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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.

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