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Author: phenders Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 45  
Subject: Corporate Statements -Good News? Date: 10/31/1998 1:14 PM
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The folowing is from the US LEC Third Quarter Results released Tuesday, October 27, 1998 08:32 AM

Richard T. Aab, Chairman and Chief Executive Officer of US LEC Corp. commented, ".......During the third quarter of 1998, US LEC's core business revenue and revenue related to reciprocal compensation experienced strong growth. Given that no near term resolution is expected of the reciprocal compensation issue, and the financial markets' concerns related to this issue, US LEC elected to make a $6.0 million provision against reciprocal compensation revenue and receivables. No adjustments were made in reducing the commissions liability which is to be paid against these revenues. This provision was made to be conservative in US LEC's reporting of revenue, and does not reflect a change in the Company's commitment to pursue the matter to a successful conclusion."

Does this mean that there earnings growth is without regard to the compensation that is in dispute? That should be a strong positive. (Not sure I understand the commisions liablity relative to revenue.)

Phil
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Author: Patzer Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25 of 45
Subject: Re: Corporate Statements -Good News? Date: 10/31/1998 3:51 PM
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phenders writes:

Richard T. Aab . . . commented, " . . . US LEC elected to make a $6.0 million provision against reciprocal compensation revenue and receivables. No adjustments were made in reducing the commissions liability which is to be paid against these revenues. This provision was made to be conservative in US LEC's reporting of revenue, and does not reflect a change in the Company's commitment to pursue the matter to a successful conclusion."

Does this mean that there earnings growth is without regard to the compensation that is in dispute? That should be a strong positive. (Not sure I understand the commisions liablity relative to revenue.)


Nope. It means that US LEC is making a small reserve allowance because the analysts expect there to be a reserve allowance. I haven't seen the 3rd quarter 10-Q yet, but on the 2nd quarter 10-Q there was in increase of $22.6 million in accounts receivable, and an increase of $11.1 million in accrued expenses. Making a rough guess here, I'd say that there was at least $20 million of revenue in dispute at the end of the third quarter, offset by perhaps half that amount that US LEC would pay in commissions if it is collected. In other words, a hit of over $10 million through the end of the second quarter, plus whatever got added to the dispute in the third quarter.

The only way to justify a $6.0 million reserve on this is as a contingent liability, i.e. managment estimates x% chance of losing and reserves x% of the possible loss.

The commissions issue is quite simple. BellSouth pays US LEC to terminate traffic on the US LEC network. US LEC pays commission on this money to the end users who cause the traffic to originate from the BellSouth network and terminate on the US LEC network. This arrangement will not last forever; the major questions are how long will it last, and under what terms does it go away?

Disclaimer: I have no position, long or short, in US LEC. I keep looking at it and deciding it's too risky to go long. So far, I haven't had the guts to try go short; there's an awfully small float on this one and it's not yet certain that it's "gushing arterial blood", as Rayvt would say.

Patzer

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Author: Patzer Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26 of 45
Subject: Re: Corporate Statements -Good News? Date: 11/3/1998 8:33 PM
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US LEC is making a small reserve allowance because the analysts expect there to be a reserve allowance. I haven't seen the 3rd quarter 10-Q yet, . . .

I've seen the 3rd quarter 10-Q now. A/R stands at $45.2 million, up $16.3 million sequentially on $22.3 million reported revenue for the quarter. There wasn't a quarterly cash flow statement, but on the 9 months cash flow, $14.6 million cash was used (not produced) by operations. A/R up $45.2 million for the 9 months. Accrued expenses were flat from 2nd quarter, so I don't know where US LEC is hiding the commisssion it pays on reciprocal compensation.

In other news, the FCC says that within a week it will release an order on the subject of traffic to ISPs, including the treatment of reciprocal compensation. If I knew what the order would say, I'd be making a killing in the market . . . just gotta stay tuned.

I wonder if I can find shares of CLEC to short? Never mind, I'm not brave enough. The FCC could blow the short clean out of the water.

Patzer

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Author: phenders Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28 of 45
Subject: Re: Corporate Statements -Good News? Date: 11/9/1998 3:39 PM
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This latest on the FCC ruling was taken from www.clec.com

06-Nov-98
09:00 AM
FCC delays reciprocal compensation ruling
The FCC has postponed for at least a week or two a decision whether to
claim jurisdiction over dial-up calls to ISPs, according to Reuters News
Service. In particular, the FCC has delayed deciding if it will classify
Internet calls as long-distance in nature, thereby taking regulatory
authority of calls to ISPs away from state regulators. If the FCC does
determine calls to ISPs are of a long-distance variety, the decision could
end C-LECs' ability to collect termination charges from incumbents on calls
from incumbent customers to ISPs served by C-LECs. However, the FCC is
expected to let C-LECs continue to collect on such calls at least until
current interconnection deals with incumbents expire. After that the
Commission may opt to reduce or cut the termination fees.


Little debt, owns their switches rather than leasing, ahead of plan for area expansions, plus....I'm betting on a favorable ruling. (That's right, it's a bet at this point.)

Phil

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