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[McLeodUSA Logo]
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, PO Box 3177
Cedar Rapids, IA 52406-3177
Investor Contact: Bryce E. Nemitz
Press Contact: Bruce A. Tiemann
MCLEODUSA_IR@MCLEODUSA.COM
Phone: (319) 790-7800
FAX: (319) 790-7767
FOR IMMEDIATE RELEASE
MCLEODUSA REACHES RECAPITALIZATION AGREEMENTS WITH
FORSTMANN LITTLE AND SECURED LENDERS
TRANSACTION WILL RETIRE BOND DEBT, REDUCE BANK DEBT AND INCREASE LIQUIDITY
FORSTMANN LITTLE TO INCREASE EQUITY INVESTMENT BY $100 MILLION AND
PURCHASE THE MCLEODUSA PUBLISHING BUSINESS FOR $535 MILLION TO
PROVIDE CASH FOR BOND TENDER
CEDAR RAPIDS, IOWA, DECEMBER 3, 2001 -- McLeodUSA Incorporated (Nasdaq: MCLD),
one of the nation's largest independent competitive local exchange carriers,
announced today that it has reached agreements with Forstmann Little & Co. and
the McLeodUSA Secured Lenders on a comprehensive recapitalization and financial
restructuring plan. The plan, which is subject to agreement with the McLeodUSA
bondholders and other security holders, would eliminate at least 95 percent of
the Company's $2.9 billion of bond debt and the associated $300 million of
annual interest expense. Concurrently, the Company is initiating an exchange
offer under which its publicly-traded bonds will be tendered in exchange for not
less than $560 million in cash, plus approximately 14 percent of McLeodUSA
post-recapitalization common stock. The cash component of the exchange offer
will be funded through the sale of the McLeodUSA telephone directory publishing
business to Forstmann Little for $535 million.
As part of the recapitalization plan, which has been approved by the Company's
Board of Directors, Forstmann Little will make a new common equity investment of
$100 million to fund the balance of the cash being offered to bondholders and to
provide additional working capital to the Company. Forstmann Little also has
agreed to convert its existing preferred stock into common stock upon
consummation of the recapitalization. After the
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closing of the transaction, Forstmann Little will own approximately 45
percent of the outstanding common equity of McLeodUSA.
Chief Operating and Financial Officer Chris A. Davis, who joined the Company in
August 2001 to strengthen the Company's operational and financial management,
said, "Since announcing our revised business strategy to refocus McLeodUSA on
its core business, we have made excellent progress. However, we believe that the
Company's significant amount of debt and associated interest payments are an
impediment to our ability to effectively execute our plan. This prompted us to
explore with Forstmann Little and our senior lenders various options that would
result in a more appropriate capital structure for the Company. We believe that
the plan we are announcing today presents the best approach to restructure the
Company's debt in a timely, efficient manner."
The Company expects the recapitalization transaction to have no impact on its
employees, customers or vendors. "McLeodUSA's commitment to provide our
customers with the same level of quality service that they have long come to
expect from McLeodUSA remains unchanged," said President and Chief Executive
Officer Steve Gray. "This recapitalization positions the Company to pursue our
long-term strategy within our existing 25-state footprint. In addition, we
continue to believe that the marketing linkage between the telecommunications
and publishing businesses remains important to both entities. Therefore, with
the sale of our publishing business, we have negotiated an operating agreement
that will allow McLeodUSA to retain the branding and advertising benefits we
currently enjoy."
After careful consideration of various alternatives, the Company concluded that
this action is in the best interests of all constituents. It provides a unique
opportunity for the bondholders to realize an early, and significant, cash
distribution with equity participation in a deleveraged enterprise with a
committed sponsor. The Secured Lenders will achieve a reduction in debt
commitments and the common shareholders will have a much greater potential for
capital appreciation. The Company noted that the proposed transaction is
distinguished by Forstmann Little's firm $535 million purchase offer for the
telephone directory publishing business and agreement that McLeodUSA may seek
superior competitive offers with no break-up fee. The Company has engaged Credit
Suisse First Boston to immediately begin marketing McLeodUSA Publishing.
McLeodUSA expects to complete the recapitalization transaction during the first
or second quarter of 2002.
Highlights of the terms of the transaction:
o Forstmann Little has committed to purchase McLeodUSA Publishing for
$535 million with no financing contingency, subject only to customary
closing conditions. Under the terms of the agreement with Forstmann
Little, there is no break-up fee if the publishing business is
purchased by another party, provided the recapitalization is
completed.
o Forstmann Little will make an additional equity investment of $100
million in new preferred stock, which is mandatorily convertible to
common stock. Upon completion of the recapitalization, Forstmann
Little will convert its preferred
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Series D and Series E stock to new common stock and, including its
new equity investment, will then hold approximately 45 percent of
McLeodUSA post-recapitalization common stock.
o Theodore J. Forstmann, as Chairman of the McLeodUSA Executive
Committee, will continue his substantial ongoing involvement with the
Company.
o Chris A. Davis will remain Chief Operating and Financial Officer,
Stephen C. Gray will remain President and Chief Executive Officer and
Clark E. McLeod will remain Chairman of the Board of Directors.
o In exchange for at least 95 percent of the outstanding $2.935 billion
in bond debt, bondholders would receive their pro rata share of cash
in an amount not less than $560 million. This cash payment will be
funded by $535 million in net proceeds received from the sale of the
publishing business and $25 million in cash from the new equity
investment by Forstmann Little. Bondholders will also receive
approximately 14 percent of the new McLeodUSA common stock upon
completion of the recapitalization.
o The Series A existing public preferred stock, including accrued
dividends, will also be converted into common stock pro rata according
to liquidation preference, and are expected, after completion of the
recapitalization, to hold 11 percent of the new common stock.
o Holders of existing Class A common stock are expected to retain 30
percent of the new shares.
o McLeodUSA and its Secured Lenders have agreed to amend their existing
$1.3 billion senior secured credit facility to permit the use of
proceeds from the sale of the publishing business to retire
outstanding bond debt in connection with the recapitalization.
McLeodUSA and its Secured Lenders have also agreed to modify the
credit agreement to allow the company to retain and use the proceeds
from all currently identified future asset sales of non-core
businesses and surplus assets for general working capital purposes in
addition to capital expenditures.
o Additional terms and conditions of the transactions are outlined in
the solicitation documentation, which will be sent to security
holders.
Subject to the completion of the recapitalization transaction, the Company has
agreed with its Secured Lenders that it will (1) reduce its current revolver by
$140 million and (2) offer for sale its Illinois Consolidated Telephone Company
(ICTC) regulated incumbent local exchange subsidiary. This sale is expected to
occur within 14 months after the consummation of the recapitalization, with up
to $225 million of the proceeds applied to reduce the Company's term loan
commitments. McLeodUSA would expect to include the necessary operating
arrangements with ICTC in order to ensure effective continuation of service to
McLeodUSA customers.
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The Company has indicated that while it will seek the requisite 95 percent of
bondholder acceptances of the exchange offer, it may pursue the administrative
convenience of the court system through a voluntary pre-packaged Chapter 11 in
order to achieve retirement of all outstanding bond issues and to accomplish the
recapitalization in an expeditious manner. In the event that the Company
commences a court proceeding, McLeodUSA expects to operate its business in the
ordinary course without interruption and with no impact on its employees,
suppliers and customers. Importantly, the Company noted that the in-court
alternative, if commenced, is expected to include only the holding company,
McLeodUSA Incorporated. It is planned that the Company's operating subsidiaries,
including McLeodUSA Telecommunications, McLeodUSA Publishing and ICTC, would be
excluded from the filing.
The Company has engaged the firms of Houlihan Lokey Howard & Zukin Capital and
Skadden, Arps, Slate, Meagher & Flom to provide financial and legal counsel in
connection with the recapitalization transaction.
The Company and its advisors are planning to host a conference call with the
Company's bondholders on Tuesday, December 11, 2001 at 10:00 a.m. EST. The call
may be accessed at 877-381-6511 (U.S.) or 706-634-6027 (International), password
"McLeodUSA". A replay will be available approximately 2 hours after completion
of the call at 800-642-1687 (U.S.) or 706-645-9291 (International), Conference
Call ID No. 2587331. The audio replay will be available until midnight EST on
December 14, 2001.
The call will also be Webcast live and available via replay at:
HTTP://WWW.MCLEODUSA.COM/IR/STREAMINGMEDIA.PHP3.
For more information on the exchange offer, bondholders may contact Houlihan
Lokey Howard & Zukin at 612-338-2910.
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 September 30, 2001, 393
ATM switches, 58 voice switches, 437 collocations, 520 DSLAMs, over 31,000 route
miles of fiber optic network and 10,700 employees. In the next 12 months,
McLeodUSA plans to distribute 34 million telephone directories in 26 states,
serving a population of 58 million. McLeodUSA is traded on The Nasdaq Stock
Market(R) under the symbol MCLD. Visit the Company's web site at
WWW.MCLEODUSA.COM.
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 include
projections of financial and operational results and goals, including revenue,
EBITDA, profitability, savings and cash. 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
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predictions and actual results may vary. 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," "continue" or "potential" or the
negative of those words and other comparable words. You should be aware that
those statements only reflect our predictions. Actual events or results may
differ substantially. Important factors that could cause actual events or
results of McLeodUSA to be materially different from the forward-looking
statements include availability of financing and regulatory approvals; the
number of potential customers in a target market; the existence of strategic
alliances or relationships; technological, regulatory or other developments
in the industry; changes in the competitive climate in which McLeodUSA
operates; and the emergence of future opportunities. These and other
applicable risks are summarized under the caption "Risk Factors" in the
McLeodUSA Annual Report on Form 10-K for the fiscal year ended December 31,
2000, which is filed with the Securities and Exchange Commission.