<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
or
[ ] 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 42-1407240
(State of Incorporation) (IRS Employer Identification No.)
McLeodUSA Technology Park
6400 C Street SW
P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(Address of principal executive office) (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 [X] No [_]
The number of shares outstanding of each class of the issuer's common stock as
of April 30, 1998:
Common Stock Class A: ($.01 par value)................. 62,647,688 shares
Common Stock Class B: ($.01 par value)................. None
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. Financial Information
- ------ ---------------------
<S> <C>
Item 1. Financial Statements....................................................................... 3
Consolidated Balance Sheets, March 31, 1998 (unaudited) and December 31, 1997.............. 3
Unaudited Consolidated Statements of Operations and Comprehensive Income
for the three months ended March 31, 1998 and 1997...................................... 4
Unaudited Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997................................................................. 5
Notes to Consolidated Financial Statements (unaudited)..................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 9
<CAPTION>
PART II. Other Information
- ------- -----------------
<S>
Item 1. Legal Proceedings.......................................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................... 17
Signatures......................................................................................... 18
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
McLEODUSA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents............................................................ $ 319,265 $ 331,941
Investment in available-for-sale securities.......................................... 281,342 34,696
Trade receivables, net............................................................... 114,715 108,472
Inventory............................................................................ 4,268 3,992
Deferred expenses.................................................................... 28,830 27,641
Prepaid expenses and other........................................................... 14,294 11,044
---------- ----------
TOTAL CURRENT ASSETS.............................................................. 762,714 517,786
---------- ----------
Property and Equipment
Land and building.................................................................... 36,971 35,420
Telecommunications networks.......................................................... 201,469 198,046
Furniture, fixtures and equipment.................................................... 93,528 70,579
Networks in progress................................................................. 94,185 81,432
Building in progress................................................................. 12,340 10,002
---------- ----------
438,493 395,479
Less accumulated depreciation........................................................ 32,325 21,675
---------- ----------
406,168 373,804
---------- ----------
Investments, Intangible and Other Assets
Other investments.................................................................... 31,835 30,189
Goodwill, net........................................................................ 272,828 273,442
Other intangibles, net............................................................... 102,258 97,935
Other................................................................................ 58,413 52,496
---------- ----------
465,334 454,062
---------- ----------
$1,634,216 $1,345,652
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt................................................. $ 4,867 $ 6,004
Contracts and notes payable.......................................................... 4,112 6,556
Accounts payable..................................................................... 55,581 45,354
Accrued payroll and payroll related expenses......................................... 17,317 21,454
Other accrued liabilities............................................................ 34,024 36,793
Deferred revenue, current portion.................................................... 8,383 10,381
Customer deposits.................................................................... 13,799 12,710
---------- ----------
TOTAL CURRENT LIABILITIES......................................................... 138,083 139,252
---------- ----------
Long-term Debt, less current maturities................................................. 922,449 613,384
---------- ----------
Deferred Revenue, less current portion.................................................. 14,541 12,664
---------- ----------
Other long-term liabilities............................................................. 21,421 20,973
---------- ----------
Stockholders' Equity
Capital Stock:
Common, Class A, $.01 par value; authorized 250,000,000 shares;
issued and outstanding 1998 62,505,542 shares; 1997 61,799,412
shares.......................................................................... 625 618
Common, Class B, convertible, $.01 par value; authorized 22,000,000
shares; issued and outstanding 1998 and 1997 none............................... --- ---
Additional paid-in capital........................................................... 691,492 688,964
Accumulated deficit.................................................................. (158,002) (127,735)
Accumulated other comprehensive income............................................... 3,607 (2,468)
---------- ----------
537,722 559,379
---------- ----------
$1,634,216 $1,345,652
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
McLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Telecommunications:
Local and long distance............................................................... $ 61,658 $ 14,848
Local exchange services............................................................... 15,943 ---
Private line and data................................................................. 9,385 2,413
Network maintenance and equipment..................................................... 7,481 1,985
Other telecommunications.............................................................. 6,884 ---
-------- --------
Total telecommunications revenue.................................................... 101,351 19,246
Directory............................................................................... 27,964 14,214
Telemarketing........................................................................... 5,016 2,287
-------- --------
TOTAL REVENUES....................................................................... 134,331 35,747
Operating expense:
Cost of service........................................................................ 75,045 20,238
Selling, general and administrative.................................................... 58,768 24,947
Depreciation and amortization.......................................................... 19,431 4,122
Other.................................................................................. 1,900 1,608
-------- --------
TOTAL OPERATING EXPENSES............................................................. 155,144 50,915
-------- --------
OPERATING LOSS........................................................................ (20,813) (15,168)
Nonoperating income (expense):
Interest income........................................................................ 4,613 4,253
Interest (expense)..................................................................... (14,754) (2,447)
Other income........................................................................... 687 7
-------- --------
TOTAL NONOPERATING INCOME (EXPENSE).................................................. (9,454) 1,813
-------- --------
LOSS BEFORE INCOME TAXES............................................................. (30,267) (13,355)
Income taxes............................................................................ --- ---
-------- --------
NET LOSS............................................................................. $(30,267) $(13,355)
======== ========
Loss per common share................................................................... $(0.49) $(0.26)
======== ========
Weighted average common shares outstanding.............................................. 62,227 52,327
======== ========
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during the period................................... 6,887 ---
Less: reclassification adjustment for gains included in net income.................. (812) ---
-------- --------
TOTAL OTHER COMPREHENSIVE INCOME..................................................... 6,075 ---
-------- --------
COMPREHENSIVE LOSS................................................................... $(24,192) $(13,355)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
McLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss $ (30,267) $(13,355)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation..................................................................... 10,822 1,930
Amortization....................................................................... 8,609 2,192
Accretion of interest on senior discount notes..................................... 8,418 2,621
Changes in assets and liabilities, net of effects of acquisitions:
(Increase) decrease in trade receivables........................................... (6,243) 1,739
(Increase) in inventory............................................................ (276) (26)
(Increase) decrease in deferred expenses........................................... (1,189) 1,083
(Increase) in deferred line installation costs..................................... (3,439) (2,120)
Increase in accounts payable and accrued expenses.................................. 3,321 950
Increase (decrease) in deferred revenue............................................ (121) 291
Increase in customer deposits...................................................... 1,089 34
Other, net......................................................................... (3,167) (1,263)
--------- --------
NET CASH (USED IN) OPERATING ACTIVITIES....................................... (12,443) (5,924)
--------- --------
Cash Flows from Investing Activities
Purchases of property and equipment.................................................. (41,458) (24,511)
Available-for-sale securities:
Purchases........................................................................ (390,483) (32,721)
Sales............................................................................ 142,936 30,730
Maturities....................................................................... 6,976 22,793
Acquisitions......................................................................... (5,726) (7,529)
Payments on PCS licenses............................................................. --- (1,755)
Other................................................................................ (1,223) (143)
--------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (288,978) (13,136)
--------- --------
Cash Flows from Financing Activities
Payments on contracts and notes payable.............................................. (2,563) ---
Net proceeds from long-term debt..................................................... 292,517 289,796
Payments on long-term debt........................................................... (2,289) (533)
Net proceeds from issuance of common stock........................................... 1,080 316
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................................... 288,745 289,579
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... (12,676) 270,519
Cash and cash equivalents:
Beginning............................................................................ 331,941 96,480
--------- --------
Ending............................................................................... $ 319,265 $366,999
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
McLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the Three Months Ended
March 31, 1998 and 1997 is Unaudited)
Note 1: Basis of Presentation
Interim Financial Information (unaudited): The financial statements and
notes related thereto as of March 31, 1998, and for the three month periods
ended March 31, 1998 and 1997, are unaudited, but in the opinion of management
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position and
results of operations. The operating results for the interim periods are not
indicative of the operating results to be expected for a full year or for other
interim periods. Certain information and footnote disclosure normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to instructions,
rules and regulations prescribed by the Securities and Exchange Commission (the
"Commission"). Although the Company believes that the disclosures provided are
adequate to make the information presented not misleading, it recommends that
these consolidated condensed financial statements be read in conjunction with
the audited consolidated financial statements and the footnotes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, filed with the Commission on March 9, 1998.
Reclassifications: Certain items in the December 31, 1997 balance sheet
and the unaudited statement of operations for the three month period ended March
31, 1997 have been reclassified to be consistent with the presentation in the
March 31, 1998 unaudited financial statements.
Note 2: Supplemental Asset Data
Cash and cash equivalents: For purposes of reporting cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less and all certificates of deposit, regardless of maturity,
to be cash equivalents.
Trade Receivables: The composition of trade receivables, net is as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- -------------
(In thousands)
<S> <C> <C>
Trade Receivables:
Billed......................................................... $ 90,125 $ 86,309
Unbilled....................................................... 37,791 34,114
-------- --------
127,916 120,423
Allowance for doubtful accounts and discounts..................... (13,201) (11,951)
-------- --------
$114,715 $108,472
======== ========
</TABLE>
Inventory: Inventory is carried principally at the lower of average cost
or market and consists primarily of new and reusable parts required to maintain
fiber optic networks and parts and equipment used in the maintenance and
installation of telephone systems.
Goodwill: Goodwill resulting from the Company's acquisitions is being
amortized over a range of 15 to 30 years using the straight-line method and is
periodically reviewed for impairment based upon an assessment of future
operations to ensure that it is appropriately valued. Accumulated amortization
on goodwill totaled $8,408,000 and $5,834,000, at March 31, 1998 and December
31, 1997, respectively.
Other intangibles: Other intangibles consist of customer lists and
noncompete agreements related to the Company's acquisitions, deferred line
installation costs incurred in the establishment of local access lines for
customers and franchise rights to provide cable services to customers in three
Illinois counties and in a Michigan city. The customer lists and noncompete
agreements are being amortized using the straight-line method over periods
ranging from 3 to 15 years. The deferred line installation costs are being
amortized using the straight-line method over 36 to 60 months, which
approximates the average lives of residential and business customer contracts.
The franchise rights are being amortized
6
<PAGE>
using the straight-line method over periods ranging from 10 to 15 years.
Accumulated amortization on the other intangibles totaled $13,475,000 and
$9,158,000 at March 31, 1998 and December 31, 1997, respectively.
Note 3: Long-Term Debt
On March 16, 1998, the Company completed a private offering (the "Senior
Note Offering") of $300 million principal amount of 8 3/8% Senior Notes due
March 15, 2008 (the "Senior Notes"). The Company received net proceeds of
approximately $292.6 million from the Senior Note Offering. Interest on the
Senior Notes will be payable in cash semi-annually in arrears on March 15 and
September 15 of each year at a rate of 8 3/8% per annum, commencing September
15, 1998. The Senior Notes rank pari passu in right of payment with all existing
and future senior unsecured indebtedness of the Company and rank senior in right
of payment to all existing and future subordinated indebtedness of the Company.
As of March 31, 1998, the Company had no outstanding subordinated indebtedness
and had $560.2 million outstanding indebtedness that would rank pari passu with
the Senior Notes. As of March 31, 1998, the Senior Notes had not been registered
under the Securities Act of 1933, as amended (the "Securities Act") and
therefore cannot be offered for resale, resold or otherwise transferred unless
so registered or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Company has agreed to file
a registration statement with the Commission for the registration of $300
million principal amount of 8 3/8% Senior Notes due March 15, 2008 (the
"Exchange Notes" and together with the Senior Notes, the "Notes"). The indenture
relating to the Senior Notes contains certain covenants which, among other
things, restrict the ability of the Company to incur additional indebtedness,
pay dividends or make distributions of the Company's or its subsidiaries' stock,
make other restricted payments, enter into sale and leaseback transactions,
create liens, enter into transactions with affiliates or related persons, or
consolidate, merge or sell all or substantially all of its assets.
Note 4: Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
------- -------
(In Thousands)
(Unaudited)
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information
Cash payment for interest, net of interest capitalized 1998 $1,690,000;
1997 $290,000.................................................................... $ 362 $ ---
====== =======
Supplemental Schedule of Noncash Investing and Financing Activities
Release of 37,107 shares of Class A Common Stock from escrow to certain
of the shareholders of Ruffalo, Cody & Associates, Inc. ("Ruffalo Cody")
as additional consideration for the Company's acquisition of Ruffalo
Cody in July 1996.................................................................. $ 1,020
=======
Capital leases incurred for the acquisition of property and equipment................... $1,728
======
Acquisition of F.D.S.D. Rapid City, Inc. directory:
Cash purchase price................................................................ $2,226
======
Other intangibles.................................................................. $2,226
======
Acquisition of Bi-Rite Directories, Inc. directory:
Cash purchase price 3,500
Long-term debt assumed............................................................. 190
------
Cash purchase price................................................................ $3,690
======
Other intangibles.................................................................. $3,690
======
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
-------- --------
(In Thousands)
(Unaudited)
<S> <C> <C>
Acquisition of Digital Communications of Iowa, Inc.:
Cash acquisition costs............................................................. $ 29
Stock issued....................................................................... 2,250
-------
$ 2,279
=======
Working capital acquired, net...................................................... $ 543
Fair value of other assets acquired, principally furniture, fixtures and
equipment........................................................................ 658
Goodwill........................................................................... 1,118
Long-term debt assumed............................................................. (40)
-------
$ 2,279
=======
Acquisition of Fronteer Financial Holdings, Ltd. directories:
Cash purchase price................................................................ $ 1,500
Contract payable................................................................... 1,867
Option agreement................................................................... 500
-------
$ 3,867
=======
Other intangibles.................................................................. $ 3,867
=======
Acquisition of Indiana Directories, Inc. directories:
Cash purchase price................................................................ $ 6,000
Contract payable................................................................... 4,031
-------
$10,031
=======
Furniture, fixtures and equipment.................................................. $ 150
Other intangibles.................................................................. 9,881
-------
$10,031
=======
</TABLE>
Note 5: Acquisitions
Digital Communications of Iowa, Inc. ("Digital Communications"): On
January 30, 1997, the Company issued 84,430 shares of the Company's Class A
common stock, par value $.01 per share (the "Class A Common Stock"), in exchange
for all the outstanding shares of Digital Communications, in a transaction
accounted for using the purchase method of accounting. The total purchase price
was approximately $2.3 million based on the average closing market price of the
Class A Common Stock at the time of the acquisition.
Directories: On February 25, 1997, McLeodUSA Publishing acquired six
directories from Fronteer Financial Holdings, Ltd., ("Fronteer") for a cash
purchase price of approximately $3.9 million.
On March 31, 1997, McLeodUSA Publishing acquired 26 telephone
directories published by Indiana Directories, Inc. ("Indiana Directories") at a
cash purchase price of approximately $10 million.
On March 17, 1998, McLeodUSA Publishing acquired a telephone directory
published by F.D.S.D. Rapid City Directories, Inc. at a cash purchase price of
approximately $2.2 million.
On March 20, 1998, McLeodUSA Publishing acquired a telephone directory
published by Bi-Rite Directories, Inc. for a cash purchase price of
approximately $3.7 million.
Consolidated Communications Inc. ("CCI"): On September 24, 1997,
pursuant to the terms and conditions of an Agreement and Plan of Reorganization
dated June 14, 1997 (the "Merger Agreement"), the Company issued 8,488,586
shares of Class A Common Stock and paid approximately $155 million in cash to
the shareholders of CCI in exchange for all of the outstanding shares of CCI in
a transaction accounted for using the purchase method of accounting. The total
purchase price was approximately $382.1 million based on the average closing
price of the Company's Class A Common Stock five days before and after the date
of the Merger Agreement. The purchase price includes approximately $3.4 million
of direct acquisition costs.
The acquisitions of Digital Communications and CCI have been accounted
for as purchases and the results of operations are included in the consolidated
financial statements since the dates of acquisition.
The unaudited consolidated results of operations for the three months
ended March 31, 1997 on a pro forma basis as though the above entities had been
acquired as of the beginning of the period is as follows (in thousands, except
per share data):
1997
----------
Revenue............................................... $99,451
Net loss.............................................. (14,283)
Loss per common share................................. (0.23)
The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the acquisitions been consummated as of the above dates,
nor are such operating results necessarily indicative of future operating
results.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements included in this discussion relating, but not limited to,
future revenues, operating expenses, capital requirements, growth rates, cash
flows, operational performance, sources and uses of funds, acquisitions,
technological changes and development of a PCS system, are forward-looking
statements that involve certain risks and uncertainties. Factors that may cause
the actual results, performance, achievements or investments expressed or
implied by such forward-looking statements to differ materially from any future
results, performance, achievements or investments expressed or implied by such
forward-looking statements include, among other things, the availability of
financing and regulatory approvals, the number of potential customers in a
target market, the existence of strategic alliances and relationships,
technological, regulatory or other developments in the Company's business,
changes in the competitive climate in which the Company operates and the
emergence of future opportunities and other factors more fully described under
the caption "Business--Risk Factors" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, filed with the Commission on March
9, 1998 and which section is incorporated herein by reference.
Unless otherwise indicated, all dollar amounts in the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations that exceed $1 million have been rounded to one decimal place and all
dollar amounts less than $1 million have been rounded to the nearest thousand.
Overview
The Company derives its revenue from (i) the sale of "bundled" local and
long distance telecommunications services to end users, (ii) telecommunications
network maintenance services and telephone equipment sales, service and
installation, (iii) private line and data services, (iv) the sale of advertising
space in telephone directories, (v) local exchange services through the
operation of an independent local exchange company, Illinois Consolidated
Telephone Company ("ICTC"), acquired as part of the acquisition of Consolidated
Communications Inc. ("CCI") in September 1997 (the "CCI Acquisition"), (vi)
telemarketing services and (vii) other telecommunications services, including
cellular, operator, payphone and paging services. The Company began providing
local exchange services and other telecommunications services as a result of the
CCI Acquisition in September 1997, telephone directory advertising as a result
of its acquisition of Telecom*USA Media Group, Inc., now known as McLeodUSA
Publishing Group, Inc. ("McLeodUSA Publishing") in September 1996, and
telemarketing services as a result of its acquisition of Ruffalo, Cody &
Associates, Inc. ("Ruffalo Cody") in July 1996.
The Company began offering "bundled" local and long distance services to
business customers in January 1994. At the end of 1995, the Company began
offering, on a test basis, long distance services to residential customers. In
June 1996, the Company began marketing and providing to residential customers in
Cedar Rapids, Iowa and Iowa City, Iowa an integrated package of
telecommunications services, marketed under the name PrimeLine(R), that includes
local and long distance service, voice mail, paging, Internet access and travel
card services. During 1997, the Company expanded the states in which it offers
service to business customers to include Iowa, Illinois, Indiana, Minnesota,
Wisconsin, North Dakota, South Dakota, Colorado and Wyoming. During 1997, the
Company also expanded its PrimeLine(R) service to certain additional cities in
Iowa and Illinois and began offering the service to customers in North Dakota,
South Dakota, Wisconsin and Colorado. The Company plans to continue its efforts
to market and provide local, long distance and other telecommunications services
to business customers and market its PrimeLine(R) service to residential
customers. The Company believes its efforts to market its integrated
telecommunications services have been enhanced by its July 1996 acquisition of
Ruffalo Cody, which specializes in direct marketing and telemarketing services,
including telecommunications sales, its September 1996 acquisition of McLeodUSA
Publishing, which publishes and distributes competitive "white page" and "yellow
page" telephone directories in nineteen states in the midwestern and Rocky
Mountain regions of the United States, including most of the Company's target
markets, and its September 1997 acquisition of CCI, including its subsidiary
Consolidated Communications Directories Inc. ("CCD"), which publishes and
distributes "white page" and "yellow page" telephone directories in 38 states
and the United States Virgin Islands.
9
<PAGE>
In September 1997, the Company completed the CCI Acquisition. As a
result of the CCI Acquisition, the Company now owns all of the former CCI
subsidiaries, including ICTC, an independent local exchange carrier serving east
central Illinois; Consolidated Communications Telecom Services Inc. ("CCTS"), a
competitive local exchange carrier which offers integrated local, long distance
and other telecommunications services in central and southern Illinois and in
Indiana; CCD, a telephone directory publishing company; an operator service
company; an inmate pay-phone company; a full service telemarketing agency; a
majority interest in a cable television company serving customers in Greene,
Sangamon and Menard counties in Illinois and Benton Harbor, Michigan; and a
minority interest in a cellular telephone partnership serving parts of east
central Illinois. The Company believes the CCI Acquisition will allow it to
enhance its efforts to offer its telecommunications services in adjoining target
markets including expansion into Indiana and Missouri, states where CCI provided
telecommunications services.
The Company's principal operating expenses consist of cost of service;
selling, general and administrative expenses ("SG&A"); and depreciation and
amortization. Cost of service primarily includes local services purchased from
two Regional Bell Operating Companies, costs to terminate the long distance
calls of the Company's customers through interexchange carriers, costs of
printing and distributing the telephone directories published by McLeodUSA
Publishing and CCD, costs associated with maintaining the Iowa Communications
Network and costs associated with operating the Company's network. The Iowa
Communications Network is a fiber optic network that links certain of the State
of Iowa's schools, libraries and other public buildings. SG&A consists of sales
and marketing, customer service and administrative expenses. Depreciation and
amortization include depreciation of the Company's telecommunications network
and equipment; amortization of goodwill and other intangibles related to the
Company's acquisitions, amortization expense related to the excess of estimated
fair market value in aggregate of certain options over the aggregate exercise
price of such options granted to certain officers, other employees and
directors; and amortization of one-time installation costs associated with
transferring customers' local line service from the Regional Bell Operating
Companies to the Company's local telecommunications service.
As the Company expands into new markets, both cost of service and SG&A
will increase. The Company expects to incur cost of service and SG&A expenses
prior to achieving significant revenues in new markets. Fixed costs related to
leasing of central office facilities needed to provide telephone services must
be incurred prior to generating revenue in new markets, while significant levels
of marketing activity may be necessary in the new markets in order for the
Company to build a customer base large enough to generate sufficient revenue to
offset such fixed costs and marketing expenses.
In January and February 1996, the Company granted options to purchase an
aggregate of 965,166 and 688,502 shares of its Class A Common Stock,
respectively, at an exercise price of $2.67 per share, to certain directors,
officers and other employees. The estimated fair market value of these options,
in the aggregate, at the date of grant was later determined to exceed the
aggregate exercise price by approximately $9.2 million. Additionally, in
September 1997, the Company granted options to purchase an aggregate of
1,468,945 shares of its Class A Common Stock at an exercise price of $24.50 to
certain employees of CCI. The fair market value of these options, in the
aggregate, at the date of grant exceeded the aggregate exercise price by
approximately $15.8 million. These amounts are being amortized on a monthly
basis over the four-year vesting period of the options.
The Company has experienced operating losses since its inception as a
result of efforts to build its customer base, develop and construct its network
infrastructure, build its internal staffing, develop its systems and expand into
new markets. The Company expects to continue to focus on increasing its
customer base and geographic coverage. Accordingly, the Company expects that
its cost of service, SG&A and capital expenditures will continue to increase,
all of which may have a negative impact on operating results. In addition, the
projected increases in capital expenditures will continue to generate negative
cash flows from construction activities during the next several years while the
Company installs and expands its fiber optic network and develops and constructs
its proposed PCS system. The Company may also be forced to change its pricing
policies to respond to a changing competitive environment, and there can be no
assurance that the Company will be able to maintain its operating margin. There
can be no assurance that growth in the Company's revenue or customer base will
continue or that the Company will be able to achieve or sustain profitability or
positive cash flows.
The Company has generated net operating losses since its inception and,
accordingly, has incurred no income tax expense. The Company has reduced the
net deferred tax assets generated by these losses by a valuation allowance which
offsets the net deferred tax asset due to the uncertainty of
10
<PAGE>
realizing the benefit of the tax loss carryforwards. The Company will reduce the
valuation allowance when, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax assets will be
realized.
Three Months Ended March 31, 1998 Compared with Three Months Ended March 31,
1997
Total revenue increased from $35.7 million for the three months ended
March 31, 1997 to $134.3 million for the three months ended March 31, 1998,
representing an increase of $98.6 million or 276%. Revenue from the sale of
local and long distance telecommunications services accounted for $46.8 million
of the increase, including $19.2 million contributed by CCI, which was acquired
on September 24, 1997. Local exchange services provided by ICTC generated
revenues of $15.9 million for the period, for which there were no corresponding
1997 revenues. Private line and data revenues accounted for $7 million of
increased revenues over 1997, which was primarily attributable to the CCI
Acquisition. Network maintenance and equipment revenue increased $5.5 million
over 1997 due primarily to the acquisitions of Digital Communications, ESI
Communications, Inc. ("ESI Communications") and CCI. Other telecommunications
revenue, which was due entirely to the CCI Acquisition, represented $6.9 million
of the first quarter 1998 revenues, for which there is no corresponding 1997
amount. Directory revenues increased $13.8 million from the first quarter of
1997 to the first quarter of 1998 due to revenues from new directories acquired
in 1997 and the acquisition of CCD on September 24, 1997. Telemarketing
revenues increased $2.7 million from the first quarter of 1997 to the first
quarter of 1998 with the increase due almost entirely to the CCI Acquisition.
Cost of service increased from $20.2 million for the three months ended
March 31, 1997, to $75 million for the three months ended March 31, 1998,
representing an increase of $54.8 million or 271%. This increase in cost of
service was due primarily to the growth in the Company's local and long distance
telecommunications services and to the acquisitions of Digital Communications,
ESI Communications and CCI, which contributed an aggregate of $34.1 million to
the increase. Cost of service as a percentage of revenue decreased from 57% for
the three months ended March 31, 1997 to 56% for the three months ended
March 31, 1998, primarily as a result of the effect of these acquisitions. The
cost of providing competitive local and long distance services as a percentage
of competitive local and long distance telecommunications revenue decreased from
76% for the three months ended March 31, 1997 to 70% for the three months ended
March 31, 1998, primarily due to the realization of benefits associated with new
wholesale line cost rate agreements with the Regional Bell Operating Companies.
SG&A increased from $24.9 million for the three months ended March 31, 1997
to $58.8 million for the three months ended March 31, 1998, an increase of
$33.9 million or 136%. The acquisitions of Digital Communications, ESI
Communications and CCI contributed an aggregate of $22.7 million to the
increase. Also contributing to this increase were increased costs of $11.2
million related primarily to expansion of selling, customer support and
administration activities to support the Company's growth.
Depreciation and amortization expenses increased from $4.1 million for the
three months ended March 31, 1997 to $19.4 million for the three months ended
March 31, 1998, representing an increase of $15.3 million or 371%. This
increase consisted of $10.5 million related to the acquisitions of Digital
Communications, ESI Communications and CCI, and $4.8 million due primarily to
the growth of the Company's network.
Other operating expenses represented the realization of a purchase
accounting adjustment related to the capitalization of costs associated with CCD
directories in progress at the time the Company acquired CCI.
Interest income increased from $4.3 million for the three-month period
ended March 31, 1997, to $4.6 million for the same period in 1998. This
increase resulted from increased earnings on investments made with the remaining
proceeds from the Company's private debt offerings in March and July 1997 and
the proceeds from the Company's private offering of the Senior Notes in March
1998.
Gross interest expense increased from $2.7 million for the first quarter of
1997 to $16.5 million for the first quarter of 1998. This increase was
primarily a result of an increase in the accretion of interest on the March 1997
issuance of $500 million aggregate principal amount at maturity of 10 1/2%
Senior Discount Notes due March 15, 2007 (the "Senior Discount Notes") of
$5.8 million and accrual of interest on the July 1997 issuance of $225 million
principal amount 9 1/4% Senior Notes due July 2007 (the "1997 Senior Notes") and
the Senior Notes of $6.3 million. Interest expense of approximately $1.7
11
<PAGE>
million and $290,000 was capitalized as part of the Company's construction of
fiber optic network during the first quarter of 1998 and 1997, respectively.
Net loss increased from $13.4 million for the three months ended March 31,
1997 to $30.3 million for the three months ended March 31, 1998, an increase of
$16.9 million. This increase resulted primarily from the following three
factors: the construction and expansion of the Company's network which require
significant expenditures, a substantial portion of which is incurred before the
realization of revenues; the increased depreciation expense related to those
networks and amortization of intangibles related to acquisitions; and net
interest expense on indebtedness to fund market expansion, network development
and acquisitions.
Liquidity and Capital Resources
The Company's total assets increased from $1.3 billion at December 31, 1997
to $1.6 billion at March 31, 1998, primarily due to the net proceeds of
approximately $292.6 million from the Company's March 1998 Senior Note Offering.
At March 31, 1998, the Company's current assets of $762.7 million exceeded its
current liabilities of $138.1 million, providing working capital of $624.6
million, which represents an increase of $246.1 million compared to December 31,
1997 primarily attributable to the net proceeds from the Senior Note Offering.
At December 31, 1997, the Company's current assets of $517.8 million exceeded
current liabilities of $139.3 million, providing working capital of
$378.5 million.
The net cash used in operating activities totaled $12.4 million for the
three months ended March 31, 1998 and $5.9 million for the three months ended
March 31, 1997. During the three months ended March 31, 1998, cash for
operating activities was used primarily to fund the Company's net loss of
$30.3 million for such period. The Company also required cash to fund the growth
in accounts receivable and deferred line installation costs of $6.2 million and
$3.4 million, respectively, primarily as a result of the expansion of the
Company's local and long distance telecommunications services. During the three
months ended March 31, 1997, cash for operating activities was used primarily to
fund the Company's net loss of $13.4 million for such period. The Company also
required cash to fund the growth in line installation costs of $2.1 million.
The Company's investing activities used cash of $289 million during the
three months ended March 31, 1998 and $13.1 million during the three months
ended March 31, 1997. The equipment required for the expansion of the Company's
local and long distance telecommunications services, the Company's development
and construction of its fiber optic telecommunications network and other capital
expenditures resulted in purchases of equipment and fiber optic cable and other
property and equipment totaling $41.5 million and $24.5 million during the three
months ended March 31, 1998 and 1997, respectively. The Company also used cash
of $390.4 million and $32.7 million to acquire available-for-sale securities
during the first three months of 1998 and 1997, respectively, offset by proceeds
from sales and maturities of available-for-sale securities of $149.9 million and
$53.5 million, respectively, during those periods.
The Company used an aggregate of $5.7 million cash to acquire one directory
from F.D.S.D. Rapid City, Inc. in Rapid City, South Dakota, and one directory
from Bi-Rite Directories, Inc. in Springfield, Missouri, on March 17, 1998 and
March 20, 1998, respectively. The Company used cash of $7.5 million to acquire
directories from Fronteer and Indiana Directories in February 1997 and March
1997, respectively.
Cash received from net financing activities was $288.7 million during the
three months ended March 31, 1998, primarily as a result of the Company's Senior
Note Offering in March 1998. Cash received from financing activities during the
three months ended March 31, 1997 was $289.6 million and was primarily obtained
from the Company's private offering of the Senior Discount Notes, in March 1997.
On March 16, 1998, the Company completed the Senior Note Offering and
received net proceeds of approximately $292.6 million. Interest on the Senior
Notes will be payable in cash semi-annually in arrears on March 15 and September
15 of each year at a rate of 8 3/8% per annum, commencing September 15, 1998.
The Senior Notes rank pari passu in right of payment with all existing and
future senior unsecured indebtedness of the Company and rank senior in right of
payment to all existing and future subordinated indebtedness of the Company. As
of March 31, 1998, the Company had no outstanding subordinated indebtedness and
had $560.2 million outstanding indebtedness that would rank pari passu with the
Senior Notes. The Senior Notes will mature on March 15, 2008. As of March 31,
1998, the Senior Notes had not been registered under the Securities Act and
therefore cannot
12
<PAGE>
be offered for resale, resold or otherwise transferred unless so registered or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The Company has agreed to file a registration
statement with the Commission for the registration of $300 million principal
amount of Exchange Notes to be offered in exchange for the Senior Notes. The
Notes will be redeemable at the option of the Company, in whole or in part, at
any time on or after March 15, 2003 at 104.188% of their principal amount at
maturity, plus accrued and unpaid interest, declining to 100.000% of their
principal amount at maturity, plus accrued and unpaid interest, on or after
March 15, 2006. In the event of certain equity investments in the Company by
certain strategic investors on or before March 15, 2001, the Company may, at its
option, use all or a portion of the net proceeds from such sale to redeem up to
33 1/3% of the originally issued principal amount of the Notes at a redemption
price equal to 108.375% of the principal amount of the Notes plus accrued and
unpaid interest thereon, if any, to the redemption date, provided that at least
66 2/3% of the originally issued principal amount of the Notes would remain
outstanding immediately after giving effect to such redemption. In addition, in
the event of a Change of Control (as defined in the indenture relating to the
Senior Notes) of the Company, each holder of Notes shall have the right to
require the Company to repurchase all or any part of such holder's Notes at a
purchase price equal to 101% of the principal amount of the Notes tendered by
such holder plus accrued and unpaid interest, if any, to any Change of Control
Payment Date (as defined in the indenture relating to the Senior Notes).
The indentures relating to the Senior Notes, the Senior Discount Notes and
the 1997 Senior Notes (the "Indentures") impose operating and financial
restrictions on the Company and its subsidiaries. These restrictions affect,
and in certain cases significantly limit or prohibit, among other things, the
ability of the Company and its subsidiaries to incur additional indebtedness,
pay dividends or make distributions in respect of the Company's or such
subsidiaries' capital stock, make other restricted payments, enter into sale and
leaseback transactions, create liens upon assets, enter into transactions with
affiliates or related persons, sell assets, or consolidate, merge or sell all or
substantially all of their assets. There can be no assurance that such
covenants will not adversely affect the Company's ability to finance its future
operations or capital needs or to engage in other business activities that may
be in the interest of the Company.
As of March 31, 1998, the Company estimates that its aggregate capital
requirements for the remainder of 1998, 1999 and 2000 will be approximately $850
million. The Company's estimated capital requirements include the estimated
cost of (i) developing and constructing its fiber optic network, (ii) market
expansion activities, (iii) developing, constructing and operating a PCS system,
and (iv) constructing its new corporate headquarters and associated buildings.
These capital requirements are expected to be funded, in large part, out of the
approximately $292.6 million in net proceeds from the Senior Note Offering in
March 1998, the approximately $308 million in net proceeds remaining from the
Company's offerings in 1997 of the Senior Discount Notes and the 1997 Senior
Notes, additional debt and equity issuances and lease payments to the Company
for portions of the Company's networks.
The Company may require additional capital in the future for business
activities related to those specified above and also for acquisitions, joint
ventures and strategic alliances, as well as to fund operating deficits and net
losses. These activities could require significant additional capital not
included in the foregoing estimated aggregate capital requirements.
The Company's estimate of its future capital requirements contained in this
report is a "forward looking statement" within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual capital requirements may differ materially as a result of
regulatory, technological and competitive developments (including new
opportunities) in the Company's industry.
The Company expects to meet its additional capital needs with the proceeds
from credit facilities and other borrowings, and additional debt and equity
issuances. The Company plans to obtain one or more lines of credit, although no
such lines of credit have yet been negotiated. There can be no assurance,
however, that the Company will be successful in producing sufficient cash flows
or raising sufficient debt or equity capital to meet its strategic objectives or
that such funds, if available at all, will be available on a timely basis or on
terms that are acceptable to the Company.
Effects of New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
("SFAS 131"). This
13
<PAGE>
pronouncement is effective for calendar year 1998 financial statements and
requires reporting segment information consistent with the way executive
management of an entity disaggregates its operations internally to assess
performance and make decisions regarding resource allocations. Among information
to be disclosed, SFAS 131 requires an entity to report a measure of segment
profit or loss, certain specific revenue and expense items and segment assets.
SFAS 131 also requires reconciliations of total segment revenues, total segment
profit or loss and total segment assets to the corresponding amounts shown in
the entity's consolidated financial statements. The Company is in the process of
identifying reportable segments and has not yet determined the effect of
implementing SFAS 131.
Inflation
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
14
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not aware of any material litigation against the Company.
The Company is involved in numerous regulatory proceedings before various state
public utilities commissions, as well as before the FCC.
The Company is dependent on the Regional Bell Operating Companies for
provision of its local and certain of its long distance services. As of the
date hereof, U S WEST Communications, Inc. ("U S WEST") and Ameritech
Corporation ("Ameritech") are the Company's primary suppliers of access to local
central office switches or, in the case of customers served in central Illinois,
to local lines. The Company uses such access to either partition the local
switch or transmit traffic over unbundled local line segments and provide local
service to its customers.
The Company purchases access to local switches in the form of a product
generally known as "Centrex." Without such access, the Company could not, as of
the date hereof, efficiently provide bundled local and long distance services to
most of its customers, although it could provide stand-alone long distance
service. Since the Company believes its ability to offer bundled local and long
distance services is critical to its current sales efforts, any successful
effort by U S WEST or Ameritech to deny or substantially limit the Company's
access to partitioned switches would have a material adverse effect on the
Company.
On February 5, 1996, U S WEST filed tariffs and other notices announcing
its intention to limit future Centrex access to its switches by Centrex
customers (including the Company) throughout U S WEST's fourteen-state service
region, effective February 5, 1996 (the "U S WEST Centrex Action"). Although U
S WEST stated that it would "grandfather" existing Centrex agreements with the
Company and permit the Company to continue to use U S WEST's central office
switches through April 29, 2005, it also indicated that it would not permit the
Company to expand to new cities and would severely limit the number of new lines
it would permit the Company to partition onto U S WEST's portion of the switches
in cities served by the Company.
The Company has challenged, or is challenging, the U S WEST Centrex Action
before the public utilities commissions in certain of the states served by U S
WEST where the Company is doing business or plans to do business. The Company's
challenges to the U S WEST Centrex Action have as of the date hereof been
successful in Iowa, Minnesota, South Dakota, North Dakota and Colorado. In
Wyoming, state regulators rejected U S WEST's action, but the matter remains
pending on appeal. The Company has, however, been unsuccessful in its
challenges to the U S WEST Centrex Action in Nebraska and Idaho. In Nebraska,
the Company and other parties have appealed the order of the Nebraska Public
Service Commission rejecting complaints objecting to the U S WEST Centrex
Action. As of the date hereof, the appeal remains pending before the Nebraska
Supreme Court. In Utah, the Company has requested that the Utah Public
Utilities Commission reconsider its order imposing temporary restrictions on
Centrex resale. As of the date hereof, the Company's request remains pending
before the Utah Public Utilities Commission.
In addition to the U S WEST Centrex Action, U S WEST has taken other
measures that may impede the Company's ability to use Centrex service to provide
its competitive local exchange services. For example, in January 1997, U S WEST
proposed to implement certain interconnection surcharges in several of the
states in its service region. On February 20, 1997, the Company and several
other parties filed a petition with the FCC objecting to U S WEST's proposal.
The petition was based on Section 252(d) of the Telecommunications Act, which
governs the pricing of interconnection and network elements. The Company
believes that U S WEST's proposal is an unlawful attempt to recover costs
associated with the upgrading of U S WEST's network, in violation of Section 252
of the Telecommunications Act. U S WEST filed an opposition to the Company's
petition with the FCC on March 3, 1997. The matter remains pending before the
FCC and various state public utilities commissions.
There can be no assurance that the Company will ultimately succeed in its
legal challenges to the U S WEST Centrex Action or other actions by U S WEST
that have the effect of preventing or deterring the Company from using Centrex
service, or that these actions by U S WEST, or similar actions by other Regional
Bell Operating Companies, will not have a material adverse effect on the
15
<PAGE>
Company. In any jurisdiction where U S WEST prevails, the Company's ability to
offer integrated telecommunications services would be impaired, which could have
a material adverse effect on the Company.
The Company also anticipates that U S WEST will seek various legislative
initiatives in states within the Company's target market area in an effort to
reduce state regulatory oversight over its rates and operations. There can be
no assurance that U S WEST will not succeed in such efforts or that any such
state legislative initiatives, if adopted, will not have a material adverse
effect on the Company.
Refusal of U S WEST to Improve its Processing of Service Orders. As a
result of its significant use of the Centrex product to serve its customers in
U S WEST's service territories, the Company depends upon U S WEST to process
service orders placed by the Company to transfer new customers to the Company's
local service. The Company has had substantial difficulty in obtaining timely
and accurate processing of its orders by U S WEST. On July 12, 1996, the
Company filed a complaint with the Iowa Utilities Board against U S WEST in
connection with such actions. In an order issued on October 10, 1996, the Iowa
Utilities Board determined that U S WEST's limitation on the processing of the
Company's service orders constituted an unlawful discriminatory practice under
Iowa law. On February 14, 1997, the Iowa Utilities Board further clarified that
U S WEST must eliminate numerical limitations on the Company's residential and
business orders. U S WEST has subsequently agreed to process the Company's
service orders within a standard five-day period. There can be no assurance,
however, that the decision of, or any further action by, the Iowa Utilities
Board will adequately resolve the service order problems or that such problems
will not impair the Company's ability to expand or to attract new customers,
which could have a material adverse effect on the Company.
Legal Challenges to the Interconnection Decision. The Company's plans to
provide local switched services are dependent upon obtaining favorable
interconnection agreements with local exchange carriers. In August 1996, the
FCC released the Interconnection Decision implementing the interconnection
portions of the Telecommunications Act. Certain provisions of the
Interconnection Decision were appealed to the U.S. Eighth Circuit Court of
Appeals. In July and October 1997, the U.S. Eighth Circuit Court of Appeals
vacated portions of the Interconnection Decision, including provisions
establishing a pricing methodology and a procedure permitting new entrants to
"pick and choose" among various provisions of existing interconnection
agreements. Although the decisions vacating the Interconnection Decision do not
prevent the Company from negotiating interconnection agreements with local
exchange carriers, they do create uncertainty about the rules governing pricing,
terms and conditions of interconnection agreements, and could make negotiating
such agreements more difficult and protracted. The U.S. Supreme Court has
granted certiorari in this matter and is scheduled to review the decisions of
the U.S. Eighth Circuit Court of Appeals during the 1998 term. There can be no
assurance that the Company will be able to obtain interconnection agreements on
terms acceptable to the Company, or that the pending Supreme Court appeal will
be resolved on terms that promote local exchange competition as originally
contemplated by the FCC.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
- -------
Number Exhibit Description
- ------ -------------------
11.1 Statement regarding computation of loss per common share.
27.1 Financial Data Schedule.
99.1 Press release dated January 28, 1998
99.2 Press Release dated March 10, 1998 (Filed as exhibit 99.1 to the
Current Report on Form 8-K, File No. 0-20763, filed with the
Commission on March 20, 1998)
99.3 Press Release dated March 11, 1998 (Filed as exhibit 99.2 to the
Current Report on Form 8-K, File No. 0-20763, filed with the
Commission on March 20, 1998)
99.4 Press Release dated April 29, 1998.
99.5 Press Release dated April 30, 1998.
99.6 Press Release dated May 1, 1998.
(b) Reports on Form 8-K
On March 20, 1998, the Company filed a Current Report on Form 8-K which
reported that the Company proposed to make a private offering of the Senior
Notes.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McLEODUSA INCORPORATED
(registrant)
Date: May 13, 1998 By: /s/ Stephen C. Gray
------------------------------------------
Stephen C. Gray
President and Chief Operating Officer
Date: May 13, 1998 By: /s/ Blake O. Fisher, Jr.
------------------------------------------
Blake O. Fisher, Jr.
Chief Financial and Administrative Officer
and Treasurer
18
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Description Page
- ------- ------------------- ------------
11.1 Statement regarding computation of loss per common
share.
27.1 Financial Data Schedule.
99.1 Press release dated January 28, 1998
99.2 Press Release dated March 10, 1998 (Filed as
exhibit 99.1 to the Current Report on Form 8-K,
File No. 0-20763, filed with the Commission on
March 20, 1998)
99.3 Press Release dated March 11, 1998 (Filed as
exhibit 99.2 to the Current Report on Form 8-K,
File No. 0-20763, filed with the Commission on
March 20, 1998)
99.4 Press Release dated April 29, 1998.
99.5 Press Release dated April 30, 1998.
99.6 Press Release dated May 1, 1998.
<PAGE>
EXHIBIT 11.1
McLEODUSA INCORPORATED
COMPUTATION OF LOSS PER COMMON SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Computation of weighted average number of
common shares outstanding:
Common shares, Class A, outstanding at the
beginning of the period................................................................. 61,799 36,173
Common shares, Class B, outstanding at the
beginning of the period (A)............................................................. --- 15,626
Weighted average number of shares issued
during the period....................................................................... 428 528
-------- --------
Weighted average number of common shares................................................. 62,227 52,327
======== ========
Net loss................................................................................. $(30,267) $(13,355)
======== ========
Loss per common share.................................................................... $ (0.49) $ (0.26)
======== ========
</TABLE>
(A) The Class B common stock, $.01 par value per share is convertible on a one-
for-one basis at any time at the option of the holder into Class A common
stock. As of March 31, 1998, all shares of Class B common stock had been
converted into shares of Class A common stock.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF MCLEODUSA INCORPORATED AND
SUBSIDIARIES FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 319,265
<SECURITIES> 281,342
<RECEIVABLES> 127,916
<ALLOWANCES> 13,201
<INVENTORY> 4,268
<CURRENT-ASSETS> 762,714
<PP&E> 438,493
<DEPRECIATION> 32,325
<TOTAL-ASSETS> 1,634,216
<CURRENT-LIABILITIES> 138,083
<BONDS> 922,449
0
0
<COMMON> 625
<OTHER-SE> 537,097
<TOTAL-LIABILITY-AND-EQUITY> 1,634,216
<SALES> 134,331
<TOTAL-REVENUES> 134,331
<CGS> 75,045
<TOTAL-COSTS> 75,045
<OTHER-EXPENSES> 76,260
<LOSS-PROVISION> 3,839
<INTEREST-EXPENSE> 14,754
<INCOME-PRETAX> (30,267)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,267)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,267)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
<PAGE>
EXHIBIT 99.1
[LOGO OF MCLEODUSA APPEARS HERE]
[LETTERHEAD OF MCLEODUSA APPEARS HERE]
MCLEODUSA REPORTS FOURTH QUARTER AND 1997 RESULTS
1997: A Year of Expansion and Growth
Cedar Rapids, Iowa, January 28, 1998 -- McLeodUSA Incorporated
(NASDAQ/NMS:MCLD) today reported results for fourth quarter and fiscal year
1997. Revenues were a record $267.9 million for the year ended December 31,
1997, compared to $81.3 million for 1996, an increase of 230 percent. Net loss
for the year was $79.9 million compared to a net loss of $22.3 million for 1996.
EBITDA (earnings before interest, taxes, depreciation and amortization) loss for
the year was $31.5 million, compared with EBITDA loss of $17.3 million for 1996.
Commenting on 1997 results, Clark McLeod, chairman and CEO stated, "It was
a challenging year with substantial rewards. We completed the Consolidated
Communications merger while maintaining significant internal growth. Our 1996 to
1997 statistics highlight our progress:
. local lines in service grew from 65,000 to 283,000,
. fiber route miles increased from 2,400 to nearly 5,000,
. directory distribution grew from 10 million to 15 million, and
. revenues increased from $81 million to $268 million."
(more)
<PAGE>
The Company reported fourth quarter revenues of $136.3 million, compared to
revenues of $35.8 million for the same quarter of 1996, an increase of 281
percent. Net loss for the quarter was $26.4 million compared to a net loss of
$8.9 million for the fourth quarter of 1996. EBITDA was a positive $1.1 million
in fourth quarter, compared to negative $13.6 million in third quarter 1997, and
negative $5.5 million for fourth quarter 1996.
A comparison of sequential quarters shows an additional 38,800 CLEC local
lines in service over third quarter, an increase in new CLEC lines sold of
41,200; and 22,100 new CLEC local line customers.
Commenting on fourth quarter results, Steve Gray, president and chief
operating officer, stated: "This is our first full quarter of results combining
the CCI organization with McLeodUSA. Two elements of a cyclical nature also
occurred during the quarter. First, our directory business experienced its
strongest quarter of the year contributing $35.5 million in revenue. Second,
installs of new service increased from third quarter to fourth quarter even with
nearly 15 percent fewer business days. Fourth quarter results also reflect the
shift in our sales emphasis to business, which will trend to just over two-
thirds business, one-third residential in 1998. This shift is expected to help
our gross margin and simplify order implementation and customer service."
McLeod summarized: "Our focus in 1998 will be to:
1. Continue our successful branding strategy through ubiquitous coverage
of our target geography with McLeodUSA phone directories.
2. Aggressively capture business line share in the states we have
targeted for 1998.
3. Emphasize marketing our residential services in our core states.
4. Add 1,400 miles of fiber and focus on 36 new city rings.
5. Prepare for the migration of local service customers to our network
in 1999 and 2000."
Concluding, Mr. McLeod stated, "The expansion and growth we achieved in
1997 positioned us for 1998, establishing most of the key anchor points of our
geographic footprint and bringing together the team who will continue to execute
our plan."
###
McLeodUSA, founded in June of 1991, is a provider of integrated
telecommunications services to businesses and residential customers. The
Company's telecommunications customers are located primarily in Iowa, Illinois,
Minnesota, Wisconsin, North Dakota and South Dakota. In September 1997 McLeodUSA
completed a merger with Consolidated Communications Inc. of Mattoon, IL,
creating the first Super Regional Competitive Local Exchange Carrier. The
combined firm is a 14-state facilities-oriented telecommunications provider with
6 switches, and more than 282,000 local lines, 4,500 employees, and 4,900 route
miles of fiber optics
<PAGE>
network. In the next 12 months, the Company's publishing subsidiaries will
distribute over 14.8 million copies of competitive directories in 21 states,
reaching a population of 26 million.
The statements contained in this release are forward-looking statements that
involve risks and uncertainties, including, but not limited to revision of
expansion plans, availability of financing and regulatory approvals, the numbers
of potential customers in a target market, the existence of strategic alliances
or relationships, technological, regulatory or other developments in the
Company's business, changes in the competitive climate in which the Company
operates and the emergence of future opportunities, all of which could cause
actual results and experiences of McLeodUSA Incorporated to differ materially
from anticipated results and expectations expressed in the forward-looking
statements contained herein. These and other applicable risks are summarized
under the caption "Business-Risk Factors" and elsewhere in the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 1996, which is filed
with the Securities and Exchange Commission.
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Consolidated Statement of Operations
(In thousands except for per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
------------------- -------------------
December 31, December 31,
------------ ------------
1997 1996 1997 1996
---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications:
Local and long distance $49,841 $12,465 $110,023 $41,399
Local exchange services (ICTC) 16,117 ---- 16,117 ----
Private line and data 9,657 2,157 17,174 10,272
Network maintenance and equipment 9,150 1,509 20,965 5,936
Other telecommunications 9,907 ---- 9,907 ----
-------- -------- -------- --------
Total telecommunications revenue 94,672 16,131 174,186 57,607
Directory 35,495 15,152 81,055 15,152
Telemarketing 6,124 4,543 12,645 8,564
-------- -------- -------- --------
Total revenues 136,291 35,826 267,886 81,323
Operating expenses:
Cost or service 74,750 20,931 155,430 52,624
Selling, general and administrative 60,490 20,418 143,918 46,044
Depreciation and amortization 17,567 3,751 33,275 8,485
Other 1,943 2,380 4,632 2,380
-------- -------- -------- --------
Total operating expenses 154,750 47,480 337,255 109,533
-------- -------- -------- --------
Operating loss (18,459) (11,654) (69,369) (28,210)
Non-operating income (expense):
Interest income 4,590 2,630 22,660 6,034
Interest (expense) (13,871) (122) (34,627) (665)
Other 1,386 218 1,426 495
-------- -------- -------- --------
Total non-operating income (expense) (7,895) 2,726 (10,541) 5,864
-------- -------- -------- --------
Loss before income taxes (26,354) (8,928) (79,910) (22,346)
Income taxes ---- ---- ---- ----
-------- -------- -------- --------
Net loss $(26,354) $(8,928) $(79,910) $(22,346)
======== ======== ======== ========
Loss per common and common equivalent share $(0.43) $(0.18) $(1.45) $(0.52)
======== ======== ======== ========
Weighted average common and
common equivalent shares outstanding 61,567 48,707 54,974 43,019
======== ======== ======== ========
EBITDA $1,051 $(5,523) $(31,462) $(17,345)
======== ======== ======== ========
</TABLE>
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Consolidated Statement of Operations
(In thousands except for per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
3/31/97 6/30/97 9/30/97 12/31/97
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications:
Local and long distance $14,848 $18,551 $26,783 $49,841
Local exchange services (ICTC) ---- ---- ---- 16,117
Private line and data 2,413 2,256 2,848 9,657
Network maintenance and equipment 1,985 3,434 6,396 9,150
Other telecommunications ---- ---- ---- 9,907
-------- -------- -------- ---------
Total telecommunications revenue 19,246 24,241 36,027 94,672
Directory 14,214 20,273 11,073 35,495
Telemarketing 2,287 2,009 2,225 6,124
-------- -------- -------- ---------
Total revenues 35,747 46,523 49,325 136,291
Operating expenses:
Cost of service 21,200 27,563 31,917 74,750
Selling, general and administrative 23,985 28,398 31,045 60,490
Depreciation and amortization 4,122 5,231 6,355 17,567
Other 1,608 999 82 1,943
-------- -------- -------- ---------
Total operating expenses 50,915 62,191 69,399 154,750
-------- -------- -------- ---------
Operating loss (15,168) (15,668) (20,074) (18,459)
Non-operating income (expense):
Interest income 4,253 6,199 7,618 4,590
Interest (expense) (2,447) (7,039) (11,270) (13,871)
Other 7 12 21 1,386
-------- -------- -------- ---------
Total non-operating income (expense) 1,813 (828) (3,631) (7,895)
-------- -------- -------- ---------
Loss before income taxes (13,355) (16,496) (23,705) (26,354)
Income Taxes ---- ---- ---- ----
-------- -------- -------- ---------
Net loss $(13,355) $(16,496) $(23,705) $(26,354)
======== ======== ======== =========
Loss per common and
common equivalent share $(0.26) $(0.31) $(0.45) $(0.43)
======== ======== ======== =========
Weighted average common and
common equivalent shares outstanding 52,327 52,583 53,335 61,567
======== ======== ======== =========
EBITDA $(9,438) $(9,438) $(13,637) $1,051
======== ======== ======== =========
</TABLE>
<PAGE>
McLeodUSA Selected Statistical Data:
<TABLE>
<CAPTION>
4Q97 vs. 4Q97 vs.
4Q96 3Q97
12/31/97 12/31/96 % Change 9/30/97 % Change
-------- -------- -------- -------- --------
<S> <C> <C>
Sales cities 60 39 54% 60 0%
Central offices 366 186 97% 350 5%
Cities served 227 92 147% 212 7%
Route miles 4,908 2,352 109% 4,617 6%
Total local lines in service 282,600 65,400 332% 244,000 16%
Business 149,300 61,500 143% 128,200 16%
Residential 133,300 3,900 3,318% 115,800 15%
Total local customers 157,000 16,600 846% 135,400 16%
Business 29,200 12,100 141% 25,200 16%
Residential 127,800 4,500 2,740% 110,200 16%
CLEC Local lines in service 193,000 65,400 195% 154,200 25%
Business 124,900 61,500 103% 104,100 20%
Residential 68,100 3,900 1,646% 50,100 36%
CLEC Local line customers 86,000 16,600 418% 63,900 35%
Business 22,200 12,100 83% 18,300 21%
Residential 63,800 4,500 1,318% 45,600 40%
CLEC Lines per business customer 5.6 5.1 10% 5.7 (2)%
CLEC Lines sold during quarter 41,200 10,300 300% 48,400 (15)%
Business 26,700 6,900 287% 19,800 35%
Residential 14,500 3,400 326% 28,600 (49)%
New CLEC Lines in service
during quarter* 38,800 9,400 313% 35,300 10%
Business 20,800 6,900 201% 16,300 28%
Residential 18,000 2,500 620% 19,000 (5)%
ILEC Local lines in service 89,600 NA NA 89,800 0%
Business 24,400 NA NA 24,100 1%
Residential 65,200 NA NA 65,700 (1)%
ILEC Local line customers 71,000 NA NA 71,500 (1)%
Business 7,000 NA NA 6,900 1%
Residential 64,000 NA NA 64,600 (1)%
</TABLE>
* Third and Fourth Quarters exclude lines acquired from CCI
<PAGE>
EXHIBIT 99.4
------------
[LOGO OF MCLEODUSA APPEARS HERE]
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, PO Box 3177
Cedar Rapids, IA 52406-3177
Press and Investor Contact: Bryce E. Nemitz
[email protected]
Phone: (319) 298-7800
FAX: (319) 298-7767
FOR IMMEDIATE RELEASE
McLeodUSA Reports Continued Growth and Margin Improvement for First Quarter 1998
Cedar Rapids, Iowa, April 29, 1998 -- McLeodUSA Incorporated
(NASDAQ/NMS:MCLD), a provider of integrated telecommunications services in
Midwest and Rocky Mountain states, today reported first quarter results for
1998. Revenues were $134.3 million for the quarter ended March 31, 1998, an
increase of 276 percent compared to revenues of $35.7 million for the first
quarter of 1997. Net loss for the quarter was $30.3 million or $(0.49) per share
compared to a net loss of $13.4 million or $(0.26) per share for the first
quarter of 1997. EBITDA for the quarter was a positive $0.5 million compared
with EBITDA loss of $9.4 million a year ago.
Steve Gray, President and COO, commented, "I'm pleased with our
performance, both operationally and financially. Our quarterly EBITDA
achievement exceeded market expectations due to lower expenses and higher margin
revenues associated with our continuing shift in emphasis toward business
sales."
Of the $134.3 million in total revenues for the quarter, telecommunications
revenues accounted for 75 percent, and directory advertising revenues were 21
percent. Due to anticipated seasonal variations, revenues from directory
publishing were down from the most recent quarter, but up 97 percent from the
same quarter a year ago.
"Consistent with our financial performance, our operating statistics
continue to improve," said Gray. "The ongoing process of shifting our sales
emphasis to business has streamlined our order implementation and customer
service, and has improved margins. In cities where our business market share is
stronger and our network is operational, we were able to move our sales
<PAGE>
efforts upmarket, allowing the sale of higher margin access, private line and
data services to business customers for both intra- and inter-city services."
McLeodUSA reported an increase in CLEC local lines in service from 193,000
lines at the end of 1997 to 223,200 lines as of March 31, an increase of 16
percent for the quarter and 189 percent over the first quarter total in 1997.
Total local lines in service increased 307 percent year over year. Market
penetration in states other than Iowa and Illinois continued strong during the
quarter, with the Company's expansion states contributing 54 percent of new
business lines sold.
During 1998, McLeodUSA is focusing on continuing its market share growth as
it builds facilities to prepare for the 1999 and 2000 migration of customers
onto the Company's network. Consistent with this strategy, Gray stated, "We will
aggressively add network along the intra-city business corridors in 100 selected
cities to reach more business customers and prospects via direct build. As a
result, we have increased our planned 1998 network build to 2,000 route miles."
McLeodUSA added the first of three switches planned for 1998 to its
network, bringing the total number of switches to seven. The new switch will
carry local and long distance traffic for McLeodUSA customers. In addition, the
Company reported that construction of its 36 city rings is progressing on
schedule. Gray commented, "Every indication is that building network directly to
customers in our core business markets is the right approach. By attacking this
portion of our strategy, we can continue to improve our margins, be less
dependent on the Bell companies, and offer our customers improved responsiveness
and a broader array of advanced telecommunications services."
To help fund this incremental facilities construction, the Company
completed a private offering of senior notes in March yielding $293 million in
proceeds. "These additional funds will help finance the third part of our core
strategy: migrating customers onto our network," stated Clark McLeod, Chairman
and CEO.
Summarizing the quarter, McLeod stated, "It is exciting to see our
execution strategy entering its third and most important phase: the migration of
our customer share to our network. Continued growth and preparation for the
migration process is our clear focus for 1998."
McLeodUSA, founded in June of 1991, is a provider of integrated
telecommunications services to business and residential customers. The Company's
telecommunications customers are located in ten Midwest and Rocky Mountain
states; future expansion will add 4 additional states. McLeodUSA is a
facilities-oriented telecommunications provider with 7 switches, and nearly
314,000 local lines, 4,700 employees, and 5,100 route miles of fiber optics
network. In the next 12 months, the Company's publishing subsidiaries will
distribute nearly 15 million copies of competitive directories in 21 states,
reaching a population of nearly 27 million.
The statements contained in this release are forward-looking statements
that involve risks and uncertainties, including, but not limited to revision of
expansion plans, availability of financing and regulatory approvals, the number
of potential customers in a target market,
<PAGE>
the existence of strategic alliances or relationships, technological, regulatory
or other developments in the Company's business, changes in the competitive
climate in which the Company operates and the emergence of future opportunities,
all of which could cause actual results and experiences of McLeodUSA
Incorporated to differ materially from anticipated results and expectations
expressed in the forward-looking statements contained herein. These and other
applicable risks are summarized under the caption "Business-Risk Factors" and
elsewhere in the Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1997, which is filed with the Securities and Exchange Commission.
###
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Consolidated Statement of Operations
(In thousands except for per share data)
(UNAUDITED)
Three Months Ended
------------------
March 31,
---------
1998 1997
-----------------
Revenues:
Telecommunications:
Local and long distance $61,658 $14,848
Local exchange services (ICTC) 15,943 ---
Private line and data 9,385 2,413
Network maintenance and equipment 7,481 1,985
Other telecommunications 6,884 ---
------- -------
Total telecommunications revenue 101,351 19,246
Directory 27,964 14,214
Telemarketing 5,016 2,287
------- -------
Total revenues 134,331 35,747
Operating expenses:
Cost of service 75,045 20,238
Selling, general and administrative 58,768 24,947
Depreciation and amortization 19,431 4,122
Other 1,900 1,608
------- -------
Total operating expenses 155,144 50,915
------- -------
Operating loss (20,813) (15,168)
Non-operating income (expense):
Interest income 4,613 4,253
Interest (expense) (14,754) (2,447)
Other 687 7
------- -------
Total non-operating income (expense) (9,454) 1,813
------- -------
Loss before income taxes (30,267) (13,355)
Income Taxes --- ---
------- -------
Net loss $(30,267) $(13,355)
======= =======
Loss per common share $(0.49) $(0.26)
======= =======
Weighted average common shares outstanding 62,227 52,327
======= =======
EBITDA $518 $(9,438)
======= =======
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Consolidated Statement of Operations
(In thousands except for per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
6/30/97 9/30/97 12/31/97 3/31/98
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications:
Local and long distance $18,551 $26,783 $52,607 $61,658
Local exchange services (ICTC) ---- ---- 16,117 15,943
Private line and data 2,256 2,848 9,657 9,385
Network maintenance and equipment 3,434 6,396 9,150 7,481
Other telecommunications ---- ---- 7,141 6,884
-------- -------- -------- ---------
Total telecommunications revenue 24,241 36,027 94,672 101,351
Directory 20,273 11,073 35,495 27,964
Telemarketing 2,009 2,225 6,124 5,016
-------- -------- -------- ---------
Total revenues 46,523 49,325 136,291 134,331
Operating expenses:
Cost of service 26,520 30,987 73,445 75,045
Selling, general and administrative 29,441 31,975 61,795 58,768
Depreciation and amortization 5,231 6,355 17,567 19,431
Other 999 82 1,943 1,900
-------- -------- -------- ---------
Total operating expenses 62,191 69,399 154,750 155,144
-------- -------- -------- ---------
Operating loss (15,668) (20,074) (18,459) (20,813)
Non-operating income (expense):
Interest income 6,199 7,618 4,590 4,613
Interest (expense) (7,039) (11,270) (13,871) (14,754)
Other 12 21 1,386 687
-------- -------- -------- ---------
Total non-operating income (expense) (828) (3,631) (7,895) (9,454)
-------- -------- -------- ---------
Loss before income taxes (16,496) (23,705) (26,354) (30,267)
Income Taxes ---- ---- ---- ----
-------- -------- -------- ---------
Net loss $(16,496) $(23,705) $(26,354) $(30,267)
======== ======== ======== =========
Loss per common share $(0.31) $(0.45) $(0.43) $(0.49)
======== ======== ======== =========
Weighted average common shares outstanding 52,583 53,335 61,567 62,227
======== ======== ======== =========
EBITDA $(9,438) $(13,637) $1,051 $518
======== ======== ======== =========
</TABLE>
<PAGE>
McLeodUSA Selected Statistical Data:
3/31/97 12/31/97 3/31/98
------- -------- -------
Sales cities 45 60 63
Central offices/switches 227 366 376
Cities served 138 227 259
Route miles 2,576 4,908 5,086
Total local lines in service 77,200 282,600 313,900
Business 67,400 149,300 174,000
Residential 9,800 133,300 139,900
Total local customers 22,600 157,000 166,400
Business 13,200 29,200 32,300
Residential 9,400 127,800 134,100
CLEC Local lines in service 77,200 193,000 223,200
Business 67,400 124,900 149,200
Residential 9,800 68,100 74,000
CLEC Local line customers 22,600 86,000 94,700
Business 13,200 22,200 25,200
Residential 9,400 63,800 69,500
CLEC Lines per business customer 5.1 5.6 5.9
CLEC Lines sold during quarter 22,600 41,200 37,500
Business 10,600 26,700 21,600
Residential 12,000 14,500 15,900
New CLEC Lines in service during quarter 11,800 38,800 30,200
Business 5,900 20,800 24,300
Residential 5,900 18,000 5,900
ILEC Local lines in service NA 89,600 90,700
Business NA 24,400 24,800
Residential NA 65,200 65,900
ILEC Local line customers NA 71,000 71,700
Business NA 7,000 7,100
Residential NA 64,000 64,600
<PAGE>
EXHIBIT 99.5
[LOGO OF MCLEODUSA APPEARS HERE]
[PRESS RELEASE]
[LETTERHEAD OF MCLEODUSA APPEARS HERE]
FOR IMMEDIATE RELEASE
MCLEODUSA ACQUIRES DIAL US OF SPRINGFIELD
Cedar Rapids, IA, April 30, 1998 - McLeodUSA Incorporated (Nasdaq/NMS:MCLD)
of Cedar Rapids, Iowa, has signed a definitive agreement to purchase
substantially all assets of Dial US of Springfield, Missouri. The two companies
announced the agreement today at a press conference in Springfield. Terms of the
agreement were not disclosed. The transaction requires regulatory approval
before closing.
Dial US began operations in 1983 and is a privately owned company. Dial US
was the first Missouri telecommunications provider to sign a network
interconnection agreement with Southwestern Bell to offer competitive local
service in the state. In addition to local service in the Springfield area where
Dial US has approximately 4,800 access lines, the company offers competitive
long distance and Internet services to nearly 7,800 customers in Missouri,
Arkansas, Oklahoma, Texas and Kansas.
McLeodUSA is the first Super Regional Competitive Local Exchange Carrier (C-
LEC), serving business and residential customers in ten Midwest and Rocky
Mountain states. McLeodUSA provides integrated telecommunication services
including local, long distance, voice mail, paging and Internet access. The
Company is a facilities-oriented provider with nearly 5000 route miles of
network.
Steve Gray, President and Chief Operating Officer of McLeodUSA, stated,
"Dial US offers similar services, is customer oriented, and has posted
remarkable customer share gains in Springfield, capturing 4,800 local lines in
only 13 months. The Dial US team understands the value of competition and shares
the same entrepreneurial spirit that our employees exhibit every day."
1
<PAGE>
James Hedges, President of Dial US, added,"Developing Dial US has been a
tremendous experience. The telecommunications industry is exciting, but it's
difficult to gain critical mass in this era of consolidation. Rather than wait
to be approached by some other firm, we welcomed the opportunity to discuss a
relationship with McLeodUSA. The power of a Super Regional company is positive
for our community and our customers." Hedges is currently the sole owner of Dial
US. He will remain in a senior management position for McLeodUSA for a period of
two years.
Gray added, "This acquisition will help speed our entry into local service
in Missouri markets and will help leverage our current sales organization in St.
Louis. Last month, the McLeodUSA Publishing division announced the acquisition
of the Springfield telephone directory formerly published by Bi-Rite. When the
new books come out in June, they will carry the Bi-Rite name for the final time.
Beginning mid-1999, the directories will carry our distinctive black cover and
gold star now appearing on nearly 15 million directories in 21 states. We
anticipate that our McLeodUSA directory will help strengthen the recognition of
the McLeodUSA name in southwestern Missouri."
Dial US is the business name of Communications Cable-Laying Company,Inc of
Springfield, Missouri.
McLeodUSA is a provider of integrated telecommunications services to
businesses and residential customers. The Company's telecommunications customers
are located in ten Midwestern and Rocky Mountain States. The combined firm is a
14-state facilities-oriented telecommunications provider with 6 switches, and
more that 282,000 local lines, 4,500 employees and 4,900 route miles of fiber
optics network. In the next 12 months, the Company's publishing subsidiaries
will distribute over 14.8 million copies of competitive directories in 21
states, reaching a population of 26 million.
# # #
<PAGE>
EXHIBIT 99.6
[LOGO OF MCLEODUSA(R) APPEARS HERE]
PRESS RELEASE
[LETTERHEAD OF MCLEODUSA APPEARS HERE]
FOR IMMEDIATE RELEASE
McLeodUSA Acquires NewCom Technologies &
NewCom OSP Services of Des Moines
Cedar Rapids, Iowa, May 1, 1998 - McLeodUSA Incorporated (Nasdaq/NMS:MCLD)
of Cedar Rapids, Iowa, has acquired NewCom Technologies and NewCom OSP Services
of West Des Moines, Iowa. NewCom Technologies and NewCom OSP Services have been
combined into a single unit called NewCom Companies, Inc. under its current
management team, operating as a separate business unit of McLeodUSA. Terms of
the agreement were not disclosed.
NewCom provides network engineering, design and mapping services to cable
television and telecommunications clients across the nation. NewCom has been a
primary vendor to McLeodUSA for several years, providing design and engineering
services for the construction of much of the company's 5,000 route miles of
fiber optics network. NewCom will continue to provide engineering and design
services to McLeodUSA as it expands its network between cities, and as it
targets network construction within cities. NewCom will also continue to serve
other clients.
1
<PAGE>
Steve Gray, President and Chief Operating Officer of McLeodUSA, stated "Our
several year history with NewCom has been instrumental in our ability to
construct our telecommunications network at a rapid pace. In addition, the
management team has a wealth of experience in related technologies, particularly
cable television. In fact, the principals of NewCom played prominent roles with
Heritage Communications, the firm that designed and built the original Des
Moines cable television system."
McLeodUSA is a provider of integrated telecommunications services to
businesses and residential customers. The Company's telecommunications customers
are located in ten Midwestern and Rocky Mountain States. The combined firm is a
14-state facilities-oriented telecommunications provider with 7 switches, and
more than 314,000 local lines, 4,700 employees, and 5,100 route miles of fiber
optics network. In the next 12 months, the Company's publishing subsidiaries
will distribute nearly 15 million copies of competitive directories in 21
states, reaching a population of 27 million.
# # #
2
