Mais uma acção com bom aspecto - MCLD
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Por amor de Deus não se metam em cavalgadas só porque esta menina subiu 5 centimos já é uma acção interessante estamos numa fase em que tudo sobe mesmo o que não presta veja -se o caso da LVLT que hoje já vai em 14%. Isto é preciso calma e acima de tudo nada de disparates e muita disciplina eu continuo de fora e bem de fora mesmo correndo o risco de perder uma boa subida de curto/medio prazo a disciplina é fundamental ... pois queixam -se se ela voltar outra vez aos 10 centimos ....
Cumpts
Vasco
Cumpts
Vasco
Aqui no Caldeirão no Longo Prazo estamos todos ricos ... no longuissimo prazo os nossos filhos estarão ainda mais ricos ...
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10-May-2005
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis provides information concerning the results of operations and our financial condition and should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto. Additionally, the following discussion and analysis should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.
Executive Overview
In the fourth quarter of 2001, we developed a revised strategic plan, which focused on profitable revenue growth in our 25-state footprint. This plan served as the basis for our recapitalization with our principal shareholder, Forstmann Little & Co., lender group, and Preferred Shareholders, as well as the structuring of the Exit Facility and continues to serve as the basis of our yearly operating plans.
In order to execute our plan we initiated a variety of programs across the business to significantly improve the customer experience, eliminate unneeded infrastructure and cost, improve the quality of the network and grow the top line revenues. Over the past three years we have successfully executed nearly all of these programs. The operational and certain financial results of the Company, as reported in its quarterly and annual financial releases, reflect the significant progress that has been made in the operational areas.
However, the Company's revenues have not increased as forecasted and have been declining since 2002. The decline in revenue was driven primarily by our program to eliminate non-profitable customers, turnover of customers to competitors in excess of new customers acquired, reduction of long distance minutes used by our customer base, reduction in access rates as mandated by the FCC, and lower prices for some of our products. We have taken significant actions to increase revenue, including introduction of new competitively priced products, reorganization of the sales operation into three distinct channels, hiring of experienced executive sales leadership, expanding the involvement of the board of directors and executive staff in the sales process and reducing customer churn. To date, these actions have not resulted in profitable new revenue growth which continues to be a challenge as we compete against large, financially strong competitors with well-known brands. With the recent merger announcements in the industry, we believe that the large telecommunications providers will likely become even more aggressive upon the closing of these transactions further challenging our ability to grow revenue.
In light of the inability of the Company to achieve new revenue growth in excess of existing customer turnover and ultimately generate enough operating cash flow to service the existing level of debt, our Board of Directors has authorized the Company to pursue strategic alternatives. In support of these initiatives, we have hired Miller Buckfire Ying & Co., LLC and Gleacher Partners, LLC as the Company's financial advisors. We are now actively pursuing a strategic partner or a
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sale of the Company while also taking steps to maintain future liquidity, including evaluating a capital restructuring to reduce the current debt level enabling the Company to achieve positive cash flow going forward.
We believe that the Company's operational excellence combined with a highly trained workforce, state of the art product offerings and expansive network could provide strategic benefits to existing multi-state and regional telecom services providers. In addition, through the extensive cost reduction programs, which have been implemented over the past several years, we believe the Company's wholesale product suite offers an attractive alternative to UNE-P providers for local access lines and competitive long distance services.
We have undertaken numerous actions to conserve cash, including the reduction of capital expenditures and SG&A, as well as the execution of extensive cost reduction efforts initiated in late 2001 and continuing through today. In addition, we been selective in managing capital expenditures and do not believe that any of the reductions in capital spending will have a material impact on our ability to service our customers.
We ended March 31, 2005 with $34.9 million of cash on hand. In light of our level of cash at year end and the payments required during the first quarter of 2005 under the Credit Facilities, we began discussions with our agent bank and a group of lenders acting as a steering committee for the lenders under our Credit Facilities. The Company entered a forbearance agreement with our lenders with respect to scheduled principal and interest payments on our loans whereby the lenders agree not to take any action as a result of non-payment by the Company of approximately $18.1 million of scheduled principal amortization and interest payments due on or before March 31, 2005 and any related events of default through May 23, 2005. In accordance with the forbearance agreement, on March 22, 2005, we elected not to make $2.8 million of interest payments on such loans and, as a result, an event of default occurred and we are required to accrue an additional two percentage points of interest on such loans as provided in the forbearance agreement. We believe that by not making principal and interest payments on the Credit Facilities, cash on hand together with cash flows from operations is sufficient to maintain operations in the ordinary course without disruption of services.
In light of the revenue outlook and the Company's on-going cash requirements, we have also begun discussions related to a capital restructuring with our agent bank and a group of lenders acting as a steering committee for the lenders under our Credit Facilities. The Company and this committee are in negotiations related to terms of a capital restructuring which includes the conversion of a significant portion of the Company's current outstanding debt into equity. Under such a restructuring, the holders of our current debt would become equity shareholders of the Company with the current holders of the preferred and common stock unlikely to receive any recovery.
The Company is currently in discussions with the lender committee regarding an extension to the existing forbearance agreement. There can be no assurance that we will be able to reach an agreement with our lenders regarding a capital restructuring or continued forbearance and covenant relief prior to the end of the initial forbearance period on May 23, 2005. There also can be no assurance that we will be able to identify a suitable strategic partner or buyer or reach agreement with any such strategic partner or buyer on terms and conditions acceptable to us prior to the end of the initial forbearance period. In the event these alternatives are not available to the Company, it is likely that we will elect to forgo making future principal and interest payments to our lenders while we continue to seek an extended forbearance period or permanent capital restructuring from our lenders, or alternatively, the Company could be forced to seek protection from its creditors.
While we continue to explore a variety of options with a view toward maximizing value for all of our stakeholders, none of the options presented to date have suggested that there will be any meaningful recovery for the Company's current preferred stock or common stockholders. Accordingly, it is unlikely that holders of the Company's preferred stock or common stock will receive any recovery in a capital restructuring or other strategic transaction.
Our financial statements for the periods ending March 31, 2005 and December 31, 2004 are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, but we may not be able to continue as a going concern. The report of our independent registered public accounting firm accompanying our financial statements in our report on Form 10-K filed March 25, 2005, contains a comment stating that there is substantial doubt as to our ability to continue as a going concern. In the event our restructuring activities are not successful and we are required to seek protection from our creditors, additional significant adjustments may be necessary in the carrying value of assets and liabilities, the revenues and expenses reported and the balance sheet classifications used.
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Overview of Our Business
We derive our revenue from our core telecommunications and related communications services. These include local and long distance services; local data services such as dial-up and dedicated Internet access services, using DSL, cable modem and dedicated T1 access; integrated access services, which link voice and data lines together on one high-speed connection; conference calling services; wireless services; bandwidth and network facilities leasing, sales and services, including access services; facilities and services dedicated for a particular customer's use; advanced communications services for larger businesses such as frame relay, private line, and ISDN; and value-added services such as virtual private networks, hosted Exchange and shared web hosting.
As of March 31, 2005, we operated a network with 699 access nodes collocated in RBOC central offices. We serve our customers by using various loop/access unbundled network elements ("UNEs") provided by the RBOCs and aggregating them through our access nodes. In turn, our access nodes are interconnected through approximately 39 service node locations where our switching/routing systems reside. In a metropolitan area, access node to service node connectivity is based either on our own fiber facilities or on UNE transport from the RBOCs. Our service nodes are located in most of the major metropolitan areas across our footprint. These service nodes are in turn interconnected by our high capacity, inter-city core network. The underlying transport for our core network is based either on our own fiber or on leased capacity from interexchange carriers.
To develop these networks, we have assembled a collection of metro and inter-city network assets in our 25-state footprint, substantially all of which we own or control, making us a facilities-based carrier. These network assets incorporate state-of-the-art fiber optic cable, dedicated wavelengths of transmission capacity on fiber optic networks and transmission equipment capable of carrying high volumes of data, voice, video and Internet traffic. We operate in a 25-state footprint, which consists of the following states:
Arizona Indiana Minnesota North Dakota Texas
Arkansas Iowa Missouri Ohio Utah
Colorado Kansas Montana Oklahoma Washington
Idaho Louisiana Nebraska Oregon Wisconsin
Illinois Michigan New Mexico South Dakota Wyoming
Critical Accounting Policies and Estimates
Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis and Note 1 to the Consolidated Financial Statements in the McLeodUSA Annual Report on Form 10-K for the year ended December 31, 2004, describe the significant accounting estimates and policies used in preparation of the Condensed Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. There have been no significant changes in our critical accounting estimates during the first quarter of 2005. Management will continue to monitor its estimates and assumptions as well as events or changes in circumstances with respect to the reported amounts of assets, liabilities, revenues and expenses while we continue our pursuit of strategic alternatives and financial restructuring.
Liquidity and Capital Resources
Prior to August 2001, McLeodUSA grew rapidly by focusing on top-line revenue growth, which required significant capital for the construction of local and long distance voice networks and a national data network and included the acquisition of numerous businesses. By mid-2001, due to certain factors, including but not limited to complications related to our rapid growth and a general downturn in the economy and the telecommunications sector in particular, we were not meeting internal expectations in terms of profitability and cash flow.
Beginning in August of 2001, we initiated a new strategic plan that included a broad financial and operational restructuring. Our new strategy was to refocus our business to be a facilities-based communication services provider within our 25-state footprint, improve business discipline and processes and reduce our cost structure, all with the goal of profitably growing revenues and generating positive cash flow from operations. Key elements of the restructuring included abandonment of the national network plan, disposing of non-core businesses, reducing the employee base, consolidating facilities, reducing capital expenditures, and eliminating unprofitable services and unprofitable customers.
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We initiated a variety of programs across the business to significantly improve the customer experience, eliminate unneeded infrastructure and cost, improve the quality of the network and grow the top line revenues. Over the past three years we have successfully executed nearly all of these programs. The operational and certain financial results of the Company, as reported in our quarterly and annual financial releases, reflect the significant progress that has been made in the operational areas.
As an independent communications services provider, realizing the revenue growth benefits of operational excellence continues to be a challenge for the Company as we compete against large, financially strong competitors with well-known brands. Most recently, the FCC has finalized its unbundling rules and the communications industry consolidation has accelerated. With the recent merger announcements in the industry, we believe that the large telecommunications providers will likely become even more aggressive upon the closing of these transactions further challenging our ability to grow revenue.
As discussed in the "Executive Overview," we are pursuing strategic alternatives and are now actively pursuing a strategic partner or a sale of the Company while also taking steps to maintain future liquidity, including evaluating a capital restructuring to reduce the current debt level enabling the Company to achieve positive cash flow going forward.
As previously discussed, we have begun discussions with our agent bank and a group of lenders acting as a steering committee for the lenders under our Credit Facilities. The Company has entered a forbearance agreement with its lenders with respect to scheduled principal and interest payments on its loans whereby the lenders agree not to take any action as a result of non-payment by the Company of approximately $18.1 million of scheduled principal amortization and interest payments due on or before March 31, 2005 and any related events of default through May 23, 2005. We believe that by not making principal and interest payments on the Credit Facilities, cash on hand together with cash flows from operations is sufficient to maintain operations in the ordinary course without disruption of services.
2005 Cash Flow
We ended March 31, 2005 with $34.9 million of cash and cash equivalents versus $50.0 million at December 31, 2004. This decrease of $15.1 million resulted primarily from the following:
Operating Activities:
Decrease in cash from operations, excluding changes in assets and
liabilities $ (2.5 )
Payments for restructuring charges and liabilities (5.3 )
Cash provided by changes in assets and liabilities 1.7
Net cash used in operating activities (6.1 )
Investing Activities:
Capital expenditures (11.9 )
Deferred line installation costs (6.7 )
Sale of assets 9.6
Net cash used in investing activities (9.0 )
Net decrease in cash and cash equivalents $ (15.1 )
The payments for restructuring charges and liabilities relate to lease payments and lease buyouts associated with facility exits and costs in connection with our pursuit of strategic alternatives and financial restructuring. We expect our cash requirements to pay remaining lease payments and lease buyouts associated with facility exits to be less than $8 million during the remainder of 2005.
As discussed above, we have reduced our growth-related capital expenditure plan and expect to spend less than $45 million during 2005. The capital expenditure plan for the rest of 2005 remains focused on new product introduction and strategic growth initiatives. Deferred line installation costs are the result of costs required to add customers onto our network. Our deferred line installation expenditures throughout the rest of 2005 will be dependent on the rate at which we add new customers.
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During 2005, mandatory debt repayments under the Credit Agreement are scheduled to total $49.5 million. Currently, we have used a total of $108 million, including outstanding letters of credit, against the Exit Facility. As discussed above, the Company has entered a forbearance agreement with its lenders with respect to scheduled principal and interest payments on its loans whereby the lenders agree not to take any action as a result of non-payment by the Company of approximately $18.1 million of scheduled principal amortization and interest payments due on or before March 31, 2005 and any related events of default through May 23, 2005. In accordance with the forbearance agreement, on March 22, 2005, we elected not to make $2.8 million of interest payments on such loans and, as a result, an event of default occurred and we are required to accrue an additional two percentage points of interest on such loans as provided in the forbearance agreement. We believe that by not making principal and interest payments on the Credit Facilities, cash on hand together with cash flows from operations is sufficient to maintain operations in the ordinary course without disruption of services.
The Company is currently in discussions with the lender committee regarding an extension to the existing forbearance agreement. There can be no assurance that we will be able to reach an agreement with our lenders regarding a capital restructuring or continued forbearance and covenant relief prior to the end of the initial forbearance period on May 23, 2005. There also can be no assurance that we will be able to identify a suitable strategic partner or buyer or reach agreement with any such strategic partner or buyer on terms and conditions acceptable to us prior to the end of the initial forbearance period. In the event these alternatives are not available to the Company, it is likely that we will elect to forgo making future principal and interest payments to our lenders while we continue to seek an extended forbearance period or permanent capital restructuring from our lenders, or alternatively, the Company could be forced to seek protection from its creditors.
Outlook for 2005 and Future Funding Needs
We ended March 31, 2005 with $34.9 million of cash on hand. In 2005, our cash requirements will consist of new products, important capital expenditure projects, remaining lease payments and lease buyouts associated with facility exits made in 2001 and 2002 as well as changes in working capital. A combination of cash on hand, cash generated from operating activities and the proceeds from the sale of certain assets will be used to meet these ongoing cash requirements while we continue to pursue strategic alternatives and continue discussion with our lenders regarding a capital restructuring.
We have continued to take additional steps to conserve cash and improve liquidity. Actions that have been taken to generate further operational efficiencies and focused expense management resulted in a 25% reduction in SG&A expenses compared to the first quarter of 2004. We have reduced our growth related capital expenditure plan and now expect to spend approximately $45 million in 2005. The capital expenditure plan for 2005 remains focused on new product introduction and strategic growth initiatives. As a result of the actions described above we have significantly reduced our cash usage and expect to realize continuing benefits from these programs in 2005. We will continue to execute our cash management program while pursuing the strategic initiatives and capital restructuring discussions mentioned above.
There can be no assurance that we will be able to reach an agreement with our lenders regarding a capital restructuring or continued forbearance and covenant relief prior to the end of the initial forbearance period on May 23, 2005. There also can be no assurance that we will be able to identify a suitable strategic partner or buyer or reach agreement with any such strategic partner or buyer on terms and conditions acceptable to us prior to the end of the initial forbearance period. In the event these alternatives are not available to us, it is likely that we will elect to forgo making future principal and interest payments to our lenders while we continue to seek an extended forbearance period or permanent capital restructuring from our lenders, or alternatively, the Company could be forced to seek protection from its creditors.
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Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004
Revenue. Total revenue for the quarter ended March 31, 2005 declined $33.1 million, or 17%, to $160.5 million from $193.6 million for the quarter ended March 31, 2004. The following table compares our revenue for the three months ended March 31:
2005 2004 Variance
Local $ 83.4 $ 95.5 $ (12.1 )
Long distance 33.5 35.9 (2.4 )
Data services and other 29.0 35.5 (6.5 )
Carrier access 12.5 24.8 (12.3 )
Indefeasible rights of use agreements
including those that qualify as sales
type leases 2.1 1.9 0.2
$ 160.5 $ 193.6 $ (33.1 )
Total revenues declined by $33.1 million versus the first quarter of 2004 due to a continued decline in total customers, FCC mandated reduction in access rates, and lower long distance rates. Approximately $10.5 million of the decrease in local revenue is attributed to a reduction in the number of access lines in service due to customer turnover in excess of new lines sold. Retail long distance declined by approximately $8.5 million primarily as a result of a reduction in the volume of minutes. This decline was partially offset by a $6.1 million increase in wholesale long distance due to substantial volume increases related to several wholesale contracts. Access revenues have decreased $12.3 million from the first quarter of 2004 primarily due to the final phase of the FCC mandated rate reduction. Included in revenues from indefeasible rights of use in the above table is $1.3 million and $1.5 million for the quarters ended March 31, 2005 and 2004, respectively, related to on-going revenues from operating leases.
Cost of Service. Cost of service includes expenses directly associated with providing communication services to our customers. Costs classified as cost of service include, among other items, the cost of connecting customers to our network via leased facilities, the costs paid to third party providers for interconnect access and transport services, the costs of leasing components of our network facilities and the cost of fiber related to sales and leases of network facilities. Cost of service was $93.3 million for the quarter ended March 31, 2005, a decrease of $14.4 million or 13% from the quarter ended March 31, 2004. Approximately half of the decrease reflects the results of our ongoing network cost reduction efforts that began in 2002, including least cost routing, network optimization including grooms, migration of customers to the McLeodUSA network and elimination of non-profitable customers. The balance of the decrease is attributed to the reduction in revenues. The cost of fiber related to sales and leases of network facilities was not significant for the quarters ended March 31, 2005 and 2004.
Selling, general and administrative expenses. SG&A includes expenses related to sales and marketing, customer service, internal network operations and engineering, information systems and other administrative functions. SG&A expenses were $56.7 million for the first quarter of 2005, a decrease of $19 million or 25% from 2004. The decrease in SG&A year over year is primarily attributable to efficiencies realized as a result of our continuous process improvement program, which has been ongoing since early 2002 and additional actions to reduce expenses and manage cash which were implemented during 2004 and will continue throughout 2005. These combined actions have reduced non-essential expenses and reduced headcount from approximately 3,000 at March 31, 2004 to 2,300 employees at March 31, 2005.
Depreciation and amortization. Depreciation and amortization includes the depreciation of our communications network and equipment, amortization of other intangibles determined to have finite lives, and amortization over the life of the customer contract of one-time direct installation costs associated with transferring customers' local line service from the RBOCs to our local telecommunications services. Depreciation and amortization expenses were $91.3 million for the quarter ended March 31, 2005, consistent with $90.2 million recorded in the first quarter of 2004.
Restructuring charges. In the first quarter of 2005, we incurred $2.0 million in restructuring charges related to financial and legal advisors supporting our pursuit of strategic alternatives and financial restructuring.
Interest expense. Gross interest expense was $14.6 million for the quarter ended March 31, 2005, an increase of $2.8 million over the first quarter of 2004 primarily due to an almost 2% increase in the average interest rates during the period.
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Net interest expense increased by $3.3 million in the quarter ended March 31, 2005 primarily due to lower capitalized interest as a result of lower construction in progress balances during the quarter. Interest expense of approximately $0.2 million and $0.7 million was capitalized as part of our construction of our network during the quarter ended March 31, 2005 and 2004, respectively.
Inflation
We do not believe that inflation has had a significant impact on our consolidated operations.
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis provides information concerning the results of operations and our financial condition and should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto. Additionally, the following discussion and analysis should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.
Executive Overview
In the fourth quarter of 2001, we developed a revised strategic plan, which focused on profitable revenue growth in our 25-state footprint. This plan served as the basis for our recapitalization with our principal shareholder, Forstmann Little & Co., lender group, and Preferred Shareholders, as well as the structuring of the Exit Facility and continues to serve as the basis of our yearly operating plans.
In order to execute our plan we initiated a variety of programs across the business to significantly improve the customer experience, eliminate unneeded infrastructure and cost, improve the quality of the network and grow the top line revenues. Over the past three years we have successfully executed nearly all of these programs. The operational and certain financial results of the Company, as reported in its quarterly and annual financial releases, reflect the significant progress that has been made in the operational areas.
However, the Company's revenues have not increased as forecasted and have been declining since 2002. The decline in revenue was driven primarily by our program to eliminate non-profitable customers, turnover of customers to competitors in excess of new customers acquired, reduction of long distance minutes used by our customer base, reduction in access rates as mandated by the FCC, and lower prices for some of our products. We have taken significant actions to increase revenue, including introduction of new competitively priced products, reorganization of the sales operation into three distinct channels, hiring of experienced executive sales leadership, expanding the involvement of the board of directors and executive staff in the sales process and reducing customer churn. To date, these actions have not resulted in profitable new revenue growth which continues to be a challenge as we compete against large, financially strong competitors with well-known brands. With the recent merger announcements in the industry, we believe that the large telecommunications providers will likely become even more aggressive upon the closing of these transactions further challenging our ability to grow revenue.
In light of the inability of the Company to achieve new revenue growth in excess of existing customer turnover and ultimately generate enough operating cash flow to service the existing level of debt, our Board of Directors has authorized the Company to pursue strategic alternatives. In support of these initiatives, we have hired Miller Buckfire Ying & Co., LLC and Gleacher Partners, LLC as the Company's financial advisors. We are now actively pursuing a strategic partner or a
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sale of the Company while also taking steps to maintain future liquidity, including evaluating a capital restructuring to reduce the current debt level enabling the Company to achieve positive cash flow going forward.
We believe that the Company's operational excellence combined with a highly trained workforce, state of the art product offerings and expansive network could provide strategic benefits to existing multi-state and regional telecom services providers. In addition, through the extensive cost reduction programs, which have been implemented over the past several years, we believe the Company's wholesale product suite offers an attractive alternative to UNE-P providers for local access lines and competitive long distance services.
We have undertaken numerous actions to conserve cash, including the reduction of capital expenditures and SG&A, as well as the execution of extensive cost reduction efforts initiated in late 2001 and continuing through today. In addition, we been selective in managing capital expenditures and do not believe that any of the reductions in capital spending will have a material impact on our ability to service our customers.
We ended March 31, 2005 with $34.9 million of cash on hand. In light of our level of cash at year end and the payments required during the first quarter of 2005 under the Credit Facilities, we began discussions with our agent bank and a group of lenders acting as a steering committee for the lenders under our Credit Facilities. The Company entered a forbearance agreement with our lenders with respect to scheduled principal and interest payments on our loans whereby the lenders agree not to take any action as a result of non-payment by the Company of approximately $18.1 million of scheduled principal amortization and interest payments due on or before March 31, 2005 and any related events of default through May 23, 2005. In accordance with the forbearance agreement, on March 22, 2005, we elected not to make $2.8 million of interest payments on such loans and, as a result, an event of default occurred and we are required to accrue an additional two percentage points of interest on such loans as provided in the forbearance agreement. We believe that by not making principal and interest payments on the Credit Facilities, cash on hand together with cash flows from operations is sufficient to maintain operations in the ordinary course without disruption of services.
In light of the revenue outlook and the Company's on-going cash requirements, we have also begun discussions related to a capital restructuring with our agent bank and a group of lenders acting as a steering committee for the lenders under our Credit Facilities. The Company and this committee are in negotiations related to terms of a capital restructuring which includes the conversion of a significant portion of the Company's current outstanding debt into equity. Under such a restructuring, the holders of our current debt would become equity shareholders of the Company with the current holders of the preferred and common stock unlikely to receive any recovery.
The Company is currently in discussions with the lender committee regarding an extension to the existing forbearance agreement. There can be no assurance that we will be able to reach an agreement with our lenders regarding a capital restructuring or continued forbearance and covenant relief prior to the end of the initial forbearance period on May 23, 2005. There also can be no assurance that we will be able to identify a suitable strategic partner or buyer or reach agreement with any such strategic partner or buyer on terms and conditions acceptable to us prior to the end of the initial forbearance period. In the event these alternatives are not available to the Company, it is likely that we will elect to forgo making future principal and interest payments to our lenders while we continue to seek an extended forbearance period or permanent capital restructuring from our lenders, or alternatively, the Company could be forced to seek protection from its creditors.
While we continue to explore a variety of options with a view toward maximizing value for all of our stakeholders, none of the options presented to date have suggested that there will be any meaningful recovery for the Company's current preferred stock or common stockholders. Accordingly, it is unlikely that holders of the Company's preferred stock or common stock will receive any recovery in a capital restructuring or other strategic transaction.
Our financial statements for the periods ending March 31, 2005 and December 31, 2004 are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, but we may not be able to continue as a going concern. The report of our independent registered public accounting firm accompanying our financial statements in our report on Form 10-K filed March 25, 2005, contains a comment stating that there is substantial doubt as to our ability to continue as a going concern. In the event our restructuring activities are not successful and we are required to seek protection from our creditors, additional significant adjustments may be necessary in the carrying value of assets and liabilities, the revenues and expenses reported and the balance sheet classifications used.
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Overview of Our Business
We derive our revenue from our core telecommunications and related communications services. These include local and long distance services; local data services such as dial-up and dedicated Internet access services, using DSL, cable modem and dedicated T1 access; integrated access services, which link voice and data lines together on one high-speed connection; conference calling services; wireless services; bandwidth and network facilities leasing, sales and services, including access services; facilities and services dedicated for a particular customer's use; advanced communications services for larger businesses such as frame relay, private line, and ISDN; and value-added services such as virtual private networks, hosted Exchange and shared web hosting.
As of March 31, 2005, we operated a network with 699 access nodes collocated in RBOC central offices. We serve our customers by using various loop/access unbundled network elements ("UNEs") provided by the RBOCs and aggregating them through our access nodes. In turn, our access nodes are interconnected through approximately 39 service node locations where our switching/routing systems reside. In a metropolitan area, access node to service node connectivity is based either on our own fiber facilities or on UNE transport from the RBOCs. Our service nodes are located in most of the major metropolitan areas across our footprint. These service nodes are in turn interconnected by our high capacity, inter-city core network. The underlying transport for our core network is based either on our own fiber or on leased capacity from interexchange carriers.
To develop these networks, we have assembled a collection of metro and inter-city network assets in our 25-state footprint, substantially all of which we own or control, making us a facilities-based carrier. These network assets incorporate state-of-the-art fiber optic cable, dedicated wavelengths of transmission capacity on fiber optic networks and transmission equipment capable of carrying high volumes of data, voice, video and Internet traffic. We operate in a 25-state footprint, which consists of the following states:
Arizona Indiana Minnesota North Dakota Texas
Arkansas Iowa Missouri Ohio Utah
Colorado Kansas Montana Oklahoma Washington
Idaho Louisiana Nebraska Oregon Wisconsin
Illinois Michigan New Mexico South Dakota Wyoming
Critical Accounting Policies and Estimates
Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis and Note 1 to the Consolidated Financial Statements in the McLeodUSA Annual Report on Form 10-K for the year ended December 31, 2004, describe the significant accounting estimates and policies used in preparation of the Condensed Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. There have been no significant changes in our critical accounting estimates during the first quarter of 2005. Management will continue to monitor its estimates and assumptions as well as events or changes in circumstances with respect to the reported amounts of assets, liabilities, revenues and expenses while we continue our pursuit of strategic alternatives and financial restructuring.
Liquidity and Capital Resources
Prior to August 2001, McLeodUSA grew rapidly by focusing on top-line revenue growth, which required significant capital for the construction of local and long distance voice networks and a national data network and included the acquisition of numerous businesses. By mid-2001, due to certain factors, including but not limited to complications related to our rapid growth and a general downturn in the economy and the telecommunications sector in particular, we were not meeting internal expectations in terms of profitability and cash flow.
Beginning in August of 2001, we initiated a new strategic plan that included a broad financial and operational restructuring. Our new strategy was to refocus our business to be a facilities-based communication services provider within our 25-state footprint, improve business discipline and processes and reduce our cost structure, all with the goal of profitably growing revenues and generating positive cash flow from operations. Key elements of the restructuring included abandonment of the national network plan, disposing of non-core businesses, reducing the employee base, consolidating facilities, reducing capital expenditures, and eliminating unprofitable services and unprofitable customers.
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We initiated a variety of programs across the business to significantly improve the customer experience, eliminate unneeded infrastructure and cost, improve the quality of the network and grow the top line revenues. Over the past three years we have successfully executed nearly all of these programs. The operational and certain financial results of the Company, as reported in our quarterly and annual financial releases, reflect the significant progress that has been made in the operational areas.
As an independent communications services provider, realizing the revenue growth benefits of operational excellence continues to be a challenge for the Company as we compete against large, financially strong competitors with well-known brands. Most recently, the FCC has finalized its unbundling rules and the communications industry consolidation has accelerated. With the recent merger announcements in the industry, we believe that the large telecommunications providers will likely become even more aggressive upon the closing of these transactions further challenging our ability to grow revenue.
As discussed in the "Executive Overview," we are pursuing strategic alternatives and are now actively pursuing a strategic partner or a sale of the Company while also taking steps to maintain future liquidity, including evaluating a capital restructuring to reduce the current debt level enabling the Company to achieve positive cash flow going forward.
As previously discussed, we have begun discussions with our agent bank and a group of lenders acting as a steering committee for the lenders under our Credit Facilities. The Company has entered a forbearance agreement with its lenders with respect to scheduled principal and interest payments on its loans whereby the lenders agree not to take any action as a result of non-payment by the Company of approximately $18.1 million of scheduled principal amortization and interest payments due on or before March 31, 2005 and any related events of default through May 23, 2005. We believe that by not making principal and interest payments on the Credit Facilities, cash on hand together with cash flows from operations is sufficient to maintain operations in the ordinary course without disruption of services.
2005 Cash Flow
We ended March 31, 2005 with $34.9 million of cash and cash equivalents versus $50.0 million at December 31, 2004. This decrease of $15.1 million resulted primarily from the following:
Operating Activities:
Decrease in cash from operations, excluding changes in assets and
liabilities $ (2.5 )
Payments for restructuring charges and liabilities (5.3 )
Cash provided by changes in assets and liabilities 1.7
Net cash used in operating activities (6.1 )
Investing Activities:
Capital expenditures (11.9 )
Deferred line installation costs (6.7 )
Sale of assets 9.6
Net cash used in investing activities (9.0 )
Net decrease in cash and cash equivalents $ (15.1 )
The payments for restructuring charges and liabilities relate to lease payments and lease buyouts associated with facility exits and costs in connection with our pursuit of strategic alternatives and financial restructuring. We expect our cash requirements to pay remaining lease payments and lease buyouts associated with facility exits to be less than $8 million during the remainder of 2005.
As discussed above, we have reduced our growth-related capital expenditure plan and expect to spend less than $45 million during 2005. The capital expenditure plan for the rest of 2005 remains focused on new product introduction and strategic growth initiatives. Deferred line installation costs are the result of costs required to add customers onto our network. Our deferred line installation expenditures throughout the rest of 2005 will be dependent on the rate at which we add new customers.
--------------------------------------------------------------------------------
During 2005, mandatory debt repayments under the Credit Agreement are scheduled to total $49.5 million. Currently, we have used a total of $108 million, including outstanding letters of credit, against the Exit Facility. As discussed above, the Company has entered a forbearance agreement with its lenders with respect to scheduled principal and interest payments on its loans whereby the lenders agree not to take any action as a result of non-payment by the Company of approximately $18.1 million of scheduled principal amortization and interest payments due on or before March 31, 2005 and any related events of default through May 23, 2005. In accordance with the forbearance agreement, on March 22, 2005, we elected not to make $2.8 million of interest payments on such loans and, as a result, an event of default occurred and we are required to accrue an additional two percentage points of interest on such loans as provided in the forbearance agreement. We believe that by not making principal and interest payments on the Credit Facilities, cash on hand together with cash flows from operations is sufficient to maintain operations in the ordinary course without disruption of services.
The Company is currently in discussions with the lender committee regarding an extension to the existing forbearance agreement. There can be no assurance that we will be able to reach an agreement with our lenders regarding a capital restructuring or continued forbearance and covenant relief prior to the end of the initial forbearance period on May 23, 2005. There also can be no assurance that we will be able to identify a suitable strategic partner or buyer or reach agreement with any such strategic partner or buyer on terms and conditions acceptable to us prior to the end of the initial forbearance period. In the event these alternatives are not available to the Company, it is likely that we will elect to forgo making future principal and interest payments to our lenders while we continue to seek an extended forbearance period or permanent capital restructuring from our lenders, or alternatively, the Company could be forced to seek protection from its creditors.
Outlook for 2005 and Future Funding Needs
We ended March 31, 2005 with $34.9 million of cash on hand. In 2005, our cash requirements will consist of new products, important capital expenditure projects, remaining lease payments and lease buyouts associated with facility exits made in 2001 and 2002 as well as changes in working capital. A combination of cash on hand, cash generated from operating activities and the proceeds from the sale of certain assets will be used to meet these ongoing cash requirements while we continue to pursue strategic alternatives and continue discussion with our lenders regarding a capital restructuring.
We have continued to take additional steps to conserve cash and improve liquidity. Actions that have been taken to generate further operational efficiencies and focused expense management resulted in a 25% reduction in SG&A expenses compared to the first quarter of 2004. We have reduced our growth related capital expenditure plan and now expect to spend approximately $45 million in 2005. The capital expenditure plan for 2005 remains focused on new product introduction and strategic growth initiatives. As a result of the actions described above we have significantly reduced our cash usage and expect to realize continuing benefits from these programs in 2005. We will continue to execute our cash management program while pursuing the strategic initiatives and capital restructuring discussions mentioned above.
There can be no assurance that we will be able to reach an agreement with our lenders regarding a capital restructuring or continued forbearance and covenant relief prior to the end of the initial forbearance period on May 23, 2005. There also can be no assurance that we will be able to identify a suitable strategic partner or buyer or reach agreement with any such strategic partner or buyer on terms and conditions acceptable to us prior to the end of the initial forbearance period. In the event these alternatives are not available to us, it is likely that we will elect to forgo making future principal and interest payments to our lenders while we continue to seek an extended forbearance period or permanent capital restructuring from our lenders, or alternatively, the Company could be forced to seek protection from its creditors.
--------------------------------------------------------------------------------
Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004
Revenue. Total revenue for the quarter ended March 31, 2005 declined $33.1 million, or 17%, to $160.5 million from $193.6 million for the quarter ended March 31, 2004. The following table compares our revenue for the three months ended March 31:
2005 2004 Variance
Local $ 83.4 $ 95.5 $ (12.1 )
Long distance 33.5 35.9 (2.4 )
Data services and other 29.0 35.5 (6.5 )
Carrier access 12.5 24.8 (12.3 )
Indefeasible rights of use agreements
including those that qualify as sales
type leases 2.1 1.9 0.2
$ 160.5 $ 193.6 $ (33.1 )
Total revenues declined by $33.1 million versus the first quarter of 2004 due to a continued decline in total customers, FCC mandated reduction in access rates, and lower long distance rates. Approximately $10.5 million of the decrease in local revenue is attributed to a reduction in the number of access lines in service due to customer turnover in excess of new lines sold. Retail long distance declined by approximately $8.5 million primarily as a result of a reduction in the volume of minutes. This decline was partially offset by a $6.1 million increase in wholesale long distance due to substantial volume increases related to several wholesale contracts. Access revenues have decreased $12.3 million from the first quarter of 2004 primarily due to the final phase of the FCC mandated rate reduction. Included in revenues from indefeasible rights of use in the above table is $1.3 million and $1.5 million for the quarters ended March 31, 2005 and 2004, respectively, related to on-going revenues from operating leases.
Cost of Service. Cost of service includes expenses directly associated with providing communication services to our customers. Costs classified as cost of service include, among other items, the cost of connecting customers to our network via leased facilities, the costs paid to third party providers for interconnect access and transport services, the costs of leasing components of our network facilities and the cost of fiber related to sales and leases of network facilities. Cost of service was $93.3 million for the quarter ended March 31, 2005, a decrease of $14.4 million or 13% from the quarter ended March 31, 2004. Approximately half of the decrease reflects the results of our ongoing network cost reduction efforts that began in 2002, including least cost routing, network optimization including grooms, migration of customers to the McLeodUSA network and elimination of non-profitable customers. The balance of the decrease is attributed to the reduction in revenues. The cost of fiber related to sales and leases of network facilities was not significant for the quarters ended March 31, 2005 and 2004.
Selling, general and administrative expenses. SG&A includes expenses related to sales and marketing, customer service, internal network operations and engineering, information systems and other administrative functions. SG&A expenses were $56.7 million for the first quarter of 2005, a decrease of $19 million or 25% from 2004. The decrease in SG&A year over year is primarily attributable to efficiencies realized as a result of our continuous process improvement program, which has been ongoing since early 2002 and additional actions to reduce expenses and manage cash which were implemented during 2004 and will continue throughout 2005. These combined actions have reduced non-essential expenses and reduced headcount from approximately 3,000 at March 31, 2004 to 2,300 employees at March 31, 2005.
Depreciation and amortization. Depreciation and amortization includes the depreciation of our communications network and equipment, amortization of other intangibles determined to have finite lives, and amortization over the life of the customer contract of one-time direct installation costs associated with transferring customers' local line service from the RBOCs to our local telecommunications services. Depreciation and amortization expenses were $91.3 million for the quarter ended March 31, 2005, consistent with $90.2 million recorded in the first quarter of 2004.
Restructuring charges. In the first quarter of 2005, we incurred $2.0 million in restructuring charges related to financial and legal advisors supporting our pursuit of strategic alternatives and financial restructuring.
Interest expense. Gross interest expense was $14.6 million for the quarter ended March 31, 2005, an increase of $2.8 million over the first quarter of 2004 primarily due to an almost 2% increase in the average interest rates during the period.
--------------------------------------------------------------------------------
Net interest expense increased by $3.3 million in the quarter ended March 31, 2005 primarily due to lower capitalized interest as a result of lower construction in progress balances during the quarter. Interest expense of approximately $0.2 million and $0.7 million was capitalized as part of our construction of our network during the quarter ended March 31, 2005 and 2004, respectively.
Inflation
We do not believe that inflation has had a significant impact on our consolidated operations.
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pois....
McLeodUSA Reports First Quarter 2005 Results
Wednesday April 27, 7:03 pm ET
CEDAR RAPIDS, Iowa--(BUSINESS WIRE)--April 27, 2005--McLeodUSA Incorporated (Nasdaq:MCLD - News):
Continued strong operational performance with slight decline in revenues
Continuing pursuit of strategic partner or sale of the Company
Discussions for debt restructuring continuing with Lender Committee where recovery for preferred or common stockholders is unlikely
McLeodUSA Incorporated (Nasdaq:MCLD - News), one of the nation's largest independent, competitive telecommunications services providers, today reported financial and operating results for the quarter ended March 31, 2005.
Total revenues for the quarter ended March 31, 2005 were $160.5 million compared to $162.6 million in the fourth quarter of 2004 and $193.6 million in the first quarter of 2004. Revenue for the quarter declined slightly from the fourth quarter of 2004. In the first quarter of 2005, long distance revenue per customer increased 4.6% due to higher wholesale volume, local service revenue per customer was flat compared to the fourth quarter of 2004 and private line and data revenue per customer declined 1.6%.
Gross margin for the first quarter of 2005 was $67.2 million compared to $75.8 million in the fourth quarter of 2004 and $86.0 million in the first quarter of 2004. Gross margin as a percentage of revenue for the first quarter was 41.9%, compared with 46.6% in the fourth quarter of 2004 and 44.4% in the first quarter of 2004. Gross margin in the fourth quarter of 2004 included approximately $6.2 million of rate settlements, excluding these amounts would have resulted in a gross margin as a percentage of revenue of 42.8%.
SG&A expenses for the first quarter of 2005 were $56.7 million compared to $61.7 million in the fourth quarter of 2004 and $75.7 million in the first quarter of 2004 as the Company continues to realize the benefits of its ongoing process improvement programs and other actions taken to reduce non-essential expenses. Adjusted EBITDA in the first quarter of 2005 was $10.5 million compared to $14.1 million in the fourth quarter of 2004, which included the $6.2 million of rate settlements, and $10.3 million in the first quarter of 2004. In the first quarter, the Company incurred $2.0 million in restructuring charges related to financial and legal advisors supporting the Company's pursuit of strategic alternatives and financial restructuring. Net loss from continuing operations for the first quarter of 2005 was $(97.5) million, or a loss per common share of $(0.32), versus $(98.1) million in the fourth quarter of 2004 and $(91.4) million in the first quarter of 2004.
The Company's excellent operational performance continued in the first quarter of 2005. The customer satisfaction rating for the quarter was 94%, billing accuracy remained at 99.9% and the Company continued to consistently achieve 99.999% network reliability, all in line with Company goals.
Customer platform mix at the end of the first quarter was 72% UNE-L, 4% resale and 24% UNE-P versus 67%, 5% and 28%, respectively, at the end of the first quarter of 2004. Business customer line turnover was 2.0% in the first quarter of 2005 compared to 2.0% in the fourth quarter of 2004 and 1.9% in the first quarter of 2004. Total customer line turnover in the first quarter was 2.1% versus 2.2% and 2.3% in the fourth and first quarters of 2004, respectively.
The Company ended the quarter with $34.9 million of cash on hand. Total capital expenditures for the first quarter of 2005 were $11.9 million principally in support of the Company's VoIP Dynamic Integrated Access rollout and sustaining the existing voice and data networks. The Company was in full compliance with the terms of the forbearance agreement it entered into with its lenders in the first quarter of 2005. In light of the current end date of the forbearance period, the Company has classified its entire debt balance as current.
Pursuit of Strategic Alternatives
As an independent communications services provider, realizing the revenue growth benefits of operational excellence continues to be a challenge for the Company as it competes against large, financially strong competitors with well-known brands. Most recently, the FCC has finalized its unbundling rules and the communications industry consolidation has accelerated. With the recent merger announcements in the industry, the Company believes that the large telecommunications providers will likely become even more aggressive upon the closing of these transactions further challenging the Company's ability to grow revenue.
As previously announced, the Company's Board of Directors has authorized the Company to pursue strategic alternatives. The Company along with its financial advisors is continuing to actively pursue a strategic partner or a sale of the Company while also taking steps to maintain future liquidity, including the continuing evaluation of a capital restructuring to reduce the current debt level.
The Company believes that its operational excellence combined with a highly trained workforce, state of the art product offerings and expansive network could provide strategic benefits to existing multi-state and regional telecom services providers. In addition, through the extensive cost reduction programs, which have been implemented over the past several years, the Company believes its wholesale product suite offers an attractive alternative to UNE-P providers for local access lines and competitive long distance services.
In March of 2005, the Company entered into a forbearance agreement with its Lenders with respect to scheduled principal and interest payments on its loans under which the Lenders have agreed not to take any action as a result of non-payment by the Company of approximately $18.1 million of scheduled principal amortization and interest payments due on or before March 31, 2005 and any related events of default through May 23, 2005.
Financial Restructuring
The Company is continuing discussions related to a capital restructuring with its agent bank and a group of lenders acting as a steering committee for the lenders under its credit facilities. The Company and this committee are in negotiations related to terms of a capital restructuring which includes the conversion of a significant portion of the Company's current outstanding debt into equity. Under such a restructuring, the holders of the Company's current debt would become equity shareholders of the Company with the current holders of the preferred and common stock unlikely to receive any recovery.
There can be no assurance that the Company will be able to reach an agreement with its lenders regarding a capital restructuring or continued forbearance and covenant relief prior to the end of the initial forbearance period on May 23, 2005. There also can be no assurance that the Company will be able to identify a suitable strategic partner or buyer or reach agreement with any such strategic partner or buyer on terms and conditions acceptable to the Company prior to the end of the initial forbearance period. In the event these alternatives are not available to the Company, it is likely that the Company will elect to forgo making future principal and interest payments to its lenders while it continues to seek an extended forbearance period or permanent capital restructuring from its lenders, or alternatively, the Company could be forced to seek protection from its creditors.
While the Company continues to explore a variety of options with a view toward maximizing value for all of its stakeholders, none of the options presented to date have suggested that there will be any meaningful recovery for the Company's current preferred stock or common stock holders. Accordingly, it is unlikely that holders of the Company's preferred stock or common stock will receive any recovery in a capital restructuring or other strategic transaction.
The Company believes that by not making principal and interest payments on the credit facilities, cash on hand together with cash flows from operations is sufficient to maintain operations in the ordinary course without disruption of services. The Company does not expect that the exploration of the alternatives described above will negatively impact its customers or vendors. The Company remains committed to continuing to provide the highest level of service to its customers and to maintaining its strong supplier relationships.
Other highlights in the quarter include:
The Company has continued the rollout of its Preferred Advantage® Dynamic Integrated Access, which utilizes the next generation Voice-over-Internet Protocol (VoIP) switching architecture. The service has now been initiated in 33 markets to date and the Company's efforts are on track to provide service in 37 markets by April 30, 2005. The McLeodUSA Integrated Access product uses a secure IP network to offer integrated voice and data communications services over a single T-1 facility to customer locations. Customers receive up to 1.544 Mbps Internet access, high quality voice service, 17 local calling features, the convenience of an easy-to-use web-based control panel, and the ability to add or change features and generate reports.
About McLeodUSA
McLeodUSA provides integrated communications services, including local services, in 25 Midwest, Southwest, Northwest and Rocky Mountain states. The Company is a facilities-based telecommunications provider with, as of March 31, 2005, 38 ATM switches, 39 voice switches, 699 collocations, 432 DSLAMs and approximately 2,300 employees. As of April 16, 2002, Forstmann Little & Co. became a 58% shareholder in the Company. Visit the Company's Web site at www.mcleodusa.com
(1) Non-GAAP Financial Measures
To provide further clarification, the Company has begun using the term
Adjusted EBITDA as a replacement for EBITDA. Adjusted EBITDA is a
non-GAAP financial measure used by management to evaluate the
effectiveness of the Company's operating performance and to enhance
the comparability between periods. EBITDA is an acronym for earnings
before interest, taxes, depreciation and amortization. Adjusted
EBITDA, as defined by McLeodUSA, further removes the effects of other
income and expense, restructuring and impairment charges. Management
removes the effects of other income and expense, and restructuring and
impairment charges from Adjusted EBITDA because it does not believe
that such items are representative of the core operating results of
the Company's ongoing competitive telecommunications activities. For a
facilities-based telecommunications services provider like McLeodUSA
with high initial capital investments required in order to gain entry
to the industry, management believes that omitting depreciation and
amortization from Adjusted EBITDA provides a relevant and useful
measure of the Company's core operating performance and enhances
comparability between periods. Management believes that non-GAAP
measures such as Adjusted EBITDA are commonly reported and used by
analysts, investors and other interested parties in the
telecommunications industry. Adjusted EBITDA is reconciled to net
loss, the most comparable GAAP measure, within the table presented
below. McLeodUSA's use of Adjusted EBITDA may not be comparable to
similarly titled measures used by other companies in the
telecommunications industry. The use of Adjusted EBITDA is not
intended to replace measures of financial performance reported in
accordance with accounting principles generally accepted in the United
States.
Three months ended
--------------------------
(In millions) Mar 31, Dec 31, Mar 31,
2005 2004 2004
-------- -------- --------
Reconciliation of Adjusted EBITDA:
Net loss................................... $(97.5) $(98.1) $(91.4)
Interest expense........................... 14.4 13.6 11.1
Other non-operating expense................ 0.3 9.2 0.4
Restructuring charges...................... 2.0 - -
Depreciation and amortization.............. 91.3 89.4 90.2
-------- -------- --------
Adjusted EBITDA........................ $10.5 $14.1 $10.3
======== ======== ========
Gross margin is another financial measure that management uses to
evaluate operating performance. Gross margin, which is calculated as
revenues less cost of service, excludes depreciation and amortization
expenses. Cost of service includes expenses directly associated with
providing telecommunications services to its customers. Costs
classified as cost of service include, among other items, the cost of
connecting customers to the McLeodUSA network via leased facilities,
the costs paid to third party providers for interconnect access and
transport services, the costs of leasing components of network
facilities and the cost of fiber related to sales and leases of
network facilities. Gross margin is reconciled to net loss, the most
comparable GAAP measure, within the table presented below.
Three months ended
--------------------------
(In millions) Mar 31, Dec 31, Mar 31,
2005 2004 2004
-------- -------- --------
Reconciliation of Gross Margin:
Net loss................................... $(97.5) $(98.1) $(91.4)
Interest expense........................... 14.4 13.6 11.1
Other non-operating expense................ 0.3 9.2 0.4
Restructuring charges...................... 2.0 - -
Depreciation and amortization.............. 91.3 89.4 90.2
Selling, general and administrative........ 56.7 61.7 75.7
-------- -------- --------
Gross Margin........................... $67.2 $75.8 $86.0
======== ======== ========
Some of the statements in this press release include statements about
our future expectations. Statements that are not historical facts are
"forward-looking statements" for the purpose of the safe harbor
provided by Section 21E of the Exchange Act and Section 27A of the
Securities Act. Such statements may include projections of financial
and operational results and goals, including revenue, EBITDA, Adjusted
EBITDA, profitability, savings and cash. In some cases, you can
identify these so-called "forward-looking statements" by our use of
words such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "project," "intend" or "potential"
or the negative of those words and other comparable words. These
forward-looking statements are subject to known as well as unknown
risks and uncertainties that may cause actual results to differ
materially from our expectations. Our expectations are based on
various factors and assumptions and reflect only our predictions.
Factors that could cause actual results to differ materially from the
forward-looking statement include technological, regulatory, public
policy or other developments in our industry, availability and
adequacy of capital resources, our ability to implement a strategic
transaction or a capital restructuring, current and future economic
conditions, the existence of strategic alliances, our ability to
generate cash, our ability to implement process and network
improvements, our ability to attract and retain customers, our ability
to migrate traffic to appropriate platforms and changes in the
competitive climate in which we operate. These and other risks are
described in more detail in our most recent Annual Report on Form 10-K
filed with the SEC. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of future
events, new information or otherwise.
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(UNAUDITED)
Three months ended
-------------------
March 31, March 31,
2005 2004
-------------------
Revenue $160.5 $193.6
Operating expenses:
Cost of service (exclusive of depreciation and
amortization shown separately below) 93.3 107.6
Selling, general and administrative 56.7 75.7
Depreciation and amortization 91.3 90.2
Restructuring charges 2.0 -
--------- ---------
Total operating expenses 243.3 273.5
--------- ---------
Operating loss (82.8) (79.9)
--------- ---------
Non-operating expense:
Interest expense, net of amounts capitalized (14.4) (11.1)
Other expense (0.3) (0.4)
--------- ---------
Total non-operating expense (14.7) (11.5)
--------- ---------
Net loss $(97.5) $(91.4)
--------- ---------
Preferred stock dividend (0.5) (0.8)
--------- ---------
Net loss applicable to common shares $(98.0) $(92.2)
========= =========
Basic and diluted loss per common share $(0.32) $(0.32)
========= =========
Weighted average common shares outstanding 308.4 291.0
========= =========
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)
March 31, December 31,
2005 2004
------------ ------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $34.9 $50.0
Trade receivables, net 57.0 58.6
Prepaid expense and other 19.8 19.9
------------ ------------
Total Current Assets 111.7 128.5
------------ ------------
Non-current Assets
Property and equipment, net 660.1 728.7
Other intangibles, net 135.4 144.9
Other non-current assets 22.4 23.7
------------ ------------
Total Non-current Assets 817.9 897.3
------------ ------------
Total Assets $929.6 $1,025.8
============ ============
LIABILITIES AND EQUITY
Current Liabilities
Current maturities of long-term debt $777.3 $49.5
Accounts payable 37.5 39.6
Deferred revenue, current portion 6.4 6.8
Other current liabilities 99.0 95.1
------------ ------------
Total Current Liabilities 920.2 191.0
------------ ------------
Long-term Liabilities
Long-term debt, excluding current
maturities - 727.8
Deferred revenue less current portion 16.9 17.0
Other long-term liabilities 61.5 61.4
------------ ------------
Total Long-term Liabilities 78.4 806.2
------------ ------------
Redeemable Convertible Preferred Stock 58.6 75.4
Stockholders' Deficit (127.6) (46.8)
------------ ------------
Total Liabilities and Equity $929.6 $1,025.8
============ ============
McLeodUSA Incorporated and Subsidiaries
Selected Telecommunications Statistical Data
--------- --------- ---------
3/31/04 12/31/04 3/31/05
--------- --------- ---------
Active central offices 1,708 1,683 1,647
Collocations 667 699 699
Switches owned
CO / LD 40 39 39
ATM / Frame Relay 38 38 38
DSLAMs installed 435 432 432
Total Competitive:
Customers 381,791 348,258 337,358
Access Units / Customer 2.8 2.8 2.8
Revenue per Customer / Month
Local $106.55 $99.69 $100.51
Long distance 31.56 31.84 33.29
Private line & data 31.61 33.01 32.49
--------- --------- ---------
Total $169.72 $164.54 $166.29
========= ========= =========
Platform Distribution
Resale 5% 4% 4%
UNE-M/P 28% 25% 24%
UNE-L 67% 71% 72%
--------- --------- ---------
Total 100% 100% 100%
========= ========= =========
--------------------------------------------------------------------------------
Contact:
McLeodUSA Incorporated, Cedar Rapids
Investor Contact:
Bryce Nemitz, 319-790-7800
or
Press Contact:
Bruce Tiemann, 319-790-7800
--------------------------------------------------------------------------------
Source: McLeodUSA Incorporated
Wednesday April 27, 7:03 pm ET
CEDAR RAPIDS, Iowa--(BUSINESS WIRE)--April 27, 2005--McLeodUSA Incorporated (Nasdaq:MCLD - News):
Continued strong operational performance with slight decline in revenues
Continuing pursuit of strategic partner or sale of the Company
Discussions for debt restructuring continuing with Lender Committee where recovery for preferred or common stockholders is unlikely
McLeodUSA Incorporated (Nasdaq:MCLD - News), one of the nation's largest independent, competitive telecommunications services providers, today reported financial and operating results for the quarter ended March 31, 2005.
Total revenues for the quarter ended March 31, 2005 were $160.5 million compared to $162.6 million in the fourth quarter of 2004 and $193.6 million in the first quarter of 2004. Revenue for the quarter declined slightly from the fourth quarter of 2004. In the first quarter of 2005, long distance revenue per customer increased 4.6% due to higher wholesale volume, local service revenue per customer was flat compared to the fourth quarter of 2004 and private line and data revenue per customer declined 1.6%.
Gross margin for the first quarter of 2005 was $67.2 million compared to $75.8 million in the fourth quarter of 2004 and $86.0 million in the first quarter of 2004. Gross margin as a percentage of revenue for the first quarter was 41.9%, compared with 46.6% in the fourth quarter of 2004 and 44.4% in the first quarter of 2004. Gross margin in the fourth quarter of 2004 included approximately $6.2 million of rate settlements, excluding these amounts would have resulted in a gross margin as a percentage of revenue of 42.8%.
SG&A expenses for the first quarter of 2005 were $56.7 million compared to $61.7 million in the fourth quarter of 2004 and $75.7 million in the first quarter of 2004 as the Company continues to realize the benefits of its ongoing process improvement programs and other actions taken to reduce non-essential expenses. Adjusted EBITDA in the first quarter of 2005 was $10.5 million compared to $14.1 million in the fourth quarter of 2004, which included the $6.2 million of rate settlements, and $10.3 million in the first quarter of 2004. In the first quarter, the Company incurred $2.0 million in restructuring charges related to financial and legal advisors supporting the Company's pursuit of strategic alternatives and financial restructuring. Net loss from continuing operations for the first quarter of 2005 was $(97.5) million, or a loss per common share of $(0.32), versus $(98.1) million in the fourth quarter of 2004 and $(91.4) million in the first quarter of 2004.
The Company's excellent operational performance continued in the first quarter of 2005. The customer satisfaction rating for the quarter was 94%, billing accuracy remained at 99.9% and the Company continued to consistently achieve 99.999% network reliability, all in line with Company goals.
Customer platform mix at the end of the first quarter was 72% UNE-L, 4% resale and 24% UNE-P versus 67%, 5% and 28%, respectively, at the end of the first quarter of 2004. Business customer line turnover was 2.0% in the first quarter of 2005 compared to 2.0% in the fourth quarter of 2004 and 1.9% in the first quarter of 2004. Total customer line turnover in the first quarter was 2.1% versus 2.2% and 2.3% in the fourth and first quarters of 2004, respectively.
The Company ended the quarter with $34.9 million of cash on hand. Total capital expenditures for the first quarter of 2005 were $11.9 million principally in support of the Company's VoIP Dynamic Integrated Access rollout and sustaining the existing voice and data networks. The Company was in full compliance with the terms of the forbearance agreement it entered into with its lenders in the first quarter of 2005. In light of the current end date of the forbearance period, the Company has classified its entire debt balance as current.
Pursuit of Strategic Alternatives
As an independent communications services provider, realizing the revenue growth benefits of operational excellence continues to be a challenge for the Company as it competes against large, financially strong competitors with well-known brands. Most recently, the FCC has finalized its unbundling rules and the communications industry consolidation has accelerated. With the recent merger announcements in the industry, the Company believes that the large telecommunications providers will likely become even more aggressive upon the closing of these transactions further challenging the Company's ability to grow revenue.
As previously announced, the Company's Board of Directors has authorized the Company to pursue strategic alternatives. The Company along with its financial advisors is continuing to actively pursue a strategic partner or a sale of the Company while also taking steps to maintain future liquidity, including the continuing evaluation of a capital restructuring to reduce the current debt level.
The Company believes that its operational excellence combined with a highly trained workforce, state of the art product offerings and expansive network could provide strategic benefits to existing multi-state and regional telecom services providers. In addition, through the extensive cost reduction programs, which have been implemented over the past several years, the Company believes its wholesale product suite offers an attractive alternative to UNE-P providers for local access lines and competitive long distance services.
In March of 2005, the Company entered into a forbearance agreement with its Lenders with respect to scheduled principal and interest payments on its loans under which the Lenders have agreed not to take any action as a result of non-payment by the Company of approximately $18.1 million of scheduled principal amortization and interest payments due on or before March 31, 2005 and any related events of default through May 23, 2005.
Financial Restructuring
The Company is continuing discussions related to a capital restructuring with its agent bank and a group of lenders acting as a steering committee for the lenders under its credit facilities. The Company and this committee are in negotiations related to terms of a capital restructuring which includes the conversion of a significant portion of the Company's current outstanding debt into equity. Under such a restructuring, the holders of the Company's current debt would become equity shareholders of the Company with the current holders of the preferred and common stock unlikely to receive any recovery.
There can be no assurance that the Company will be able to reach an agreement with its lenders regarding a capital restructuring or continued forbearance and covenant relief prior to the end of the initial forbearance period on May 23, 2005. There also can be no assurance that the Company will be able to identify a suitable strategic partner or buyer or reach agreement with any such strategic partner or buyer on terms and conditions acceptable to the Company prior to the end of the initial forbearance period. In the event these alternatives are not available to the Company, it is likely that the Company will elect to forgo making future principal and interest payments to its lenders while it continues to seek an extended forbearance period or permanent capital restructuring from its lenders, or alternatively, the Company could be forced to seek protection from its creditors.
While the Company continues to explore a variety of options with a view toward maximizing value for all of its stakeholders, none of the options presented to date have suggested that there will be any meaningful recovery for the Company's current preferred stock or common stock holders. Accordingly, it is unlikely that holders of the Company's preferred stock or common stock will receive any recovery in a capital restructuring or other strategic transaction.
The Company believes that by not making principal and interest payments on the credit facilities, cash on hand together with cash flows from operations is sufficient to maintain operations in the ordinary course without disruption of services. The Company does not expect that the exploration of the alternatives described above will negatively impact its customers or vendors. The Company remains committed to continuing to provide the highest level of service to its customers and to maintaining its strong supplier relationships.
Other highlights in the quarter include:
The Company has continued the rollout of its Preferred Advantage® Dynamic Integrated Access, which utilizes the next generation Voice-over-Internet Protocol (VoIP) switching architecture. The service has now been initiated in 33 markets to date and the Company's efforts are on track to provide service in 37 markets by April 30, 2005. The McLeodUSA Integrated Access product uses a secure IP network to offer integrated voice and data communications services over a single T-1 facility to customer locations. Customers receive up to 1.544 Mbps Internet access, high quality voice service, 17 local calling features, the convenience of an easy-to-use web-based control panel, and the ability to add or change features and generate reports.
About McLeodUSA
McLeodUSA provides integrated communications services, including local services, in 25 Midwest, Southwest, Northwest and Rocky Mountain states. The Company is a facilities-based telecommunications provider with, as of March 31, 2005, 38 ATM switches, 39 voice switches, 699 collocations, 432 DSLAMs and approximately 2,300 employees. As of April 16, 2002, Forstmann Little & Co. became a 58% shareholder in the Company. Visit the Company's Web site at www.mcleodusa.com
(1) Non-GAAP Financial Measures
To provide further clarification, the Company has begun using the term
Adjusted EBITDA as a replacement for EBITDA. Adjusted EBITDA is a
non-GAAP financial measure used by management to evaluate the
effectiveness of the Company's operating performance and to enhance
the comparability between periods. EBITDA is an acronym for earnings
before interest, taxes, depreciation and amortization. Adjusted
EBITDA, as defined by McLeodUSA, further removes the effects of other
income and expense, restructuring and impairment charges. Management
removes the effects of other income and expense, and restructuring and
impairment charges from Adjusted EBITDA because it does not believe
that such items are representative of the core operating results of
the Company's ongoing competitive telecommunications activities. For a
facilities-based telecommunications services provider like McLeodUSA
with high initial capital investments required in order to gain entry
to the industry, management believes that omitting depreciation and
amortization from Adjusted EBITDA provides a relevant and useful
measure of the Company's core operating performance and enhances
comparability between periods. Management believes that non-GAAP
measures such as Adjusted EBITDA are commonly reported and used by
analysts, investors and other interested parties in the
telecommunications industry. Adjusted EBITDA is reconciled to net
loss, the most comparable GAAP measure, within the table presented
below. McLeodUSA's use of Adjusted EBITDA may not be comparable to
similarly titled measures used by other companies in the
telecommunications industry. The use of Adjusted EBITDA is not
intended to replace measures of financial performance reported in
accordance with accounting principles generally accepted in the United
States.
Three months ended
--------------------------
(In millions) Mar 31, Dec 31, Mar 31,
2005 2004 2004
-------- -------- --------
Reconciliation of Adjusted EBITDA:
Net loss................................... $(97.5) $(98.1) $(91.4)
Interest expense........................... 14.4 13.6 11.1
Other non-operating expense................ 0.3 9.2 0.4
Restructuring charges...................... 2.0 - -
Depreciation and amortization.............. 91.3 89.4 90.2
-------- -------- --------
Adjusted EBITDA........................ $10.5 $14.1 $10.3
======== ======== ========
Gross margin is another financial measure that management uses to
evaluate operating performance. Gross margin, which is calculated as
revenues less cost of service, excludes depreciation and amortization
expenses. Cost of service includes expenses directly associated with
providing telecommunications services to its customers. Costs
classified as cost of service include, among other items, the cost of
connecting customers to the McLeodUSA network via leased facilities,
the costs paid to third party providers for interconnect access and
transport services, the costs of leasing components of network
facilities and the cost of fiber related to sales and leases of
network facilities. Gross margin is reconciled to net loss, the most
comparable GAAP measure, within the table presented below.
Three months ended
--------------------------
(In millions) Mar 31, Dec 31, Mar 31,
2005 2004 2004
-------- -------- --------
Reconciliation of Gross Margin:
Net loss................................... $(97.5) $(98.1) $(91.4)
Interest expense........................... 14.4 13.6 11.1
Other non-operating expense................ 0.3 9.2 0.4
Restructuring charges...................... 2.0 - -
Depreciation and amortization.............. 91.3 89.4 90.2
Selling, general and administrative........ 56.7 61.7 75.7
-------- -------- --------
Gross Margin........................... $67.2 $75.8 $86.0
======== ======== ========
Some of the statements in this press release include statements about
our future expectations. Statements that are not historical facts are
"forward-looking statements" for the purpose of the safe harbor
provided by Section 21E of the Exchange Act and Section 27A of the
Securities Act. Such statements may include projections of financial
and operational results and goals, including revenue, EBITDA, Adjusted
EBITDA, profitability, savings and cash. In some cases, you can
identify these so-called "forward-looking statements" by our use of
words such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "project," "intend" or "potential"
or the negative of those words and other comparable words. These
forward-looking statements are subject to known as well as unknown
risks and uncertainties that may cause actual results to differ
materially from our expectations. Our expectations are based on
various factors and assumptions and reflect only our predictions.
Factors that could cause actual results to differ materially from the
forward-looking statement include technological, regulatory, public
policy or other developments in our industry, availability and
adequacy of capital resources, our ability to implement a strategic
transaction or a capital restructuring, current and future economic
conditions, the existence of strategic alliances, our ability to
generate cash, our ability to implement process and network
improvements, our ability to attract and retain customers, our ability
to migrate traffic to appropriate platforms and changes in the
competitive climate in which we operate. These and other risks are
described in more detail in our most recent Annual Report on Form 10-K
filed with the SEC. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of future
events, new information or otherwise.
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(UNAUDITED)
Three months ended
-------------------
March 31, March 31,
2005 2004
-------------------
Revenue $160.5 $193.6
Operating expenses:
Cost of service (exclusive of depreciation and
amortization shown separately below) 93.3 107.6
Selling, general and administrative 56.7 75.7
Depreciation and amortization 91.3 90.2
Restructuring charges 2.0 -
--------- ---------
Total operating expenses 243.3 273.5
--------- ---------
Operating loss (82.8) (79.9)
--------- ---------
Non-operating expense:
Interest expense, net of amounts capitalized (14.4) (11.1)
Other expense (0.3) (0.4)
--------- ---------
Total non-operating expense (14.7) (11.5)
--------- ---------
Net loss $(97.5) $(91.4)
--------- ---------
Preferred stock dividend (0.5) (0.8)
--------- ---------
Net loss applicable to common shares $(98.0) $(92.2)
========= =========
Basic and diluted loss per common share $(0.32) $(0.32)
========= =========
Weighted average common shares outstanding 308.4 291.0
========= =========
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)
March 31, December 31,
2005 2004
------------ ------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $34.9 $50.0
Trade receivables, net 57.0 58.6
Prepaid expense and other 19.8 19.9
------------ ------------
Total Current Assets 111.7 128.5
------------ ------------
Non-current Assets
Property and equipment, net 660.1 728.7
Other intangibles, net 135.4 144.9
Other non-current assets 22.4 23.7
------------ ------------
Total Non-current Assets 817.9 897.3
------------ ------------
Total Assets $929.6 $1,025.8
============ ============
LIABILITIES AND EQUITY
Current Liabilities
Current maturities of long-term debt $777.3 $49.5
Accounts payable 37.5 39.6
Deferred revenue, current portion 6.4 6.8
Other current liabilities 99.0 95.1
------------ ------------
Total Current Liabilities 920.2 191.0
------------ ------------
Long-term Liabilities
Long-term debt, excluding current
maturities - 727.8
Deferred revenue less current portion 16.9 17.0
Other long-term liabilities 61.5 61.4
------------ ------------
Total Long-term Liabilities 78.4 806.2
------------ ------------
Redeemable Convertible Preferred Stock 58.6 75.4
Stockholders' Deficit (127.6) (46.8)
------------ ------------
Total Liabilities and Equity $929.6 $1,025.8
============ ============
McLeodUSA Incorporated and Subsidiaries
Selected Telecommunications Statistical Data
--------- --------- ---------
3/31/04 12/31/04 3/31/05
--------- --------- ---------
Active central offices 1,708 1,683 1,647
Collocations 667 699 699
Switches owned
CO / LD 40 39 39
ATM / Frame Relay 38 38 38
DSLAMs installed 435 432 432
Total Competitive:
Customers 381,791 348,258 337,358
Access Units / Customer 2.8 2.8 2.8
Revenue per Customer / Month
Local $106.55 $99.69 $100.51
Long distance 31.56 31.84 33.29
Private line & data 31.61 33.01 32.49
--------- --------- ---------
Total $169.72 $164.54 $166.29
========= ========= =========
Platform Distribution
Resale 5% 4% 4%
UNE-M/P 28% 25% 24%
UNE-L 67% 71% 72%
--------- --------- ---------
Total 100% 100% 100%
========= ========= =========
--------------------------------------------------------------------------------
Contact:
McLeodUSA Incorporated, Cedar Rapids
Investor Contact:
Bryce Nemitz, 319-790-7800
or
Press Contact:
Bruce Tiemann, 319-790-7800
--------------------------------------------------------------------------------
Source: McLeodUSA Incorporated
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