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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2002

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period                              to                             

Commission file number 0-20763

McLEODUSA INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware
(State of Incorporation)		   42-1407240
(IRS Employer Identification No.)

McLeodUSA Technology Park
6400 C Street SW
P.O. Box 3177
Cedar Rapids, Iowa
(Address of principal executive office)
 
52406-3177
(Zip Code)

319-364-0000
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý    No o

        The number of shares outstanding of each class of the issuer's common stock as of August 8, 2002:

Common Stock Class A: ($0.01 par value)   162,499,986 shares
Common Stock Class B: ($0.01 par value)   78,203,135 shares
Common Stock Class C: ($0.01 par value)   35,546,879 shares


McLEODUSA INCORPORATED AND SUBSIDIARIES

INDEX

 
    
    
   Page
PART I. Financial Information    

Item 1.
 
Condensed Consolidated Financial Statements:
 
 

 
 
Condensed Consolidated Balance Sheets
 
 

 
 
 
 
Reorganized McLeodUSA—as of June 30, 2002 (unaudited)
 
3-4

 
 
 
 
Predecessor McLeodUSA—as of December 31, 2001
 
3-4

 
 
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
 
 

 
 
 
 
Reorganized McLeodUSA—for the period April 17, 2002 to June 30, 2002
 
5

 
 
 
 
Predecessor McLeodUSA—for the period April 1, 2002 to April 16, 2002
 
5

 
 
 
 
Predecessor McLeodUSA—for the three months ended June 30, 2001
 
5

 
 
 
 
Reorganized McLeodUSA—for the period April 17, 2002 to June 30, 2002
 
6

 
 
 
 
Predecessor McLeodUSA—for the period January 1, 2002 to April 16, 2002
 
6

 
 
 
 
Predecessor McLeodUSA—for the six months ended June 30, 2001
 
6

 
 
Unaudited Condensed Consolidated Statements of Cash Flows
 
 

 
 
 
 
Reorganized McLeodUSA—for the period April 17, 2002 to June 30, 2002
 
7

 
 
 
 
Predecessor McLeodUSA—for the period January 1, 2002 to April 16, 2002
 
7

 
 
 
 
Predecessor McLeodUSA—for the six months ended June 30, 2001
 
7

 
 
Notes to the Condensed Consolidated Financial Statements
 
8-25

Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
28-35

Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
36

PART II. Other Information
 
 

Item 1.
 
Legal Proceedings
 
37

Item 2.
 
Changes in Securities and Use of Proceeds
 
38-40

Item 5.
 
Other Information
 
40

Item 6.
 
Exhibits and Reports on Form 8-K
 
41

Signatures
 
42

2


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements


McLEODUSA INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share data)

 
   Reorganized
McLeodUSA
June 30, 2002
   Predecessor
McLeodUSA
December 31, 2001
 
   (Unaudited)

    
ASSETS            
Current assets            
  Cash and cash equivalents   $ 78.2   $ 137.1
  Investment in available-for-sale securities     0.3     4.5
  Trade receivables, net     125.5     150.8
  Inventory     3.3     4.4
  Prepaid expense and other     29.1     25.2
  Assets held for sale     444.1     760.1
   
 
    Total current assets     680.5     1,082.1
   
 
Property and equipment            
  Land and buildings     73.3     59.5
  Communications networks     710.7     1,645.8
  Furniture, fixtures and equipment     169.4     366.5
  Networks in progress     363.2     866.6
   
 
      1,316.6     2,938.4
  Less accumulated depreciation     47.2     479.4
   
 
      1,269.4     2,459.0
   
 
Investments, intangibles and other assets            
  Other investments     0.4     28.1
  Goodwill     221.9     949.4
  Other intangibles, net     250.5     158.5
  Other     23.5     78.0
   
 
      496.3     1,214.0
   
 
TOTAL ASSETS   $ 2,446.2   $ 4,755.1
   
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
(Continued on the next page)

3


McLEODUSA INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In millions, except per share data)

 
   Reorganized
McLeodUSA
June 30, 2002
   Predecessor
McLeodUSA
December 31, 2001
  
 
   (Unaudited)

    
  
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities              
  Current maturities of long-term debt   $ 5.7   $ 15.7  
  Long-term debt classified as current     —     2,978.8  
  Accounts payable     54.0     81.5  
  Accrued payroll and payroll related expenses     23.5     23.1  
  Other accrued liabilities     163.5     357.4  
  Deferred revenue, current portion     13.0     13.2  
  Customer deposits     2.7     3.0  
  Liabilities related to discontinued operations     69.3     130.3  
   
 
 
    Total current liabilities     331.7     3,603.0  
  Long-term debt less current maturities     942.6     945.5  
  Deferred revenue, less current portion     14.9     16.4  
  Other long-term liabilities     53.4     7.1  
   
 
 
      1,342.6     4,572.0  
   
 
 
Redeemable convertible preferred stock              
  Reorganized McLeodUSA Preferred Series A, redeemable, convertible, $0.01 par value; 10,000,000 authorized, issued and outstanding at June 30, 2002     169.3     —  
  Predecessor McLeodUSA Preferred Series D, redeemable, convertible, $0.01 par value; 275,000 authorized, issued and outstanding at December 31, 2001     —     110.4  
  Predecessor McLeodUSA Preferred Series E, redeemable, convertible $0.01 par value; 125,000 authorized, issued and outstanding at December 31, 2001     —     45.7  
   
 
 
      169.3     156.1  
   
 
 
Stockholders' equity              
  Predecessor McLeodUSA Preferred Series A, $0.01 par value; 1,149,375 authorized, issued and outstanding at December 31, 2001     —     —  
  Predecessor McLeodUSA Common, Class A $0.01 par value; 2,000,000,000 authorized, 627,739,907 issued and outstanding at December 31, 2001     —     6.3  
  Reorganized McLeodUSA Common, Class A $0.01 par value; 1,886,249,986 authorized, 162,499,986 issued and outstanding at June 30, 2002     1.6     —  
  Reorganized McLeodUSA Common, Class B $0.01 par value; 78,203,135 authorized, issued and outstanding at June 30, 2002     0.8     —  
  Reorganized McLeodUSA Common, Class C $0.01 par value; 35,546,879 authorized, issued and outstanding at June 30, 2002     0.3     —  
  Reorganized McLeodUSA Preferred Series B, $0.01 par value; 10 authorized, issued and outstanding at June 30, 2002     —     —  
  Reorganized McLeodUSA Warrants     22.6     —  
  Additional paid-in capital     954.3     3,843.4  
  Accumulated deficit     (45.3 )   (3,821.6 )
  Accumulated other comprehensive income     —     (1.1 )
   
 
 
      934.3     27.0  
   
 
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 2,446.2   $ 4,755.1  
   
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


McLEODUSA INCORPORATED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

(In millions, except per share data)

 
   Reorganized McLeodUSA
   Predecessor McLeodUSA
   Predecessor McLeodUSA
  
 
   April 17, 2002
to June 30, 2002
   April 1, 2002
to April 16, 2002
   Three months ended
June 30, 2001
  
Revenues:                    
  Competitive telecommunications   $ 207.2   $ 47.3   $ 328.3  
  Other     —     —     3.6  
   
 
 
 
    Total revenue     207.2     47.3     331.9  
Operating expenses:                    
  Cost of service (exclusive of depreciation shown separately below)     119.4     32.1     215.9  
  Selling, general and administrative     79.5     17.5     116.7  
  Depreciation and amortization     59.5     17.4     142.5  
  Reorganization charges, net     —     1,539.6     —  
  Restructuring charge (adjustment)     —     (6.8 )   28.2  
   
 
 
 
    Total operating expenses     258.4     1,599.8     503.3  
   
 
 
 
    Operating loss     (51.2 )   (1,552.5 )   (171.4 )
   
 
 
 
Nonoperating income (expense):                    
  Interest income     0.3     —     2.1  
  Interest expense, net of amounts capitalized     (8.5 )   (1.8 )   (57.5 )
  Other income (expense)     1.1     (1.0 )   80.4  
  Gain on the cancellation of debt     —     2,372.8     —  
   
 
 
 
    Total nonoperating income (expense)     (7.1 )   2,370.0     25.0  
   
 
 
 
    Income (loss) before discontinued operations     (58.3 )   817.5     (146.4 )
Discontinued operations (Note 5):                    
  Income from discontinued operations (including gain on disposal of $148.3 for the period April 1, 2002 to April 16, 2002)     13.0     152.6     14.7  
   
 
 
 
    Net income (loss)     (45.3 )   970.1     (131.7 )
   
 
 
 
Preferred stock dividend     (1.1 )   —     (13.6 )
   
 
 
 
    Net income (loss) applicable to common shares     (46.4 )   970.1     (145.3 )
   
 
 
 
Basic and diluted income (loss) per common share:                    
      Income (loss) before discontinued operations   $ (0.22 ) $ 1.30   $ (0.26 )
      Discontinued operations     0.05     0.25     0.02  
   
 
 
 
      Income (loss) per common share   $ (0.17 ) $ 1.55   $ (0.24 )
   
 
 
 
Weighted average common shares outstanding     276.3     627.7     617.2  
   
 
 
 
Other comprehensive income (loss), net of tax:                    
    Unrealized holding losses arising during the period   $ —   $ —   $ 4.9  
      Less: reclassification adjustment for gains included in net income     —     —     (6.5 )
   
 
 
 
      Total other comprehensive loss     —     —     (1.6 )
   
 
 
 
      Comprehensive income (loss)   $ (45.3 ) $ 970.1   $ (133.3 )
   
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


McLEODUSA INCORPORATED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

(In millions, except per share data)

 
   Reorganized McLeodUSA
   Predecessor McLeodUSA
   Predecessor McLeodUSA
  
 
   April 17, 2002
to June 30, 2002
   January 1, 2002
to April 16, 2002
   Six months ended
June 30, 2001
  
Revenues:                    
  Competitive telecommunications   $ 207.2   $ 311.4   $ 629.1  
  Other     —     —     6.7  
   
 
 
 
    Total revenue     207.2     311.4     635.8  
Operating expenses:                    
  Cost of service (exclusive of depreciation shown separately below)     119.4     211.2     406.9  
  Selling, general and administrative     79.5     108.9     230.8  
  Depreciation and amortization     59.5     126.3     264.3  
  Reorganization charges, net     —     1,596.8     —  
  Restructuring charge (adjustment)     —     (6.8 )   28.2  
   
 
 
 
    Total operating expenses     258.4     2,036.4     930.2  
   
 
 
 
    Operating loss     (51.2 )   (1,725.0 )   (294.4 )
   
 
 
 
Nonoperating income (expense):                    
  Interest income     0.3     0.4     8.7  
  Interest expense, net of amounts capitalized     (8.5 )   (33.6 )   (113.6 )
  Other income     1.1     2.0     77.1  
  Gain on the cancellation of debt     —     2,372.8     —  
   
 
 
 
    Total nonoperating income (expense)     (7.1 )   2,341.6     (27.8 )
   
 
 
 
    Income (loss) before discontinued operations     (58.3 )   616.6     (322.2 )
Discontinued operations (Note 5):                    
  Income from discontinued operations (including a net gain on disposal of $145.4 for the period January 1, 2002 to April 16, 2002)     13.0     167.1     17.4  
   
 
 
 
    Net income (loss)     (45.3 )   783.7     (304.8 )
   
 
 
 
Preferred stock dividend     (1.1 )   (4.8 )   (27.2 )
   
 
 
 
    Net income (loss) applicable to common shares     (46.4 )   778.9     (332.0 )
   
 
 
 
Basic and diluted income (loss) per common share:                    
      Income (loss) before discontinued operations   $ (0.22 ) $ 0.97   $ (0.57 )
      Discontinued operations     0.05     0.27     0.03  
   
 
 
 
      Income (loss) per common share   $ (0.17 ) $ 1.24   $ (0.54 )
   
 
 
 
Weighted average common shares outstanding     276.3     627.7     613.8  
   
 
 
 
Other comprehensive income (loss), net of tax:                    
  Unrealized holding gains arising during the period   $ —   $ (2.1 ) $ (8.5 )
    Less: reclassification adjustment for gains (losses) included in net income     —     3.2     (6.5 )
   
 
 
 
    Total other comprehensive income (loss)     —     1.1     (15.0 )
   
 
 
 
    Comprehensive income (loss)   $ (45.3 ) $ 784.8   $ (319.8 )
   
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


McLEODUSA INCORPORATED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 
   Reorganized McLeodUSA
   Predecessor McLeodUSA
   Predecessor McLeodUSA
  
 
   April 17, 2002
to June 30, 2002
   January 1, 2002
to April 16, 2002
   Six months ended
June 30, 2001
  
Cash Flows from Operating Activities                    
  Net income (loss) before discontinued operations   $ (58.3 ) $ 616.6   $ (322.2 )
  Adjustments to reconcile net income (loss) to net cash used in operating activities:                    
    Depreciation     47.5     108.6     150.9  
    Amortization     12.0     17.7     113.4  
    Accretion of interest     —     4.1     23.8  
    Gain on sale of assets     1.2     (6.4 )   (78.6 )
    Non cash reorganization items     —     1,538.4     —  
    Gain on the cancellation of debt     —     (2,372.8 )   —  
    Restructuring charge (adjustment)     —     (6.8 )   23.6  
    Changes in assets and liabilities, net of acquisitions and dispositions:                    
      Trade receivables     10.3     14.3     (36.0 )
      Inventory     0.1     0.9     (3.3 )
      Deferred expenses     (0.5 )   —     3.8  
      Prepaid expenses and other     (12.5 )   9.3     (1.9 )
      Accounts payable and accrued expenses     (26.7 )   (43.4 )   (163.6 )
      Deferred revenue     (4.8 )   1.1     6.4  
      Customer deposits     0.5     0.1