<PAGE>
================================================================================
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 September 30, 2000
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 November 3, 2000:
Common Stock Class A: ($.01 par value).............. 585,913,753 shares
Common Stock Class B: ($.01 par value).............. None
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. Financial Information
------ ---------------------
Item 1. Financial Statements......................................................................... 3
Consolidated Balance Sheets, September 30, 2000 (unaudited) and December 31, 1999............ 3
Unaudited Consolidated Statements of Operations and Comprehensive Income
for the three and nine months ended September 30, 2000 and 1999......................... 4
Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999............................................................. 5
Notes to Consolidated Financial Statements (unaudited)....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12
PART II. Other Information
------- -----------------
Item 2. Changes in Securities and Use of Proceeds.................................................... 20
Item 6. Exhibits and Reports on Form 8-K............................................................. 20
Signatures............................................................................................. 21
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
McLEODUSA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents....................................................... $ 353.6 $ 326.9
Investment in available-for-sale securities..................................... 226.3 934.1
Trade receivables, net.......................................................... 255.4 183.8
Inventory....................................................................... 31.0 27.5
Deferred expenses............................................................... 42.9 39.2
Prepaid expenses and other...................................................... 50.2 58.0
--------- ---------
TOTAL CURRENT ASSETS.................................................... 959.4 1,569.5
--------- ---------
Property and Equipment
Land and building............................................................... 116.5 85.1
Telecommunications networks..................................................... 1,043.8 635.9
Furniture, fixtures and equipment............................................... 401.0 267.2
Networks in progress............................................................ 941.4 453.2
Building in progress............................................................ 3.2 1.2
--------- ---------
2,505.9 1,442.6
Less accumulated depreciation................................................... 343.6 172.6
--------- ---------
2,162.3 1,270.0
--------- ---------
Investments, Intangible and Other Assets
Other investments............................................................... 31.8 35.9
Goodwill, net................................................................... 3,032.8 957.1
Other intangibles, net.......................................................... 346.3 290.2
Other........................................................................... 137.1 80.4
--------- ---------
3,548.0 1,363.6
--------- ---------
$ 6,669.7 $ 4,203.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt......................................... $ 29.1 $ 14.4
Contracts and notes payable.................................................. 0.1 0.1
Accounts payable............................................................. 179.2 109.6
Accrued payroll and payroll related expenses................................. 37.6 26.2
Other accrued liabilities.................................................... 218.6 92.2
Deferred revenue, current portion............................................ 49.6 24.1
Customer deposits............................................................ 47.8 30.1
--------- ---------
TOTAL CURRENT LIABILITIES............................................. 562.0 296.7
Long-term Debt, less current maturities........................................... 2,371.3 1,763.8
Deferred Revenue, less current portion............................................ 13.5 15.8
Other long-term liabilities....................................................... 19.0 18.3
--------- ---------
2,965.8 2,094.6
--------- ---------
Redeemable convertible preferred stock
Preferred, Series B, redeemable, convertible, $.01 par value, authorized,
issued and outstanding 2000 275,000 shares; 1999 275,000 shares.............. 687.5 687.5
Preferred, Series C, redeemable, convertible, $.01 par value, authorized,
issued and outstanding 2000 125,000 shares; 1999 125,000 shares............ 312.5 312.5
--------- ---------
1,000.0 1,000.0
--------- ---------
Stockholders' Equity
Capital Stock:
Preferred, Series A, $.01 par value: authorized 1,150,000 shares; issued
and outstanding 2000 1,149,580 shares; 1999 1,150,000 shares............ --- ---
Common, Class A, $.01 par value; authorized 2,000,000,000 shares;
issued and outstanding 2000 585,128,506 shares; 1999 472,761,036
shares................................................................... 5.9 4.8
Common, Class B, convertible, $.01 par value; authorized 22,000,000
shares; issued and outstanding 2000 and 1999 none........................ --- ---
Additional paid-in capital................................................... 3,518.6 1,523.5
Accumulated deficit.......................................................... (872.4) (494.5)
Accumulated other comprehensive income....................................... 51.8 74.7
--------- ---------
2,703.9 1,108.5
--------- ---------
$ 6,669.7 $ 4,203.1
========= =========
</TABLE>
Class A common stock and accumulated deficit are presented after giving effect
for the three-for-one stock split effected in the form of a stock dividend as
described in Note 4.
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 millions, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------
2000 1999 2000 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications............................................... $ 278.2 $ 163.6 $ 721.6 $ 416.1
Local exchange services.......................................... 21.6 20.3 63.8 57.7
Directory........................................................ 60.7 51.9 185.3 157.2
Telemarketing.................................................... 6.1 5.3 16.0 13.9
-------- ------- ------- --------
TOTAL REVENUES................................................. 366.6 241.1 986.7 644.9
Operating expenses:
Cost of service.................................................. 204.2 121.9 548.6 327.4
Selling, general and administrative.............................. 147.3 104.0 403.9 282.4
Depreciation and amortization.................................... 113.6 51.9 276.8 130.6
-------- ------- ------- --------
TOTAL OPERATING EXPENSES....................................... 465.1 277.8 1,229.3 740.4
-------- ------- ------- --------
OPERATING LOSS................................................. (98.5) (36.7) (242.6) (95.5)
Nonoperating income (expense):
Interest income.................................................. 12.2 8.1 43.1 23.1
Interest (expense)............................................... (40.7) (36.8) (113.6) (102.5)
Other income (expense)........................................... (0.7) 7.0 1.2 7.6
-------- ------- ------- --------
TOTAL NONOPERATING INCOME (EXPENSE)............................ (29.2) (21.7) (69.3) (71.8)
-------- ------- ------- --------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY CHARGE...................................... (127.7) (58.4) (311.9) (167.3)
Income taxes........................................................ --- --- --- ---
-------- ------- ------- --------
LOSS BEFORE EXTRAORDINARY CHARGE............................... (127.7) (58.4) (311.9) (167.3)
Extraordinary charge for early retirement of debt................... (24.5) --- (24.5) ---
-------- ------- ------- --------
NET LOSS....................................................... (152.2) (58.4) (336.4) (167.3)
Preferred stock dividend............................................ (13.6) (4.1) (40.8) (4.1)
-------- ------- ------- --------
NET LOSS APPLICABLE TO COMMON SHARES........................... $ (165.8) $ (62.5) $(377.2) $ (171.4)
======== ======= ======= ========
Loss per common share:
Loss before extraordinary charge............................... $ (0.24) $ (0.14) $ (0.65) $ (0.39)
Extraordinary charge........................................... (0.04) --- (0.04) ---
-------- ------- ------- --------
Loss per common share.......................................... (0.28) $ (0.14) $ (0.69) $ (0.39)
======== ======= ======= ========
Weighted average common shares outstanding.......................... 583.3 458.0 547.3 434.9
======== ======= ======= ========
Other comprehensive income (loss), net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the
period...................................................... (30.5) 8.8 (21.1) 26.6
Less: reclassification adjustment for gains included in
net income.................................................. (0.5) (8.1) 1.8 (8.8)
-------- ------- ------- --------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)........................ (30.0) 0.7 (22.9) 17.8
-------- ------- ------- --------
COMPREHENSIVE LOSS............................................. $ (195.8) $ (61.8) $(400.1) $ (153.6)
======== ======= ======= ========
</TABLE>
Loss per common share and weighted average common shares outstanding are
presented after giving effect for the three-for-one stock split effected in the
form of a dividend as described in Note 4.
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 millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
2000 1999
------- -------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss............................................................................. $ (336.4) $ (167.3)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation....................................................................... 142.7 74.3
Amortization....................................................................... 134.1 56.3
Accretion of interest on senior discount notes..................................... 31.7 28.8
Changes in assets and liabilities, net of effects of acquisitions:
(Increase) in trade receivables................................................. (59.0) (19.1)
(Increase) in inventory......................................................... (3.2) (17.3)
(Increase) in deferred expenses................................................. (3.6) (1.4)
Decrease in prepaid expenses and other.......................................... 49.2 28.7
(Increase) in deferred line installation costs.................................. (32.4) (19.5)
Increase (decrease) in accounts payable and accrued expenses.................... 32.0 (35.7)
Increase in deferred revenue.................................................... 23.1 6.8
Increase in customer deposits................................................... 17.4 5.5
--------- ---------
NET CASH (USED IN) OPERATING ACTIVITIES....................................... (4.4) (59.9)
--------- ---------
Cash Flows from Investing Activities
Purchases of property and equipment.................................................. (876.5) (394.1)
Available-for-sale securities:
Purchases.......................................................................... (556.9) (821.9)
Sales.............................................................................. 34.4 135.9
Maturities......................................................................... 1,232.3 262.5
Business Acquisitions................................................................ (25.3) (231.1)
Other................................................................................ (42.8) (1.6)
--------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES....................................... (234.8) (1,050.3)
--------- ---------
Cash Flows from Financing Activities
Payments on contracts and notes payable.............................................. ---- (21.7)
Net proceeds from preferred stock - Series B and C................................... (1.0) 999.9
Net proceeds from long-term debt..................................................... 555.6 485.6
Payments on long-term debt........................................................... (313.2) (211.0)
Net proceeds from preferred stock - Series A......................................... ---- 278.1
Net proceeds from issuance of common stock........................................... 42.0 9.4
Payments of preferred stock dividends................................................ (17.5) ----
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. 265.9 1,540.3
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 26.7 430.1
Cash and cash equivalents:
Beginning............................................................................ 326.9 455.1
--------- ---------
Ending............................................................................... $ 353.6 $ 855.2
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash payment for interest............................................................ $ 117.6 $ 77.3
========= =========
Supplemental Schedule of Noncash Investing and Financing Activities
Capital leases incurred for the acquisition of property and equipment................ $ 7.7 $ 9.4
========= =========
</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 and Nine Months
Ended September 30, 2000 and 1999 is Unaudited)
Note 1: Basis of Presentation
Interim Financial Information (unaudited): The financial statements and
related notes as of September 30, 2000, and for the three and nine month periods
ended September 30, 2000 and 1999, are unaudited, but in the opinion of
management include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our 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
("SEC"). Although we believe that the disclosures provided are adequate to make
the information presented not misleading, we recommend that you read these
consolidated condensed financial statements in conjunction with the audited
consolidated financial statements and the related footnotes included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999, filed with the SEC on March 30, 2000.
Reclassifications: Certain items in the unaudited statement of operations
for the three and nine month period ended September 30, 1999 have been
reclassified to be consistent with the presentation in the September 30, 2000
unaudited financial statements.
Note 2: Supplemental Asset Data
Cash and cash equivalents: For purposes of reporting cash flows, we
consider 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>
September 30, December 31,
2000 1999
------------- ------------
(In millions)
<S> <C> <C>
Trade Receivables:
Billed....................................................... $ 238.7 $ 165.7
Unbilled..................................................... 70.3 59.5
------- --------
309.0 225.2
Allowance for doubtful accounts and discounts................... (53.6) (41.4)
------- --------
$ 255.4 $ 183.8
======= ========
</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 our 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
$142.5 million and $52.1 million, at September 30, 2000 and December 31, 1999,
respectively.
6
<PAGE>
Other intangibles: Other intangibles consist of customer lists and
noncompete agreements related to our 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 using the straight-line method over periods ranging from 10 to 15
years. Accumulated amortization on the other intangibles totaled $101.4 million
and $60.7 million at September 30, 2000 and December 31, 1999, respectively.
Note 3: Acquisitions
Talking Directories, Inc. (Talking Directories) and Info America Phone
Books, Inc. (Info America): On February 10, 1999, we acquired Talking
Directories in exchange for 15.3 million shares of our Class A common stock, par
value $.01 per share ("Class A common stock") after giving effect to the three-
for-one stock split described in Note 4. In a related and concurrent
transaction, on February 10, 1999, we acquired Info America in exchange for 7.2
million shares of our Class A common stock. We also paid outstanding obligations
of Talking Directories and Info America of approximately $27 million.
Dakota Telecommunications Group, Inc. (DTG): On March 5, 1999, we acquired
DTG in exchange for approximately 5.7 million shares of our Class A common
stock, after giving effect to the three-for-one stock split described in Note 4,
and the assumption of approximately $31 million in DTG debt.
Ovation Communications, Inc. (Ovation): On March 31, 1999, we acquired
Ovation in exchange for approximately 33.6 million shares of our Class A common
stock, after giving effect to the three-for-one stock split described in Note 4,
and the payment of approximately $121.3 million in cash to the stockholders of
Ovation. The total purchase price was approximately $310.2 million based on the
average closing price of our Class A common stock five days before and after the
date of the acquisition agreement. The Company also assumed approximately $105.6
million in Ovation debt.
Access Communications Holdings, Inc (Access) and S.J. Investments Holdings,
Inc (SJIH): On August 14, 1999, the Company acquired Access and SJIH in exchange
for approximately 11.61 million shares of our Class A common stock, after giving
effect to the three-for-one stock split described in Note 4, and the payment of
$48.3 million in cash to the stockholders of Access and SJIH. The Company also
assumed approximately $96.2 million in Access and SJIH debt.
Splitrock Services, Inc. (Splitrock): On March 30, 2000, we acquired
Splitrock pursuant to the Amended Plan of Merger dated February 11, 2000. The
acquisition of Splitrock was effected through two separate but related
transactions: (1) a holding company reorganization, in which Splitrock Services,
Inc. became a wholly owned subsidiary of its former subsidiary, Splitrock
Holdings; and (2) a merger of Southside Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary of McLeodUSA, with and into Splitrock
Holdings in which Splitrock Holdings was the surviving corporation and became a
wholly owned subsidiary of McLeodUSA.
Pursuant to these transactions, each common stockholder of Splitrock
ultimately received 0.5347 of a share of Class A common stock of McLeodUSA in
exchange for each share of Splitrock common stock owned. We issued approximately
93.2 million shares of Class A common stock, after giving effect for the three-
for-one stock split described in Note 4. The total purchase price was
approximately $2.3 billion based on the average closing price of our Class A
common stock five days before and after January 6, 2000, the initial date of the
Merger Agreement. Approximately $261 million in Splitrock debt remained
outstanding after the closing. This debt has been paid off (see Note 6). The
purchase price includes approximately $29.4 million of direct acquisition costs.
7
<PAGE>
The following table summarizes the purchase price allocations we incurred
for business acquisitions incurred in the nine months ended September 30, 2000
and 1999 (in millions):
<TABLE>
<CAPTION>
Transaction Year: 2000 1999
---------------- ------ ------
<S> <C> <C>
Cash purchase price $ 25.4 $ 231.1
Acquisition costs 43.7 0.7
Promissory notes 56.7 7.7
Stock issued 1,838.3 452.3
Option agreements 103.3 0.9
Note receivable -- (1.6)
--------- ---------
$ 2,067.4 $ 691.1
========= =========
Working capital acquired, net $ 15.8 $ (116.1)
Fair value of other assets acquired 184.5 132.5
Intangibles 2,157.8 831.9
Liabilities assumed (290.7) (157.2)
--------- ---------
$ 2,067.4 $ 691.1
========= =========
</TABLE>
These acquisitions have been accounted for as purchases and the results of
operations are included in the consolidated financial statements since the dates
of acquisition. All 2000 purchase price allocations are preliminary and subject
to revisions.
The unaudited consolidated results of operations for the nine months ended
September 30, 2000 and 1999 on a pro forma basis as though the above entities
had been acquired as of the beginning of the period is as follows (in millions,
except per share data):
<TABLE>
<CAPTION>
2000 1999
------- ------
<S> <C> <C>
Revenue.................................... $ 1,022.0 $ 775.2
Net loss applicable to common shares....... (441.5) (342.8)
Loss per common share...................... (0.76) (0.62)
</TABLE>
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.
Note 4: Common Stock Split
On February 29, 2000, we announced a three-for-one stock split in the form
of a stock dividend on our Class A common stock. The record date for the stock
split was April 4, 2000 and the distribution of the additional shares took place
on April 24, 2000. All share data in the consolidated financial statements and
notes to the financial statements have been adjusted to reflect the stock split.
Note 5: Information by Business Segment
We operate predominantly in the business of providing local, long distance
and related communications services to end-users, selling advertising space in
telephone directories and supplying end-to-end data communications. The three
business segments have separate management teams and infrastructures that offer
different products and services. The principal elements of these segments are to
(1) provide integrated communications services, provide outstanding customer
service, expand fiber optic network and expand intra-city fiber network build,
(2) publish and distribute directories to local area subscribers, and (3)
provide end-to-end data communications. The acquisition of Splitrock on March
30, 2000 introduced our third business segment: end-to-end data communications
services on the Splitrock network. Since the data segment was part of McLeodUSA
for only one day in the first quarter ended March 31, 2000, operating statement
information for the nine month period ended September 30, 2000 reflects only the
data segment's second and third quarter activity in the segment information
table below.
8
<PAGE>
We evaluate the performance of our operating segments based on earnings
before interest, taxes, depreciation and amortization, excluding general
corporate expenses ("EBITDA"). The accounting policies of the reportable
segments are the same as those described in Note 1 of our Annual Report on Form
10-K for the fiscal year ended December 31, 1999. Intersegment transfers are
accounted for on an arm's length pricing basis.
Identifiable assets (excluding intersegment receivables) are our assets
that are identified in each business segment. Corporate assets primarily include
cash and cash equivalents, investments in available-for-sale securities,
administrative headquarters and goodwill recorded primarily as a result of the
acquisition of Consolidated Communications, Inc. in 1997, the acquisitions of
DTG and Ovation in 1999 and the acquisition of Splitrock in 2000.
In the three and nine months ended September 30, 2000 and 1999, no single
customer or group under common control represented 10% or more of our sales.
Segment information for the three and nine months ended September 30, 2000 and
1999 was as follows (in millions):
<TABLE>
<CAPTION>
Telecommunications Directories Data Corporate Total
------------------ ----------- ---- --------- -----
<S> <C> <C> <C> <C> <C>
Three months ended
September 30, 2000
Revenues $ 268.5 $ 61.9 $ 36.2 $ -- $ 366.6
===================================================================================
EBITDA $ 11.8 $ 9.5 $ 3.1 $ (9.3) $ 15.1
Depreciation and Amortization (48.9) (8.6) (13.2) (42.9) (113.6)
Interest Income 0.2 0.1 0.3 11.6 12.2
Interest Expense (1.1) -- (0.6) (39.0) (40.7)
Taxes and Other (1.4) -- -- 0.7 (0.7)
-----------------------------------------------------------------------------------
Net Income (Loss) $ (39.4) $ 1.0 $ (10.4) $ (78.9) $ (127.7)
===================================================================================
Nine months ended
September 30, 2000
Revenues $ 725.3 $ 188.1 $ 73.3 $ -- $ 986.7
===================================================================================
EBITDA $ 32.6 $ 36.0 $ (10.8) $ (23.6) $ 34.2
Depreciation and Amortization (127.4) (23.6) (24.3) (101.5) (276.8)
Interest Income 0.9 0.5 0.9 40.8 43.1
Interest Expense (2.9) -- (8.9) (101.8) (113.6)
Taxes and Other (5.0) (0.1) -- 6.3 1.2
-----------------------------------------------------------------------------------
Net Income (Loss) $ (101.8) $ 12.8 $ (43.1) $ (179.8) $ (311.9)
===================================================================================
As of September 30, 2000
Total assets $ 2,232.3 $ 498.9 $ 291.2 $3,647.3 $ 6,669.7
Three months ended
September 30, 2000
Capital expenditures $ 259.5 $ 16.2 $ 49.0 $ 7.2 $ 331.9
Nine months ended
September 30, 2000
Capital expenditures $ 773.9 $ 59.2 $ 86.7 $2,024.9 $ 2,944.7
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Telecommunications Directories Data Corporate Total
------------------ ----------- ---- --------- -----
<S> <C> <C> <C> <C> <C>
Three months ended
September 30, 1999
Revenues $ 189.0 $ 52.1 $ -- $ -- $ 241.1
=====================================================================================
EBITDA $ 12.2 $ 7.6 $ -- $ (4.6) $ 15.2
Depreciation and Amortization (33.9) (6.3) -- (11.7) (51.9)
Interest Income 0.5 -- -- 7.6 8.1
Interest Expense (1.9) (0.7) -- (34.2) (36.8)
Taxes and Other 8.1 -- -- (1.1) 7.0
-------------------------------------------------------------------------------------
Net Income (Loss) $ (15.0) $ 0.6 $ -- $ (44.0) $ (58.4)
=====================================================================================
Nine months ended
September 30, 1999
Revenues $ 487.2 $ 157.7 $ -- $ -- $ 644.9
=====================================================================================
EBITDA $ 26.6 $ 24.9 $ -- $ (16.4) $ 35.1
Depreciation and Amortization (78.9) (23.5) -- (28.2) (130.6)
Interest Income 1.3 -- -- 21.8 23.1
Interest Expense (4.9) (0.7) -- (96.9) (102.5)
Taxes and Other 9.0 (0.1) -- (1.3) 7.6
-------------------------------------------------------------------------------------
Net Income (Loss) $ (46.9) $ 0.6 $ -- $ (121.0) $ (167.3)
=====================================================================================
As of September 30, 1999
Total assets $ 1,579.7 $ 432.1 $ -- $2,161.3 $ 4,173.1
Three months ended
September 30, 1999
Capital expenditures $ 172.8 $ 11.6 $ -- $ 156.4 $ 340.8
Nine months ended
September 30, 1999
Capital expenditures $ 513.4 $ 207.0 $ -- $ 345.9 $ 1,066.3
</TABLE>
Note 6: Long-term Debt
On May 31, 2000 we put in place $1.3 billion of Senior Secured Credit
Facilities (together the "Credit Facilities") with a syndicate of financial
institutions. The Credit Facilities consist of (1) a seven year Senior Secured
Revolving Facility with an aggregate principal amount of $450 million (the
"Revolving Facility), (2) a seven year Senior Secured Multi-Draw Term Loan
Facility with an aggregate principal of $275 million ("Tranche A Term
Facility"), and (3) an eight year single draw Senior Secured Term Loan with an
aggregate principal amount of $575 million ("Tranche B Term Facility"). The
Tranche A Term Facility provides for multiple ($50 million minimum) draws for
the first 24 months of the agreement at which time any undrawn commitments
expire. At September 30, 2000 the Tranche B Term Facility was drawn in full and
the balance of the other Facilities remain undrawn.
The Credit Facilities are secured by 1) a first priority pledge of all the
capital stock owned by us and by each subsidiary, and 2) a perfected first
priority security interest in substantially all our tangible and intangible
assets and, to the extent of $100 million, by each subsidiary. In addition,
telecommunications assets acquired with proceeds or refinanced from the Credit
Facilities serve as collateral.
Interest on the Credit Facilities is payable quarterly and variable at LIBOR
plus 1% to LIBOR plus 3.25% based on the Company's debt rating. At our current
debt rating, interest rates are LIBOR plus 2.25% on the Revolving Facility and
Tranche A Term Facility, and LIBOR plus 3.00% on the Tranche B Term Facility. A
commitment fee of 0.5% to 1.0% is charged on the undrawn portion of the
commitment relating to the Revolving Facility and the Tranche A Term Facility.
We must maintain certain financial covenants requiring minimum revenue, minimum
access lines and debt to capital and debt to EBITDA ratios.
Note 7. Extraordinary Charge
On July 11, 2000 we completed our offer, commenced on May 31, 2000, to
purchase all the outstanding 11.75% Senior Notes of Splitrock Services, Inc., a
wholly owned subsidiary, due 2008. The Company recognized an extraordinary
charge of $24.5 million or $0.04 per share as a result of the
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<PAGE>
repurchase of the 11.75% Senior Notes of Splitrock Services, Inc. Our cost to
repurchase the notes was the aggregate of the principal amount of $260.9
million plus accrued interest and call premium of $55.4 million.
Note 8. Subsequent Events
The CapRock Merger Agreement. On October 2, 2000, the Company entered into
an Agreement and Plan of Merger, dated as of October 2, 2000, by and among the
Company, Cactus Acquisition Corp, a Delaware corporation and wholly owned
subsidiary of the Company ("Cactus"), and CapRock Communications Corp., a Texas
corporation ("CapRock"). Under the merger agreement, Cactus will be merged with
and into CapRock, with CapRock surviving as a wholly-owned subsidiary of
McLeodUSA. The Company and CapRock expect that the CapRock merger will be
consummated promptly after the special meeting of CapRock stockholders.
At the effective time of the merger, each outstanding share of CapRock
common stock will be converted into the right to receive 0.3876 of a share of
McLeodUSA Class A common stock and cash in lieu of fractional shares.
The Company estimates that it will be required to issue approximately 15.0
million shares of Class A common stock to effect the CapRock merger, as well as
options to purchase approximately an additional 2.7 million shares of Class A
common stock. The Company has prepared and filed a registration statement on
Form S-4 to effect the issuance of these shares.
The Company has prepared and filed a registration statement on Form S-4 to
effect exchange offers to acquire all of the outstanding CapRock 12% senior
notes due 2008 and CapRock 11.5% senior notes due 2009 in exchange for notes of
McLeodUSA having the same interest rate, payment, maturity and redemption terms
as the applicable CapRock notes. The exchange offers are expected to be
completed concurrently with the completion of the merger.
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<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, and
technological changes and developments, are forward-looking statements that
involve certain risks and uncertainties. Factors that may cause the actual
results, events, performance, achievements or investments expressed or implied
by such forward-looking statements to differ materially from any future results,
events, 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, 1999, filed with the Securities and
Exchange Commission on March 30, 2000 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.
All share data in the consolidated financial statements and notes to the
financial statements have been adjusted to reflect the April 24, 2000 three-for-
one stock split of our Class A common stock.
Overview
Our core business is providing communications services in competition with
existing local telephone companies, including:
. local and long distance services
. dial and dedicated Internet access
. higher bandwidth Internet access services, such as digital subscriber
line (DSL) and cable modem
. value-added services such as virtual private networks and web hosting
. bandwidth leasing and colocation services
. facilities and services dedicated for a particular customer's use
. telephone and computer sales, leasing, networking, service and
installation
. other communications services, including video, cellular, operator,
payphone, mobile radio, wireless communications and paging services
We also derive revenue from the following services related to our core
business:
. sale of advertising in print and electronic telephone directories
. traditional local telephone company services in east central Illinois
and southeast South Dakota
. telemarketing services
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The table set forth below summarizes our percentage of revenues from
these sources:
<TABLE>
<CAPTION>
Quarter Ended September 30,
--------------------------
2000 1999
------ ------
<S> <C> <C>
Telecommunications services......................................... 76% 68%
Telephone directory advertising..................................... 16 22
Traditional local telephone company services........................ 6 8
Telemarketing services.............................................. 2 2
--- ---
100% 100%
=== ===
</TABLE>
We began offering local and long distance services to business customers in
January 1994. In June 1996, we began marketing and providing to residential
customers in two cities in Iowa an integrated package of communications
services. Since June 1996, we have expanded the scope of our services. We now
provide selected telecommunications services to customers nationwide. We provide
integrated communications services, including local services, in many Midwest
and Rocky Mountain states and long distance and advanced data services in all 50
states. We are a facilities-based telecommunications provider with 375 ATM
switches, 37 voice switches, nearly 905,000 local lines and 9,500 employees. We
expanded our marketplace for advanced data and Internet services to all 50
states through our March 30, 2000 acquisition of Splitrock Services, Inc. In the
next 12 months, we plan to distribute 30 million telephone directories in 26
states, serving a population of 51 million. We plan to continue our efforts to
market and provide local, long distance and other communications services to
business and residential customers.
Our 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 the MegaBells,
costs to terminate the long distance calls of our customers through long
distance carriers, and costs of printing and distributing telephone directories.
SG&A consist of sales and marketing, customer service and administrative
expenses, including the costs associated with operating our communications
network. Depreciation and amortization include depreciation of our
telecommunications network and equipment; amortization of goodwill and other
intangibles related to our acquisitions, amortization expense related to the
excess of estimated fair market value in aggregate of options over the aggregate
exercise price of such options granted to some of our 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 our local telecommunications service.
As we expand into new markets, both cost of service and SG&A will increase.
We expect to incur cost of service and SG&A expenses before 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 us to build a customer
base large enough to generate sufficient revenue to offset such fixed costs and
marketing expenses.
We have experienced operating losses since our inception as a result of
efforts to build our customer base, develop and construct our communications
network infrastructure, build our internal staffing, develop our systems and
expand into new markets. We expect to continue to focus on increasing our
customer base and geographic coverage and bringing our customer base onto our
communications network. Accordingly, we expect that our cost of service, SG&A
and capital expenditures will continue to increase significantly, all of which
may have a negative impact on operating results.
In addition, our projected increases in capital expenditures will continue
to generate negative cash flows from construction activities during the next
several years while we install and expand our fiber optic communications network
and develop wireless services. We may also be forced to change our pricing
policies to respond to a changing competitive environment, and we cannot assure
you that we will be able to maintain our operating margins. We cannot assure you
that growth in our revenue or customer base will continue or that we will be
able to achieve or sustain profitability or positive cash flows.
We have generated net operating losses since our inception and,
accordingly, have incurred no income tax expense. We have reduced the net
deferred tax assets generated by these losses by a
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valuation allowance which offsets the net deferred tax asset due to the
uncertainty of realizing the benefit of the tax loss carry forwards. We 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 September 30, 2000 Compared with Three Months Ended September
30, 1999
Total revenue increased from $241.1 million for the three months ended
September 30, 1999 to $366.6 million for the three months ended September 30,
2000, representing an increase of $125.5 million or 52%. The increase was due to
the acquisitions completed in 2000 as well as the increase in telecommunications
customers. Revenue from the sale of telecommunications services accounted for
$114.6 million of the increase, including $36.2 million contributed by Splitrock
Services, Inc. ("Splitrock") which was acquired in early 2000. Directory
revenues increased $8.8 million from the third quarter of 1999 to the third
quarter of 2000 due mainly to revenues from new directories acquired in 1999.
Local exchange services generated $1.3 million in additional revenues over the
same period in 1999. Telemarketing revenues in the third quarter of 2000
increased $0.8 million when compared to the same period in 1999.
Cost of service increased from $121.9 million for the three months ended
September 30, 1999, to $204.2 million for the three months ended September 30,
2000, representing an increase of $82.3 million or 68%. This increase in cost of
service was due primarily to the growth in our local and long distance
telecommunications business and to the acquisition of Splitrock which
contributed an aggregate of $25.4 million to the increase. Cost of service as a
percentage of revenue increased from 51 % for the three months ended September
30, 1999 to 56% for the three months ended September 30, 2000, due primarily to
the Splitrock acquisition. For the three months ended September 30, 2000,
Splitrock's network costs as a percentage of its revenue was 70%.
SG&A increased from $104.0 million for the three months ended September 30,
1999 to $147.3 million for the three months ended September 30, 2000, an
increase of $43.3 million or 42%. Our acquisition of Splitrock contributed $7.6
million to the increase. Also contributing to this increase were increased costs
related primarily to expansion of selling, customer support and administrative
activities to support our growth.
Depreciation and amortization expenses increased from $51.9 million for the
three months ended September 30, 1999 to $113.6 million for the three months
ended September 30, 2000, representing an increase of $61.7 million or 119%.
This increase related primarily to the amortization of goodwill for the
acquisition of Splitrock and to the growth of our network.
Interest income increased from $8.1 million for the three month period
ended September 30, 1999, to $12.2 million for the same period in 2000. This
increase resulted from a higher average investment balance during 2000.
Gross interest expense increased from $42.8 million for the third quarter
of 1999 to $59.6 million for the third quarter of 2000. This increase was
primarily a result of an increase in the accretion of interest on our 10.5%
senior discount notes of $1.0 million and to the interest on our senior secured
credit facility of $16.6 million. Interest expense of approximately $18.9 and
$6.0, million was capitalized as part of our construction of telecommunications
network during the third quarter of 2000 and 1999, respectively.
Net loss applicable to common shares increased from $62.5 million for the
three months ended September 30, 1999 to $165.8 million for the three months
ended September 30, 2000, an increase of $103.3 million. This increase resulted
primarily from the following five factors: (1) the expansion of our local and
long distance services, which requires significant expenditures, a substantial
portion of which is incurred before the realization of revenues; (2) the
increased depreciation expense related to the construction and expansion of our
communications networks and amortization of intangibles related to acquisitions;
(3) net interest expense on indebtedness to fund market expansion, network
development and acquisitions, (4) dividends on preferred stock issued and (5) an
extraordinary charge on retirement of debt of approximately $24.5 million.
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<PAGE>
Nine Months Ended September 30, 2000 Compared with Nine Months Ended September
30, 1999
Total revenue increased from $644.9 million for the nine months ended
September 30, 1999 to $986.7 million for the nine months ended September 30,
2000, representing an increase of $341.8 million or 53%. Our 1999 acquisitions
of Talking Directories Inc. and Info America Phone Books, Inc. (together,
"Talking Directories"), DTG, Ovation and Access and our acquisition of Splitrock
in 2000 contributed to the increase. Revenue from the sale of competitive
telecommunications services, including the contributions of acquisitions in 1999
and 2000 of $170.1 million, accounted for $305.5 million of this increase. Local
exchange services generated $6.1 million additional revenues over the same
period in 1999. Directory revenues increased $28.1 million from the first nine
months of 1999 to the first nine months of 2000. Telemarketing revenues
increased $2.1 million for the nine months ended September 30, 2000 when
compared to the nine months ended September 30, 1999.
Cost of service increased from $327.4 million for the nine months ended
September 30, 1999, to $548.6 million for the nine months ended September 30,
2000, representing an increase of $221.2 million or 68%. This increase in cost
of service was due primarily to the growth in the Company's local and long
distance telecommunications. Cost of service as a percentage of revenue
increased from 51% for the nine months ended September 30, 1999 to 56% for the
nine months ended September 30, 2000, primarily due to the Splitrock
acquisition. The cost of service of Splitrock from acquisition date through
September 30, 2000 as a percentage of its revenue was 96%.
SG&A increased from $282.4 million for the nine months ended September 30,
1999 to $403.9 million for the nine months ended September 30, 2000, an increase
of $121.5 million or 43%. Our 1999 acquisitions of Talking Directories, DTG,
Ovation and Access and our acquisition of Splitrock in 2000 contributed $43.2
million to the increase. Also contributing to this increase were increased costs
related primarily to expansion of selling, customer support and administration
activities to support our growth.
Depreciation and amortization expenses increased from $130.6 million for
the nine months ended September 30, 1999 to $276.8 million for the nine months
ended September 30, 2000, representing an increase of $146.2 million or 112%.
This increase consisted of $88.4 million related to the acquisitions of Talking
Directories, DTG, Ovation, Access and Splitrock and $57.8 million due primarily
to the growth of the Company's network.
Interest income increased from $23.1 million for the nine month period
ended September 30, 1999, to $43.1 million for the same period in 1999. This
increase resulted from a higher average investment balance during 2000.
Gross interest expense increased from $118.1 million for the first nine
months of 1999 to $156.1 million for the first nine months of 2000. This
increase was primarily a result of (1) an increase in the accretion of interest
on our 10.5% senior discount notes of $3.1 million, (2) an increase due to the
acquisition of Splitrock which contributed an aggregate of $8.9 million, and (3)
additional interest of $16.6 million on the senior secured credit facility.
Interest expense of approximately $42.5 and $15.6 million was capitalized as
part of the Company's construction of telecommunications network during the nine
month period ended September 30, 2000 and 1999, respectively.
Net loss applicable to common shares increased from $171.4 million for the
nine months ended September 30, 1999 to $377.2 million for the nine months ended
September 30, 2000, an increase of $205.8 million. This increase resulted
primarily from the following five factors: (1) the expansion of our local and
long distance services, which requires significant expenditures, a substantial
portion of which is incurred before the realization of revenues; (2) the
increased depreciation expense related to the construction and expansion of our
communications networks and amortization of intangibles related to acquisitions;
(3) net interest expense on indebtedness to fund market expansion, network
development and acquisitions, (4) dividends on preferred stock issued and (5) an
extraordinary charge on retirement of debt of approximately $24.5 million.
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Liquidity and Capital Resources
Our total assets increased from $4.2 billion at December 31, 1999 to $6.7
billion at September 30, 2000. The increase is primarily due to the additional
intangibles of approximately $2.1 billion resulting from the acquisition of
Splitrock. At September 30, 2000, our current assets of $959.4 million exceeded
our current liabilities of $562.0 million, providing working capital of $397.4
million, which represents a decrease in working capital of $875.4 million
compared to December 31, 1999. At December 31, 1999, our current assets of
$1,569.5 million exceeded current liabilities of $296.7 million, providing
working capital of $1,272.8 million.
The net cash used in operating activities totaled $4.4 million for the nine
months ended September 30, 2000 and $59.9 million for the nine months ended
September 30, 1999. During the nine months ended September 30, 2000, cash used
in operating activities was used primarily to fund our net loss of $336.4
million for such period. Primarily as a result of the expansion of our
competitive telecommunications services, we also required cash to fund:
. growth in trade receivables of $59.0 million
. growth in inventory of $3.2 million
. increases in deferred expenses of $3.6 million
. increases in deferred line installation costs of $32.4 million
These amounts were partially offset by:
. decreases in prepaid and other expenses of $49.2 million
. increases in accounts payable and accrued expenses of $32.0 million
. increases in deferred revenue of $23.1 million
. increases in customer deposits of $17.4 million
. cumulative non-cash expenses of $308.5 million
During the nine months ended September 30, 1999, cash for operating
activities was used primarily to fund our net loss of $167.3 million for the
period. We also required cash to fund the growth in trade receivables,
inventory, deferred expenses and deferred line installation costs of $19.1
million, $17.3 million, $1.4 million and $19.5 million, respectively, and to
decrease accounts payable and accrued expenses of $35.7 million. These uses of
cash for operating activities during the nine months ended September 30, 1999,
were offset by decreases in prepaid expenses of $28.7 million and increases in
deferred revenue and customer deposits of $6.8 million and $5.5 million,
respectively, and cumulative non-cash expenses of $159.4 million.
Our investing activities used cash of $234.8 million during the nine months
ended September 30, 2000 and used cash of $1,050.3 million during the nine
months ended September 30, 1999. The equipment required for the expansion of our
local and long distance telecommunications services, our development and
construction of fiber optic telecommunications network and other capital
expenditures resulted in purchases totaling $876.5 million and $394.1 million
during the nine months ended September 30, 2000 and 1999, respectively. We also
used cash of $556.9 million and $821.9 million to acquire available-for-sale
securities during the first nine months of 2000 and 1999, respectively, offset
by proceeds from sales and maturities of available-for-sale securities of
$1,266.7 million and $398.4 million, respectively, during those periods.
16
<PAGE>
During the nine months ended September 30, 2000 and 1999, we used aggregate
cash of $25.3 million and $231.1 million, respectively, to acquire various
directories and other telecommunication businesses.
Net cash received from financing activities was $265.9 million during the
nine months ended September 30, 2000 and was primarily obtained from our senior
secured credit facility in May 2000 offset by our retirement of debt in July
2000. Net cash received from financing activities during the nine months ended
September 30, 1999 was $1,540.3 million and was primarily obtained from our
offering of our 8.125% senior notes, our offering of Series B and C redeemable,
convertible preferred stock, and our offering of Series A preferred stock.
On May 31, 2000 we put in place $1.3 billion of Senior Secured Credit
Facilities (together the "Credit Facilities") with a syndicate of financial
institutions. The Credit Facilities consist of (1) a seven year Senior Secured
Revolving Facility with an aggregate principal amount of $450 million (the
"Revolving Facility), (2) a seven year Senior Secured Multi-Draw Term Loan
Facility with an aggregate principal amount of $275 million ("Tranche A Term
Facility"), and (3) an eight year single draw Senior Secured Term Loan with an
aggregate principal amount of $575 million ("Tranche B Term Facility"). The
Tranche A Term Facility provides for multiple ($50 million minimum) draws for
the first 24 months of the agreement at which time any undrawn commitments
expire. At September 30, 2000 the Tranche B Term Facility was drawn in full and
the balance of the other Facilities remained undrawn.
On February 22, 1999, we completed an offering of $500.0 million aggregate
principal amount of our 8.125% senior notes in which we received net proceeds of
approximately $485.8 million. Interest on the 8.125% senior notes is payable in
cash semi-annually in arrears on February 15 and August 15.
Our 10.5% senior discount notes, 9.25% senior notes, 8.375% senior notes,
9.5% senior notes and 8.125% senior notes are senior unsecured obligations of
McLeodUSA Incorporated, the parent company, ranking pari passu in right of
payment with all other existing and future senior unsecured obligations of
McLeodUSA and senior to all existing and future subordinated debt of McLeodUSA.
The 10.5% senior discount notes, 9.25% senior notes, 8.375% senior notes, 9.5%
senior notes and 8.125% senior notes are effectively subordinated to all
existing and future secured indebtedness of McLeodUSA and our subsidiaries to
the extent of the value of the assets securing such indebtedness. The 10.5%
senior discount notes, 9.25% senior notes, 8.375% senior notes, 9.5% senior
notes and 8.125% senior notes also are effectively subordinated to all existing
and future third-party indebtedness and other liabilities of our subsidiaries.
Our Credit Facilities are secured by 1) a first priority pledge of all the
capital stock owned by us and by each subsidiary, and 2) a perfected first
priority security interest in substantially all our tangible and intangible
assets and, to the extent of $100 million, by each subsidiary. In addition,
telecommunications assets acquired with proceeds or refinanced from the Credit
Facilities serve as collateral.
The indentures governing our 10.5% senior discount notes, 9.25% senior
notes, 8.375% senior notes, 9.5% senior notes and 8.125% senior notes and our
Credit Facilities impose operating and financial restrictions on our
subsidiaries and us. These restrictions affect, and in many cases significantly
limit or prohibit, among other things, our ability to:
. incur additional indebtedness
. pay dividends or make other distributions in respect of our or our
subsidiaries' capital stock
. redeem capital stock
. make investments or other restricted payments
. enter into sale and leaseback transactions
. pledge, mortgage or permit liens upon assets
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. enter into transactions with affiliates
. sell assets
. consolidate, merge or sell all or substantially all of our assets
On July 11, 2000 we completed our offer, commenced May 31, 2000, to
purchase all of the outstanding 11.75% Senior Notes of Splitrock Services, Inc.,
a wholly owned subsidiary, due 2008. Our cost to repurchase the notes was the
principal amount of $260.9 million plus accrued interest and call premium of
$55.4 million.
We cannot assure you that the covenants and encumbrances in our various
indentures and in our Credit Facilities will not adversely affect our ability to
finance our future operations or capital needs or to engage in other business
activities that may be in our interests.
As of September 30, 2000, based on the combined McLeodUSA and CapRock
business plans, capital requirements and growth projections as of that date, we
estimated that we would require approximately $1.7 billion through 2002. Our
estimated aggregate capital requirements include the projected costs of:
. expanding our fiber optic communications network, including national
and intra-city fiber optic communications networks
. adding voice and ATM switches
. expanding operations in existing and new markets
. developing wireless services in limited markets
. funding general corporate expenses
. completing recent acquisitions, including the CapRock merger
. constructing, acquiring, developing or improving telecommunications
assets
We expect to use the following to address our capital needs:
. approximately $579.9 million of cash and investments on hand at
September 30, 2000 (plus any cash balances of CapRock)
. $725 million of current availability under our Credit Facilities
. projected operating cash flow
Our estimate of future capital requirements is a forward-looking statement
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The actual amount and timing of our future
capital requirements may differ substantially from our estimate due to factors
such as:
. strategic acquisition costs and effects of acquisitions on our
business plan, capital requirements and growth projections
. unforeseen delays
. cost overruns
. engineering design changes
. changes in demand for our services
. regulatory, technological or competitive developments
. new opportunities
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<PAGE>
We also expect to evaluate potential acquisitions, joint ventures and
strategic alliances on an ongoing basis. We may require additional financing if
we pursue any of these opportunities. Accordingly, we may need additional
capital to continue to expand our markets, operations, facilities, network and
services.
We may meet any additional capital needs by issuing additional debt or
equity securities or borrowing funds from one or more lenders. We cannot assure
you that we will have timely access to additional financing sources on
acceptable terms.
Failure to generate or raise sufficient funds may require us to delay or
abandon some of our expansion plans or expenditures, which could have a material
adverse effect on our business, results of operations or financial condition.
See "Business--Risk Factors--Failure to Raise Necessary Capital Could Restrict
Our Ability to Develop Our Network and Services and Engage in Strategic
Acquisitions" in our Annual Report on Form 10-K.
Market Risk
At September 30, 2000, we recorded the marketable equity securities that we
hold at a fair value of $68.8 million. These securities have exposure to price
risk. A hypothetical ten percent adverse change in quoted market prices would
amount to a decrease in the recorded value of investments of approximately $6.9
million. We believe our exposure to market price fluctuations on all other
investments is nominal due to the short-term nature of our investment portfolio.
We have no material future earnings or cash flow exposures from changes in
interest rates on our long-term debt obligations, as substantially all of our
long-term debt obligations are fixed rate obligations.
Effects of New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities by
requiring that entities recognize all derivatives as either assets or
liabilities at fair market value on the balance sheet. The Company does not
expect the impact of the adoption of SFAS No. 133 to be material to its results
of operations as it does not currently hold any derivative instruments or engage
in hedging activities.
Revenue Recognition
The effective date for Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition" has been delayed and must be adopted no later than the fourth
quarter of 2000. SAB No. 101 provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. Management believes that this
statement will not have a material effect on results of operations and financial
position of the Company.
Inflation
We do not believe that inflation has had a significant impact on our
consolidated operations.
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<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the period from July 1, 2000 through September 30, 2000, we issued
and sold the following equity securities not registered under the Securities Act
of 1933, as amended:
On August 21, 2000, we issued 94,837 shares, respectively, of Class A
common stock in connection with our acquisition of Advanced Telecommunications,
Inc.
The issuance of securities described above were made in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act or
Regulation D promulgated thereunder for transactions by an issuer not involving
any public offering. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for distribution in connection with such transactions. All
recipients had adequate access to information about us through their
relationship with us or through information about us made available to them.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
-------
Number Exhibit Description
------ -------------------
10.67 Sixth Amendment to Cost Sharing IRU Agreement by and between Level 3
Communications and Splitrock Services, Inc.
10.68 Seventh Amendment to Cost Sharing IRU Agreement by and between Level 3
Communications and Splitrock Services, Inc.*
11.1 Statement regarding computation of loss per common share.
27.1 Financial Data Schedule.
------------
* Confidential treatment has been requested. The copy filed as an exhibit omits
the information subject to the confidential treatment requested.
(b) Reports on Form 8-K
On October 13, 2000, we filed a Current Report on Form 8-K announcing
the Company entered into an Agreement and Plan of Merger with CapRock
Communications Corp., a Texas corporation.
On October 27, 2000, we filed a Current Report on form 8-K to report
our financial and operating results for the third quarter 2000.
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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: November 10, 2000 By: /s/ Stephen C. Gray
------------------------------------
Stephen C. Gray
President and Chief Operating Officer
Date: November 10, 2000 By: /s/ J. Lyle Patrick
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J. Lyle Patrick
Chief Financial Officer
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INDEX TO EXHIBITS
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Sequentially
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Exhibit Numbered
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Number Exhibit Description Page
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<S> <C> <C>
10.67 Sixth Amendment to Cost Sharing IRU Agreement by and between Level 3 Communications and
Splitrock Services, Inc.
10.68 Seventh Amendment to Cost Sharing IRU Agreement by and between Level 3 Communications
and Splitrock Services, Inc.*
11.1 Statement regarding computation of loss per common share.
27.1 Financial Data Schedule.
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* Confidential treatment has been requested. The copy filed as an exhibit omits
the information subject to the confidential treatment requested.
