2.9 million and $6.1 million for the three months and six ended June 30, 2001, respectively. This decrease in interest expense was primarily due to declining interest rates on borrowings under the Company's credit facility as well as a decreased debt balance resulting from the $4.7 million paydown in April 2002. For the three months and six months ended June 30, 2002 and 2001, the Company did not record an income tax expense or benefit. For these periods, the deferred tax asset, primarily created from operating losses, was offset by increases in the tax valuation allowance. Net loss for the three and six months ended June 30, 2002 amounted to $20.5 million and $32.2 million, respectively. Dividends accrued on Series A Preferred Stock for the three and six months ended June 30, 2002 amounted to $3.4 million and $6.7 million, respectively (see Note 6 to the Company's condensed consolidated financial statements for additional information). The accretion of preferred stock issuance cost for the three and six months ended June 30, 2002 amounted to $129 and $256, respectively. 16 As a result of the foregoing, net loss attributable to common stockholders for the three months ended June 30, 2002 amounted to $24.0 million, or ($0.91) per share (diluted) compared to net loss of $18.4 million, or ($0.66) per share (diluted) for the three months ended June 30, 2001. For the six months ended June 30, 2002, net loss attributable to common stockholders was $39.1 million, or ($1.48) per share (diluted), compared to a net loss attributable to common stockholders for the six months ended June 30, 2001, of $36.7 million, or ($1.32) per share (diluted). LIQUIDITY AND CAPITAL RESOURCES The Company's credit facility agreement contains certain financial covenants, measured quarterly, the most significant of which relate to the achievement of increasing levels of revenue and earnings and maintenance of specified debt ratios. The Company was in compliance with these covenants as of the quarter ended June 30, 2002 prior to establishing an additional provision of $9,500 for doubtful accounts related to the bankruptcy filing of WorldCom, Inc. and its subsidiaries ("WorldCom"). After recording this additional provision related to WorldCom, the Company was not in compliance with its minimum quarterly earnings before interest, taxes, depreciation and amortization ("EBITDA") covenant. The Company received a waiver of compliance with its quarterly EBITDA financial covenant for the quarter ended June 30, 2002. Management believes that the Company will be in compliance with all quarterly financial covenants during the remainder of 2002 based upon projected operating results and a commitment from its lenders to amend prospective financial covenants consistent with these projected operating results. These projected operating results are dependent upon the Company meeting quarterly targets for new customers, customer retention, customer usage, billing rates, gross margins and selling, general and administrative costs, and as a result involve some degree of uncertainty. Should any of these assumptions not be achieved for a particular quarter, it is possible that a financial covenant will not be met during the remainder of 2002. Although there can be no assurances, management believes if this were to occur, it would be able to obtain the necessary waivers or amendments from its lenders. Should such waivers or amendments not be obtained, the lenders would have the right under the credit facility to certain remedies including acceleration of debt repayment. The following table provides a summary of our contractual obligations and commerical commitments as of June 30, 2002.
Payments Due by Period ------------------------------------------------------------- Less than 1-3 4-5 After 5 Contractual Obligations Total 1 year years years years ----------- ---------- ----------- ----------- ----------- Long-term debt $ 145,313 $ 23,438 $ 106,250 $ 15,625 $ - Operating leases 50,404 7,546 18,538 10,422 13,898 ----------- ---------- ----------- ----------- ----------- Total contractual cash obligations $ 195,717 $ 30,984 $ 124,788 $ 26,047 $ 13,898 =========== ========== =========== =========== ===========
As of June 30, 2002, the outstanding amount under the Company's senior secured credit facility was $145.3 million and there was no additional availability under this credit facility. 17 While management believes the $49.7 million in cash at June 30, 2002 will fund the Company's operating, investing and financing activities through June 2003, funding beyond that point is highly likely to require additional financing. The Company is aggressively pursuing all options to obtain additional financing and improve liquidity. These options include, but are not limited to, raising additional equity, restructuring the existing amortization of the current credit facility, obtaining vendor financing and continued improvement of operating results and working capital management. There can be no assurance that the Company will be successful in its pursuit of any of these options. Cash used in operating activities decreased to $7.7 million for the six months ended June 30, 2002 from $32.1 million during the comparable period in 2001. The decrease in cash used in operating activities was primarily due to lower operating losses net of non-cash charges and decreases in cash used for working capital. Cash used in investing activities decreased to $18.9 million for the six months ended June 30, 2002 from $23.7 million during the six months ended June 30, 2001. The investing activities are primarily related to purchases of switching and related telecommunications equipment, office equipment, back office and leasehold improvements. The decrease in cash used was the result of the completion of our network expansion in 2001 and current capital expenditures being growth based. Cash used by financing activities increased to $4.2 million for the six months ended June 30, 2002 from $20.4 million of cash provided during the first six months of 2001. The increase in cash used by financing activities was primarily due to a $4.7 million repayment of borrowings during the second quarter of 2002, whereas cash provided during the first six months of 2001 was primarily due to proceeds from borrowings. The Company made an additional scheduled amortization debt payment of $4.7 million on July 1, 2002. Uncertainties and Contingencies The Company's receivables are subject to certain uncertainties and contingencies related to regulatory, judicial and legislative policies and actions as well as resolution of disputes with carriers over reciprocal compensation and access revenue. For further discussion, see Note 7 to the Company's condensed consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK US LEC is exposed to various types of market risk in the normal course of business, including the impact of interest rate changes on its investments and debt. As of June 30, 2002, investments consisted primarily of institutional money market funds. All of the Company's long-term debt consists of variable rate instruments with interest rates that are based on a floating rate which, at the Company's option, is determined by either a base rate or the London Interbank Offered Rate ("LIBOR"), plus, in each case, a specified margin. Although US LEC does not currently utilize any interest rate management tools, it continues to evaluate the use of derivatives such as, but not limited to, interest rate swap agreements to manage its interest rate risk. As the Company's investments are all short-term in nature and its long-term debt is at variable short-term rates, management believes the carrying values of the Company's financial instruments approximate fair values. 18 PART II OTHER INFORMATION Item 1. Legal Proceedings US LEC is not currently a part to any material legal proceeding, other than proceedings, arbitrations, and any appeals thereof, related to reciprocal compensation, intercarrier access and other amounts due from other carriers. For a description of these proceedings and developments that have occurred during the quarter ended June 30, 2002, see Note 7 to the condensed consolidated financial statements appearing elsewhere in this report. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of the Stockholders of US LEC Corp. was held on May 7, 2002. At the annual meeting, one matter was considered, acted upon and approved: the election of five Class A Directors, and two Series A Preferred Stock Directors to a one-year term and until their successors are duly elected and qualified. Indicated below are the total votes in favor of each director nominee and the total votes withheld:
Votes ------------------------------- Nominee Class of Stock For Withheld Authority - ----------------------------------- ------------------ ----------- ------------------ Class A Directors: Richard T. Aab Class A 24,297,596 1,076,977 Series A Preferred 6,652,283 - ------------------------------- 30,949,879 1,076,977 David M. Flaum Class A 25,208,373 166,200 Series A Preferred 6,652,283 - ------------------------------- 31,860,656 166,200 Tansukh V. Ganatra Class A 25,157,479 217,094 Series A Preferred 6,652,283 - ------------------------------- 31,809,762 217,094 Francis J. Jules Class A 24,289,807 1,084,766 Series A Preferred 6,652,283 - ------------------------------- 30,942,090 1,084,766 Steven L. Schoonover Class A 25,235,573 139,000 Series A Preferred 6,652,283 - ------------------------------- 31,887,856 139,000 Series A Preferred Stock Directors: Anthony J. DiNovi Series A Preferred 6,652,283 - Michael A. Krupka Series A Preferred 6,652,283 -
19 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit No. Description ----------- ----------- 11.1 Statement Regarding Computation of Earnings per Share/(1)/ 99.1 Section 906 of Sarbanes-Oxley Act Certification by Chief Executive Officer 99.2 Section 906 of Sarbanes-Oxley Act Certification by Chief Financial Officer /(1)/ Incorporated by reference to the company's condensed consolidated statements of operations appearing in Part I of this report. (b) No Current Reports on Form 8-k were filed during the period covered by this report. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. US LEC Corp. By: /s/ Michael K. Robinson ----------------------------- Michael K. Robinson Executive Vice President and Chief Financial Officer August 14, 2002 21 EX-99.1 3 dex991.txt CERTIFICATION OF CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of US LEC Corp. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Francis J. Jules, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. (s) 1350, as adopted pursuant to (s) 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Francis J. Jules Francis J. Jules Chief Executive Officer August 14, 2002 EX-99.2 4 dex992.txt CERTIFICATION OF CFO Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of US LEC Corp. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael K. Robinson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Michael K. Robinson Michael K. Robinson Chief Financial Officer August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----