Exhibit 99.1
[GRAPHIC OMITTED]
McLeodUSA Reports Fourth Quarter and
Total Year 2004 Results
o Continued strong operational performance but revenue declines
o Actively pursuing strategic partner or sale of the Company
o Entered forbearance agreement with Lenders to maintain liquidity
o Discussions for debt restructuring underway with Lender Committee
where recovery for preferred or common stockholders is unlikely
CEDAR RAPIDS, Iowa - March 16, 2005 - McLeodUSA Incorporated (Nasdaq: MCLD),
one of the nation's largest independent, competitive telecommunications
services providers, today reported financial and operating results for the
quarter and total year ended December 31, 2004.
Total revenues for the quarter ended December 31, 2004 were $162.6 million
compared to $168.1 million in the third quarter of 2004 and $209.5 million in
the fourth quarter of 2003. Revenues were down from the third quarter of 2004
due to a reduction in total access lines as new retail sales did not offset
existing customer turnover; as well as, lower IRU sales and the impact of
normal fourth quarter seasonality on long distance volume.
Gross margin(1) for fourth quarter 2004 was $75.8 million compared to $74.0
million in the third quarter of 2004 and $93.5 million in the fourth quarter
of 2003. Gross margin in the fourth quarter included approximately $6.2
million of rate settlements. Gross margin as a percent of revenue, including
the impact of the rate settlements, was 46.6% versus 44.0% in the third
quarter of 2004 and 44.6% in the fourth quarter of 2003.
SG&A expenses for the fourth quarter of 2004 were $61.7 million compared to
$62.5 million in the third quarter of 2004 and $77.0 million in the fourth
quarter of 2003 as the Company continued to realize the benefit of its ongoing
expense reduction programs. Adjusted EBITDA1 in the fourth quarter of 2004 was
$14.1 million, including the $6.2 million of rate settlements, versus $11.5
million in the third quarter of 2004 and $16.5 million in the fourth quarter
of 2003. Net loss from continuing operations for the quarter was $(98.1)
million, or a loss per common share of $(0.32), versus $(352.8) million in the
third quarter of 2004, which included a non-cash charge of $263.1 million
related to the impairment of goodwill and intangible assets, and $(56.6)
million in the fourth quarter of 2003.
The Company's strong operational performance continued in the fourth quarter
of 2004. The customer satisfaction rating was 93%, billing accuracy was 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 fourth quarter 2004 was 71% UNE-L, 4%
resale and 25% UNE-P versus 70%, 4% and 26%, respectively, at the end of the
third quarter of 2004 and 65%, 5% and 30%, respectively, at the end of the
fourth quarter 2003. The Company continued to migrate resale and UNE-P
customers to UNE-L and add new customers to the more profitable UNE-L
platform. In January 2005, the Company reached an agreement with Qwest
Communications for the continued provisioning and service of its UNE-P lines.
Customer line turnover in the fourth quarter was 2.2% versus 2.4% in the third
quarter of 2004 and 2.1% in the fourth quarter of 2003. Business customer line
turnover was 2.0% in the fourth quarter of 2004 compared to 1.8% in the fourth
quarter of 2003.
Total revenues for the year ended December 31, 2004, were $716.2 million
versus $869.0 million for the year 2003 primarily driven by the federally
mandated access rate reductions of $43.3 million, lower long distance rates
and volume of $40.1 million, and the decline in price and volume of local
services of $48.0 million. Gross margin for the year ending December 31, 2004
was $322.4 million versus $370.1 million in 2003 driven by the decline in
revenues offset by increased profitability associated with the migration of
the business to UNE-L and the favorable impact of the Company's ongoing cost
reduction initiatives. Gross margin as a percent of revenue for the year was
45.0% versus 42.6% in 2003. Total SG&A expenses for the year were $268.4
million and $312.2 million in 2004 and 2003, respectively, as the Company
successfully executed its expense reduction and productivity improvement
plans. Adjusted EBITDA was $54.0 million for year 2004 versus $57.9 million in
2003. Net loss for the year ended December 31, 2004 was $(624.5) million
versus $(295.7) million for the year ended December 31, 2003. Net loss for
2004 included a non-cash impairment charge of $263.1 million to recognize full
impairment of goodwill and a partial impairment of the McLeodUSA trade name.
The Company ended the year with $50.0 million of cash on hand which included a
planned $20 million withdrawal from the exit credit facility in the fourth
quarter. At December 31, 2004 the Company had withdrawn a total of $100
million and had issued approximately $8 million of letters of credit against
the $110 million funded exit credit facility. The Company was in compliance
with all financial covenants at December 31, 2004. The Company's cash balance
was approximately $45 million as of March 15, 2005.
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.
In response, the Company's Board of Directors has authorized the Company to
pursue strategic alternatives. In support of these initiatives, the Company
has hired Miller Buckfire Ying & Co., LLC and Gleacher Partners, LLC as its
financial advisors. The Company is 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.
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 the interim, the Company has entered 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
- -----------------------
In light of the revenue outlook and the Company's on-going cash requirements,
the Company has also begun 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.
As a result of the activities described above the Company has delayed the
filing of its Form 10-K with the SEC. The Company has completed its internal
control review as required under Section 404 of the Sarbanes-Oxley Act and is
prepared to issue its Management's Report on Internal Control Over Financial
Reporting stating that based on management's assessment, management believes
that as of December 31, 2004, the Company's internal control over financial
reporting is effective. The Company expects that the Independent Registered
Public Accounting Firm Report that will be issued in connection with the
filing of Form 10-K will include comments with respect to the Company's
ability to continue as a going concern.
Other recent highlights include:
|X| On January 3, 2005, the Company announced a five-year extension to
its contract with the State of Iowa for operation and maintenance of
the Iowa Communications Network. McLeodUSA will continue to operate
the network from its Operations Center near Des Moines, perform
field services and conduct network locate services statewide. This
contract extension, expiring December 9, 2009, will result in
recurring revenue to McLeodUSA of approximately $5 million annually.
|X| On December 20, 2004, McLeodUSA announced that its Preferred
Advantage(R) Dynamic Integrated Access, which utilizes the next
generation Voice-over-Internet Protocol (VoIP) switching
architecture, is now generally available for sale. The service has
been initiated in 24 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.
|X| On December 16, 2004, the Company announced a three-year renewable
wholesale agreement with MCI whereby McLeodUSA will enable MCI to
provide local telephone services to its residential customers using
McLeodUSA facilities. The agreement provides for MCI and McLeodUSA
to migrate a minimum of 200,000 local lines onto the McLeodUSA UNE-L
network by October 31, 2005.
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 December
31, 2004, 38 ATM switches, 39 voice switches, 699 collocations, 432 DSLAMs and
2,426 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
adjustments and impairment charges. Management removes the effects of other
income and expense, restructuring adjustments 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) Dec 31, 2004 Sept 30, 2004 Dec 31, 2003
------------------- ------------------- -------------------
Reconciliation of Adjusted EBITDA:
Net loss............................................. $ (98.1) $ (352.8) $ (56.6)
Interest expense..................................... 13.6 11.9 9.8
Other nonoperating expense........................... 9.2 0.5 (23.1)
Restructuring adjustment............................. - - (0.2)
Impairment charge.................................... - 263.1 -
Depreciation and amortization........................ 89.4 88.8 86.6
------------------- ------------------- -------------------
Adjusted EBITDA.................................. $ 14.1 $ 11.5 $ 16.5
=================== =================== ===================
Year ended
-----------------------------------------------
(In millions) Dec 31, 2004 Dec 31, 2003
---------------------- ----------------------
Reconciliation of Adjusted EBITDA:
Net loss.................................................... $ (624.5) $ (295.7)
Interest expense............................................ 48.2 35.8
Other nonoperating expense.................................. 10.6 (22.5)
Restructuring adjustment.................................... (0.2) (0.2)
Impairment charge........................................... 263.1 -
Depreciation and amortization............................... 356.8 340.5
---------------------- ----------------------
Adjusted EBITDA......................................... $ 54.0 $ 57.9
====================== ======================
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) Dec 31, 2004 Sept 30, 2004 Dec 31, 2003
------------------- ------------------- -------------------
Reconciliation of Gross Margin:
Net loss............................................. $ (98.1) $ (352.8) $ (56.6)
Interest expense..................................... 13.6 11.9 9.8
Other nonoperating expense........................... 9.2 0.5 (23.1)
Restructuring adjustment............................. - - (0.2)
Impairment charge - 263.1 -
Depreciation and amortization........................ 89.4 88.8 86.6
Selling, general and administrative.................. 61.7 62.5 77.0
------------------- ------------------- -------------------
Gross Margin..................................... $ 75.8 $ 74.0 $ 93.5
=================== =================== ===================
Year ended
-----------------------------------------------
(In millions) Dec 31, 2004 Dec 31, 2003
---------------------- ----------------------
Reconciliation of Gross Margin:
Net loss.................................................... $ (624.5) $ (295.7)
Interest expense............................................ 48.2 35.8
Other nonoperating expense.................................. 10.6 (22.5)
Restructuring adjustment.................................... (0.2) (0.2)
Impairment charge........................................... 263.1 -
Depreciation and amortization............................... 356.8 340.5
Selling, general and administrative......................... 268.4 312.2
---------------------- ----------------------
Gross Margin............................................ $ 322.4 $ 370.1
====================== ======================
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, 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.
Contact:
McLeodUSA Incorporated, Cedar Rapids, IA
Investor Contact: Bryce Nemitz
Press Contact: Bruce Tiemann
Phone: (319) 790-7800
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(UNAUDITED)
Three months ended
----------------------------------------------
December 31, 2004 December 31, 2003
---------------------- -----------------------
Revenue $ 162.6 $ 209.5
Operating expenses:
Cost of service (exclusive of depreciation
and amortization shown separately below) 86.8 116.0
Selling, general and administrative 61.7 77.0
Depreciation and amortization 89.4 86.6
Restructuring adjustment - (0.2)
---------------- ---------------
Total operating expenses 237.9 279.4
---------------- ---------------
Operating loss (75.3) (69.9)
---------------- ---------------
Nonoperating (expense) income:
Interest expense, net of amounts capitalized (13.6) (9.8)
Other (expense) income (9.2) 23.1
---------------- ---------------
Total nonoperating (expense) income (22.8) 13.3
---------------- ---------------
Net loss $ (98.1) $ (56.6)
---------------- ---------------
Preferred stock dividend (0.5) (1.0)
---------------- ---------------
Net loss applicable to common shares $ (98.6) $ (57.6)
================ ===============
Basic and diluted loss per common share $ (0.32) $ (0.20)
================ ===============
Weighted average common shares outstanding 304.9 287.7
================ ===============
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(In millions, except per share data)
Year ended
----------------------------------------------
December 31, 2004 December 31, 2003
---------------------- -----------------------
(unaudited)
Revenue $ 716.2 $ 869.0
Operating expenses:
Cost of service (exclusive of depreciation and amortization
shown separately below) 393.8 498.9
Selling, general and administrative 268.4 312.2
Depreciation and amortization 356.8 340.5
Impairment charge 263.1 -
Restructuring adjustment (0.2) (0.2)
------------- ---------------
Total operating expenses 1,281.9 1,151.4
------------- ---------------
Operating loss (565.7) (282.4)
------------- ---------------
Nonoperating expense:
Interest expense, net of amounts capitalized (48.2) (35.8)
Other (expense) income (10.6) 22.5
-------------- ---------------
Total nonoperating expense (58.8) (13.3)
-------------- ---------------
Net loss $ (624.5) $ (295.7)
-------------- ---------------
Preferred stock dividend (2.9) (4.6)
-------------- ---------------
Net loss applicable to common shares $ (627.4) $ (300.3)
============== ===============
Basic and diluted loss per common share $ (2.12) $ (1.07)
============= ===============
Weighted average common shares outstanding 296.2 280.4
============= ===============
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)
December 31, 2004 December 31, 2003
----------------------- ----------------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 50.0 $ 56.5
Trade receivables, net 58.6 65.6
Prepaid expense and other 19.9 22.4
Assets held for sale - 2.0
-------------- -------------
Total Current Assets 128.5 146.5
-------------- -------------
Non-current Assets
Property and equipment, net 728.7 1,007.7
Goodwill and other intangibles, net 144.9 446.9
Other non-current assets 23.7 29.5
-------------- -------------
Total Non-current Assets 897.3 1,484.1
-------------- -------------
Total Assets $ 1,025.8 $ 1,630.6
============== =============
LIABILITIES AND EQUITY
Current Liabilities
Current maturities of long-term debt $ 49.5 $ 27.1
Accounts payable 39.6 30.5
Deferred revenue, current portion 6.8 6.9
Other current liabilities 95.1 121.5
Liabilities related to discontinued operations - 1.1
-------------- -------------
Total Current Liabilities 191.0 187.1
-------------- -------------
Long-term Liabilities
Long-term debt, excluding current maturities 727.8 717.3
Deferred revenue less current portion 17.0 15.1
Other long-term liabilities 61.4 58.3
-------------- -------------
Total Long-term Liabilities 806.2 790.7
-------------- -------------
Redeemable Convertible Preferred Stock 75.4 131.1
Stockholders' (Deficiency) Equity (46.8) 521.7
-------------- -------------
Total Liabilities and Stockholders (Deficiency) Equity $ 1,025.8 $ 1,630.6
============== =============
McLeodUSA Incorporated and Subsidiaries
Selected Telecommunications Statistical Data
------------------ ------------------- -------------------
12/31/03 9/30/04 12/31/04
------------------ ------------------- -------------------
Active central offices 1,724 1,705 1,683
Collocations 663 696 699
Switches owned
CO / LD 44 39 39
ATM / Frame Relay 38 38 38
DSLAMs installed 435 435 432
Total Competitive:
Customers 395,641 356,938 348,258
Access Units / Customer 2.8 2.8 2.8
Revenue per Customer / Month
Local $ 111.18 $ 102.04* $ 99.69
Long distance 31.53 29.80 31.84
Private line & data 29.95 31.70 33.01
---------------- ------------------- -------------------
Total $ 172.66 $ 163.54 $ 164.54
================ =================== ===================
Platform Distribution
Resale 5% 4% 4%
UNE-M/P 30% 26% 25%
UNE-L 65% 70% 71%
---------------- ------------------- -------------------
Total 100% 100% 100%
================ =================== ===================
* Excluding impact of federally mandated access rate reduction local revenue per customer was $104.77