Back to GetFilings.com




QuickLinks -- Click here to rapidly navigate through this document

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 September 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 November 5, 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 September 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 three months ended September 30, 2002
5

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

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

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

 
 
Predecessor McLeodUSA—for the nine months ended September 30, 2001
6

 
Unaudited Condensed Consolidated Statements of Cash Flows
 

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

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

 
 
Predecessor McLeodUSA—for the nine months ended September 30, 2001
7

 
Notes to the Condensed Consolidated Financial Statements
8-24

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
25-32

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
32

Item 4.
Controls and Procedures
33

PART II.
Other Information
 

Item 1.
Legal Proceedings
34-35

Item 4.
Submission of Matters to a Vote of Security Holders
35

Item 6.
Exhibits and Reports on Form 8-K
36

Signatures
37

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
September 30, 2002
   Predecessor
McLeodUSA
December 31, 2001
 
   (Unaudited)

    
ASSETS            
Current assets            
  Cash and cash equivalents   $ 185.0   $ 137.1
  Investment in available-for-sale securities     0.3     4.5
  Trade receivables, net     97.3     150.8
  Inventory     0.4     4.4
  Prepaid expense and other     27.1     25.2
  Assets held for sale     332.7     760.1
   
 
    Total current assets     642.8     1,082.1
   
 
Property and equipment            
  Land and buildings     71.0     59.5
  Communications networks     764.9     1,645.8
  Furniture, fixtures and equipment     172.2     366.5
  Networks in progress     312.1     866.6
   
 
        1,320.2     2,938.4
  Less accumulated depreciation     88.1     479.4
   
 
      1,232.1     2,459.0
   
 
Investments, intangibles and other assets            
  Other investments     0.4     28.1
  Goodwill     244.0     949.4
  Other intangibles, net     241.0     158.5
  Other     25.0     78.0
   
 
      510.4     1,214.0
   
 
    TOTAL ASSETS   $ 2,385.3   $ 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
September 30, 2002
   Predecessor
McLeodUSA
December 31, 2001
  
 
   (Unaudited)

    
  
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities              
  Current maturities of long-term debt   $ 4.8   $ 15.7  
  Long-term debt classified as current     —     2,978.8  
  Accounts payable     73.3     81.5  
  Accrued payroll and payroll related expenses     26.5     23.1  
  Other accrued liabilities     154.7     357.4  
  Deferred revenue, current portion     12.2     13.2  
  Customer deposits     2.9     3.0  
  Liabilities related to discontinued operations     65.7     130.3  
   
 
 
    Total current liabilities     340.1     3,603.0  
  Long-term debt less current maturities     941.9     945.5  
  Deferred revenue, less current portion     14.0     16.4  
  Other long-term liabilities     54.2     7.1  
   
 
 
      1,350.2     4,572.0  
   
 
 
Redeemable convertible preferred stock              
  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  
  Reorganized McLeodUSA Preferred Series A, redeemable, convertible, $0.01 par value; 10,000,000 authorized, issued and outstanding at September 30, 2002     169.4     —  
   
 
 
      169.4     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 September 30, 2002     1.6     —  
  Reorganized McLeodUSA Common, Class B $0.01 par value; 78,203,135 authorized, issued and outstanding at September 30, 2002     0.8     —  
  Reorganized McLeodUSA Common, Class C $0.01 par value; 35,546,879 authorized, issued and outstanding at September 30, 2002     0.3     —  
  Reorganized McLeodUSA Preferred Series B, $0.01 par value; 10 authorized, issued and outstanding at September 30, 2002     —     —  
  Reorganized McLeodUSA Warrants     22.6     —  
  Additional paid-in capital     953.1     3,843.4  
  Accumulated deficit     (112.7 )   (3,821.6 )
  Accumulated other comprehensive income     —     (1.1 )
   
 
 
      865.7     27.0  
   
 
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 2,385.3   $ 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)

 
    
   Predecessor
McLeodUSA
  
 
   Reorganized
McLeodUSA
  
 
   Three
months ended
September 30, 2001
  
 
   Three
months ended
September 30, 2002
  
Revenues:              
  Competitive telecommunications   $ 243.5   $ 315.9  
  Other     —     3.4  
   
 
 
    Total revenue     243.5     319.3  

Operating expenses:
 
 
 
 
 
 
 
  Cost of service (exclusive of depreciation shown separately below)     154.1     217.1  
  Selling, general and administrative     79.1     139.8  
  Depreciation and amortization     75.7     146.8  
  Restructuring, asset impairment and other charges     —     2,907.2  
   
 
 
    Total operating expenses     308.9     3,410.9  
   
 
 
    Operating loss     (65.4 )   (3,091.6 )
   
 
 
Nonoperating income (expense):              
  Interest income     0.2     0.8  
  Interest expense, net of amounts capitalized     (10.9 )   (65.7 )
  Other income (expense)     (1.5 )   35.5  
   
 
 
    Total nonoperating income (expense)     (12.2 )   (29.4 )
   
 
 
    Loss before discontinued operations     (77.6 )   (3,121.0 )
Discontinued operations:              
  Income from discontinued operations (Note 5) (including loss on disposals of $2.9 for 2002)     10.2     12.6  
   
 
 
    Net loss     (67.4 )   (3,108.4 )
   
 
 
Gain on exchange of preferred stock     —     851.2  
Preferred stock dividend     (1.2 )   (4.8 )
   
 
 
    Net loss applicable to common shares   $ (68.6 ) $ (2,262.0 )
   
 
 
Basic and diluted income (loss) per common share:              
      Loss before discontinued operations   $ (0.29 ) $ (3.64 )
      Discontinued operations     0.04     0.02  
   
 
 
      Loss per common share   $ (0.25 ) $ (3.62 )
   
 
 
Weighted average common shares outstanding     276.3     625.5  
   
 
 

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
  Unrealized holding losses arising during the period   $ —   $ (3.8 )
    Less: reclassification adjustment for gains included in net income     —     10.5  
   
 
 
    Total other comprehensive loss     —     (14.3 )
   
 
 
    Comprehensive loss   $ (67.4 ) $ (3,122.7 )
   
 
 

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
September 30, 2002
   January 1, 2002
to April 16, 2002
   Nine months ended
September 30, 2001
  
Revenues:                    
  Competitive telecommunications   $ 450.7   $ 311.4   $ 945.3  
  Other     —     —     10.1  
   
 
 
 
    Total revenue     450.7     311.4     955.4  
Operating expenses:                    
  Cost of service (exclusive of depreciation shown separately below)     273.5     211.2     626.4  
  Selling, general and administrative     158.6     108.9     371.8  
  Depreciation and amortization     135.2     126.3     411.2  
  Reorganization charges, net     —     1,596.8     —  
  Restructuring, asset impairment and other charges (adjustment)     —     (6.8 )   2,935.4  
   
 
 
 
    Total operating expenses     567.3     2,036.4     4,344.8  
   
 
 
 
    Operating loss     (116.6 )   (1,725.0 )   (3,389.4 )
   
 
 
 
Nonoperating income (expense):                    
  Interest income     0.5     0.4     9.5  
  Interest expense, net of amounts capitalized     (19.4 )   (33.6 )   (179.3 )
  Other income (expense)     (0.4 )   2.0     112.6  
  Gain on the cancellation of debt     —     2,372.8     —  
   
 
 
 
    Total nonoperating income (expense)     (19.3 )   2,341.6     (57.2 )
   
 
 
 
    Income (loss) before discontinued operations     (135.9 )   616.6     (3,446.6 )
Discontinued operations (Note 5):                    
  Income from discontinued operations (including net gains (losses) on disposals of $145.4 and ($2.9) for the periods January 1, to April 16 and April 17 to September 30, 2002, respectively)     23.2     167.1     33.4  
   
 
 
 
    Net income (loss)     (112.7 )   783.7     (3,413.2 )
   
 
 
 
Gain on exchange of preferred stock     —     —     851.2  
Preferred stock dividend     (2.3 )   (4.8 )   (32.0 )
   
 
 
 
    Net income (loss) applicable to common shares   $ (115.0 ) $ 778.9   $ (2,594.0 )
   
 
 
 
Basic and diluted income (loss) per common share:                    
      Income (loss) before discontinued operations   $ (0.50 ) $ 0.97   $ (4.25 )
      Discontinued operations     0.08     0.27     0.05  
   
 
 
 
      Income (loss) per common share   $ (0.42 ) $ 1.24   $ (4.20 )
   
 
 
 
Weighted average common shares outstanding     276.3     627.7     617.8  
   
 
 
 

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
    Unrealized holding gains arising during the period   $ —   $ (2.1 ) $ (5.6 )
      Less: reclassification adjustment for gains (losses) included in net income     —     3.2     23.8  
   
 
 
 
      Total other comprehensive income     —     1.1     18.2  
   
 
 
 
      Comprehensive income (loss)   $ (112.7 ) $ 784.8   $ (3,395.0 )
   
 
 
 

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
September 30, 2002
   January 1, 2002
to April 16, 2002
   Nine Months Ended
September 30, 2001
  
Cash Flows from Operating Activities                    
  Net income (loss) before discontinued operations   $ (135.9 ) $ 616.6   $ (3,446.6 )
  Adjustments to reconcile net income (loss) to net cash used in operating activities:                    
    Depreciation     106.7     108.6     242.2  
    Amortization     28.5     17.7     169.0  
    Accretion of interest     —     4.1     36.1  
    Loss (gain) on sale of assets     2.5     (6.4 )   (121.7 )
    Non cash reorganization items     —     1,538.4     —  
    Gain on the cancellation of debt     —     (2,372.8 )   —  
    Restructuring, asset impairment, and other charges (adjustment)     —     (6.8 )   2,926.8  
    Changes in assets and liabilities, net of acquisitions and dispositions:                    
      Trade receivables     38.7     14.3     (12.2 )
      Inventory     0.1     0.9     8.1  
      Deferred expenses     (0.5 )   —     (0.1 )
      Prepaid expenses and other     (9.9 )   9.3     9.1  
      Accounts payable and accrued expenses     (25.6 )   (43.4 )   (245.4 )
      Deferred revenue     (6.1 )   1.1     (12.9 )
      Customer deposits     0.1     0.1     (18.7 )
   
 
 
 
        Net cash used in operating activities     (1.4 )   (118.3 )   (466.3 )
   
 
 
 
Cash Flows from Investing Activities                    
  Purchases of property and equipment     (38.6 )   (37.2 )   (553.2 )
  Other assets     (27.2 )   (16.5 )   (47.6 )
  Available for sale securities:                    
    Purchases     —     —     (69.6 )
    Sales     —     2.0     129.4  
  Proceeds from the sale of assets     8.1     19.1     132.8  
  Proceeds from the sale of businesses     100.0     679.7     —  
  Other     (0.4 )   —     (2.7 )
   
 
 
 
        Net cash provided by (used in) investing activities     41.9     647.1     (410.9 )