20050401Qwest response to motion.pdf

Mary S. Hobson (ISB #2142)
Stoel Rives LLP
101 South Capitol Boulevard - Suite 1900
Boise, ill 83702
Telephone: [phone]
Facsimile: [phone]
mshobson~stoel.com
Adam L. Sherr (WSBA #25291)
Qwest
1600 ih Avenue - Room 3206
Seattle, W A 98191
Telephone: [phone]
Facsimile: [phone]
adam.sherr~qwest.com
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UflLIT !ES co ISS!ON
BEFORE THE PUBLIC UTILITIES COMMISSION OF IDAHO
IN RE:
PETITION OF MCLEODUSA
TELECOMMUNICATIONS SERVICES,
INC., FOR ENFORCEMENT OF
INTER CO NNECTI ON AGREEMENT
WITH QWEST CORPORATION
Docket No. MTI-O5-
RESPONSE OF QWEST
CORPORATION TO MCLEODUSA
TELECOMMUNICATIONS
SERVICES, INC. MOTION FOR
EMERGENCY RELIEF
Qwest Corporation
, ("
Qwest"), by and through its undersigned counsel, responds
to the McLeodUSA Telecommunication Services, Inc. ("McLeod") Motion for
Emergency Relief ("Motion ) pertaining to its Petition for Enforcement of
Interconnection Agreement with Qwest Corporation ("Petition
).
Both documents were
filed with the Idaho Public Utilities Commission ("Commission ) on March 30 2005.
Qwest responds that it is not necessary to hear McLeod's petition on an emergency basis
and that any action by the Commission with respect to this matter should be stayed or
dismissed.
RESPONSE OF QWEST CORPORATION TO MCLEODUSA TELECOMMUNICATIONS SERVICES
INC. MOTION FOR EMERGENCY RELIEF - Page 1
Boise-182735.1 0029164-00012
BACKGROUND
This Petition arises from McLeod's deteriorating financial condition, its refusal to
provide adequate security, and its failure to live up to its financial obligations to Qwest.
The genesis of the dispute arises from an unrelated issue between McLeod and Qwest
Communications Corporation ("QCC"), regarding charges and payments pertaining to
certain telecommunications traffic. In the course of that dispute, QCC exercised its
lawful rights by withholding payments for charges it believes McLeod had incorrectly
billed QCC. In retaliation, and even though Qwest was not involved in the McLeod-QCC
dispute, McLeod refused to pay certain Qwest charges for Qwest's tariffed services in a
current total amount of approximately $2.5 million. McLeod did not state any grounds
for withholding such payments from Qwest and, indeed, had no basis for withholding
payment for services provisioned by Qwest.
Because of the significant amount of money McLeod wrongfully withheld from
Qwest and because of recent public statements McLeod made about its bleak financial
situation, Qwest became very concerned about its financial exposure to McLeod in the
event McLeod files for protection from its creditors in bankruptcy court. On March 21
2005, Qwest sent a security deposit demand letter to McLeod pursuant to the parties
interconnection agreement ("ICA") in each state. The Idaho letter is included as Exhibit
A to this Response. 1 The Qwest demand letter requested that McLeod provide the
specified deposit by April 1 or Qwest would commence the process of pursuing its
remedies provided for under the ICA and applicable Idaho law. The requested deposit
QC also sent payment and security demand letters for QC services purchased under the tariff, and
QCC also sent payment and security demand letters.
RESPONSE OF QWEST CORPORATION TO MCLEODUSA TELECOMMUNICATIONS SERVICES
INC. MOTION FOR EMERGENCY RELIEF - Page 2
Boise-182735.10029164-00012
was equal to the estimated billings for two months of McLeod services ordered under the
ICA in the state of Idaho.
The dispute between the parties' over payment and Qwest's right to demand a
security deposit are the subject of litigation in Colorado and Iowa. On February 24
2005, QCC filed a complaint against McLeod in Colorado state court concerning the
dispute, which has since been removed to federal court. On February 25 2005, McLeod
sued Qwest and QCC in federal court in Iowa.
On March 22 2005 , McLeod filed for a temporary restraining order ("TRO") in
federal district court in Iowa seeking to prevent Qwest from demanding security deposits
and payments and from terminating services to McLeod throughout the Qwest 14-state
region. The court granted McLeod's motion and the TRO, which is in effect until April
, 2005 , states in pertinent part that Qwest and QCC are "restrained from.
. .
terminating or threatening to terminate services to McLeodUSA or requiring security
from McLeodUSA as a precondition to the start or continuation or any such services. . . .
On March 30, 2005, McLeod filed the instant petition with this Commission
requesting similar, if not identical relief to what the District Court previously granted in
the TRO. McLeod seeks an order from this Commission that Qwest may not demand a
security deposit, suspend order activity, or disconnect services, not just until April 1 st
but until after ICA dispute resolution procedures have been completed. Further, McLeod
requests this relief on an expedited basis. Qwest responds that McLeod is not entitled to
the extraordinary relief that it has requested.
RESPONSE OF QWEST CORPORATION TO MCLEODUSA TELECOMMUNICATIONS SERVICES
INC. MOTION FOR EMERGENCY RELIEF - Page 3
Boise-182735.10029164-00012
II.DISCUSSION
The Commission Does Not Have the Authority to Grant the Relief
Requested.
As a threshold matter, it is not apparent that it is within the lawful authority of the
Commission to grant the relief requested by McLeod. McLeod essentially seeks an order
enjoining Qwest from enforcing a provision of the ICA. Idaho law does not permit the
Commission to grant injunctive relief:
The Utilities Commission cannot exercise a judicial power. The judicial
power of this state is vested in the courts, and the legislature cannot vest
judicial power in the public Utilities Commission.
Humbird Lumber Company v. Public Utilities Commission 39 Idaho 505 , 513 228 P.
271 273 (1924) (citations omitted).
While the relief McLeod seeks is not labeled an injunction, McLeod's Motion for
Emergency Relief, amounts to a restraining order. As the Humbird case demonstrates
the Idaho court will look to the effect of the relief, and not its label, in determining
whether the scope of the Commission s powers has been exceeded:
While it is not labeled an injunction, and is not in the language usually
employed in a restraining order, it is nothing more nor less than a
restraining order, an injunction. The power to issue a restraining order is
judicial in character, and can only be exercised by the supreme court and
the district courts.
Id. 39 Idaho at 514, 228 P. at 274.
The Commission has only such powers as has been granted by the legislature
and in this instance the grant of the authority by the legislature does not allow for the
exercise of equitable relief. Nor does Idaho Code 9 61-501, cited by McLeod, grant this
Washington Water Power v. Kootenai Environmental Alliance 99 Idaho 875, 879, 591 P.2d 122
126 (1979).
RESPONSE OF QWEST CORPORATION TO MCLEODUSA TELECOMMUNICATIONS SERVICES
INC. MOTION FOR EMERGENCY RELIEF - Page 4
Boise-182735.1 0029164-00012
Commission authority to enter injunctive relief. Section 61-501 instead provides a
general grant of authority to the Commission to regulate public utilities.
No Expedited Relief Is Warranted.
Even if it were in within the authority of the Commission to order the relief
requested by McLeod, such demand for expedited relief is premature and unnecessary.
First, the TRO issued by the federal court in Iowa remains in effect until April 12, 2005
unless otherwise vacated by action of the court. Qwest has moved the Iowa court to have
the Iowa proceeding transferred or stayed under the "first filed" doctrine. Qwest's "first
filed" doctrine is essentially that because Qwest filed a claim in Colorado before McLeod
filed its claim in Iowa, the proper forum to hear the dispute is the Colorado court. If the
Court grants the "first filed" motion, by operation of law, the TRO would be dissolved.
However, to protect against this result, the Court obtained assurances from Qwest counsel
that if the stay or transfer were granted, the TRO issued by the Iowa Court on March 23
2005 will remain in effect until modified, extended or rescinded by the District Court in
Colorado. Exhibit B to this Response Report to Court Regarding Transfer of Action to
United States District of Colorado.
Qwest is bound by the TRO until it expires on April 12, 2005 (if the case is not
transferred) or until the Colorado court acts on the TRO if the case is transferred to
Colorado. Qwest has not and will not take any action to demand a security deposit or
terminate service while the TRO is in place, as the TRO expressly prevents such actions.
The TRO specifically prohibits Qwest from "terminating or threatening to terminate
services to McLeodUSA" and "requiring security from McLeodUSA as a precondition to
the start or continuation of any such service." Exhibit B to McLeod Petition Mem.
RESPONSE OF QWEST CORPORATION TO MCLEODUSA TELECOMMUNICATIONS SERVICES
INc. MOTION FOR EMERGENCY RELIEF - Page 5
Boise-182735.10029164-00012
Opinion at 1. McLeod asks this Commission "to rule that Qwest may not demand a
security deposit from McLeod at this time " yet this request is fully covered by the TRO.
In light of this, McLeod is protected by the TRO and McLeod has no basis for a claim
that Qwest will disconnect service on April 1 , 2005 and, therefore no basis for emergency
relief. Indeed, based upon this status, McLeod withdrew its request for emergency relief
filed with the Colorado Public Utilities Commission. Exhibit C to this Response
McLeodUSA 's Notice of Withdrawal of Its Motion for Emergency Relief
Second, even if Qwest were not restrained by the TRO, emergency action by this
Commission is not necessary because Qwest fully intends to comply with the ICA and
applicable law in enforcing the security deposit. The Idaho letter made this clear in
stating that if the security deposit is not received "Qwest will commence the process
terminating the Interconnection Agreement, suspending order activity, disconnecting
services, and/or any other remedy available to it under law or equity in the State of
Idaho." Exhibit A to this Response Security Deposit Letter p. 1 (emphasis added). In
Idaho, in accord with the ICA, Qwest could initiate the process in Section (A)3.
regarding default, which would require another notice to McLeod, and thirty days for
McLeod to cure the default, prior to Qwest seeking legal or equitable relief. It has never
been, and is not now Qwest's intent to disconnect service to McLeod on April 1 , 2005.
Consequently, McLeod's claim that Qwest is going to disconnect services to end users on
April 1 , 2005 is completely unfounded.
The issue underlying McLeod's request that the Commission step into this dispute
in an extraordinary manner is the same the issue that is the subject of the TRO, and which
is squarely before the federal court. Furthermore, McLeod has failed to exhaust all of its
RESPONSE OF QWEST CORPORATION TO MCLEODUSA TELECOMMUNICATIONS SERVICES
INC. MOTION FOR EMERGENCY RELIEF - Page 6
Boise-182735.1 0029164-00012
normal contractual remedies. The Petition prematurely and unnecessarily seeks relief to
which McLeod is not entitled.
Qwest Has Demanded A Security Deposit In Accord With The ICA.
Qwest does not believe that the Commission needs to rule on the merits of the
security deposit demand, since there is no "emergency" to justify the extraordinary relief
demanded by McLeod. Nevertheless, on the merits, McLeod is also incorrect. Qwest has
unassailable grounds in the ICA to demand a deposit. The Idaho ICA states
, "
McLeodUSA has not established satisfactory credit with Qwest or if McLeodUSA is
repeatedly delinquent in making its payments, Qwest may require a deposit to be held as
security for the payment of charges." ICA Section (A)3.4.3. The evaluation of
McLeod's credit status is an ongoing process. As the ICA states
, "
Qwest will determine
McLeodUSA's credit status on previous payment history with Qwest or credit reports
such as Dun and Bradstreet." ICA Section (A)3.4.3. The ICA, on its face, provides
Qwest the unconditioned right to request such a deposit if McLeod becomes a credit risk.
Under the circumstances described below, Qwest is taking a commonsense
approach to protecting its interest in the event of a McLeod bankruptcy. Of primary
concern to Qwest (and the triggering event for the security deposit demand) was
McLeod's own 8-K filing on March 17, 2005 to the Securities & Exchange Commission
wherein McLeod revealed that its revenues sharply declined in the fourth quarter of 2004;
it had to seek forbearance from interest payments to its lenders; and it was seeking to sell
the company. As the 8-K explained, McLeod's "Lenders have agreed to forbear from
exercising any remedies as a result of certain specified defaults under the Credit Facilities
anticipated by the Company during the forbearance period, including, without limitation
RESPONSE OF QWEST CORPORATION TO MCLEODUSA TELECOMMUNICATIONS SERVICES
INC. MOTION FOR EMERGENCY RELIEF - Page 7
Boise-182735.1 0029164-00012
the failure to make scheduled amortization payments under the Credit Facilities and
interest payments under the Credit Agreement." Exhibit D to this Response, p. 3. A
press release coincident with the 8-K filing confirmed Qwest's worst fears:
There can be no assurance that we will be able to reach an agreement with
our lenders regarding a capital restructuring or continued forbearance and
covenant relief prior to the end of the initial forbearance period on May
2005. There also can be no assurance that we will be able to identify a
suitable strategic partner or buyer. . .. In the event these alternatives are
not available to the Company, it is likely that we will elect to forgo making
future principal and interest payments to our lenders. . . or, alternatively,
the Company could be forced to seek protection from its creditors.
Exhibit E to this Response McLeod Press Release p. 4 (Mar. 16, 2005)
(emphasis added).
On the news of the 8- K filing, McLeod's common stock plunged by almost half in
one day. In light of McLeod's own statements of its financial risk and the likelihood of
insolvency, Qwest-one of McLeod's largest creditors-would have been foolish to not
have taken action to protect its interests.
The credit risk posed by McLeod was exacerbated by the fact that McLeod
wrongfully withheld nearly $2.5 million for Qwest tariffed services. McLeod argues that
Qwest cannot base a security deposit demand under the ICA on the fact that McLeod had
failed to pay its Qwest bills because the unpaid Qwest tariff charges were "invoiced
separately" from services ordered under the ICA. McLeod Petition, at 6-7. The fact that
the unpaid charges were contained in different McLeod accounts is of no consequence
however, since Qwest has the discretion under the ICA to consider McLeod's overall
credit profile in determining the security deposit requirement. The non-payment or late
payment of any Qwest invoice, not just the ICA accounts would be relevant to any credit
profile. Indeed in all commercial relationships, non-payment or late payments to
RESPONSE OF QWEST CORPORATION TO MCLEODUSA TELECOMMUNICATIONS SERVICES
INC. MOTION FOR EMERGENCY RELIEF - Page 8
Boise-182735.1 0029164-00012
unrelated third party vendors are clearly relevant to a company s credit profile. Here
there is nothing more commercially relevant than McLeod's admitted non-payment of
other Qwest bills. To Qwest, in the event of a McLeod insolvency, it will make no
difference which invoice was not paid; it will all end up wrongfully depriving Qwest of
monies for services that it rendered to McLeod.
For the foregoing reasons, McLeod's request for relief should be denied.
Respectfully submitted this 1 st day of April, 2005.
~g~-
Mary S. obson
Stoel Rives LLP
Adam Sherr
Qwest
Attorneys for Qwest Corporation
RESPONSE OF QWEST CORPORATION TO MCLEODUSA TELECOMMUNICATIONS SERVICES
INC. MOTION FOR EMERGENCY RELIEF - Page 9
Boise-182735.1 0029164-00012
CERTIFICATE OF SERVICE
I hereby certify that on this 1 st day of April, 2005 , I served the foregoing RESPONSE
OF QWEST CORPORATION TO MCLEODUSA TELECOMMUNICATIONS
SERVICES, INC. MOTION FOR EMERGENCY RELIEF upon all parties of record in this
matter as follows:
Jean Jewell, Secretary
Idaho Public Utilities Commission
472 West Washington Street
O. Box 83720
Boise, Idaho 83720-0074
iiewell~puc.state.id.
Weldon Stutzman
Idaho Public Utilities Commission
472 West Washington Street
O. Box 83720
Boise, Idaho 83720-0074
wstutzm~puc.state.id.
William Courter
McLeodUSA Telecommunications Services, Inc.
6400 C Street SW
Cedar Rapids, IA 52406
Peter Richardson (ISB #3195)
Richardson & O'Leary
515 North 28th Street
Boise, ill 83702
Telephone: [phone]
Facsimile: [phone]
peter~richardsonandoleary .com
Attorney for McLeod
Mark Trinchero (OSB #88322)
Davis Wright Tremaine LLP
1300 SW Fifth Avenue - Suite 2300
Portland, OR 97201-5682
Telephone: [phone]
Facsimile: [phone]
marktrinc hero(fYd wi. com
Attorney for McLeod
Hand Delivery
U. S. Mail
Overnight Delivery
Facsimile
Email
Hand Delivery
U. S. Mail
Overnight Delivery
Facsimile
Email
Hand Delivery
U. S. Mail
Overnight Delivery
Facsimile
Email
Hand Delivery
U. S. Mail
Overnight Delivery
Facsimile
Email
Hand Delivery
U. S. Mail
Overnight Delivery
Facsimile
Email
,6tthlt:l/
~;;~
Brandi L. Gearhart, PLS
Legal Secretary to Mary S. Hobson
Stoel Rives LLP
RESPONSE OF QWEST CORPORATION TO MCLEODUSA TELECOMMUNICATIONS SERVICES
INC. MOTION FOR EMERGENCY RELIEF - Page 10
Boise-182735.1 0029164-00012
XHIB IT
to Response of Qwest Corporation to McLeodUSA Telecommunications Services, Inc.
Motion for Emergency Relief
' .. ..' '. '
Qwest.- ..
Spirit of Service
Gw8st Comnunications
1801 California Street
Suite 2400
Denver. CO 80202Telephone: ~O3--a96-1250
Fat3nlle: 303-a96-8887
Steven Q. Hansen
Vice President. Carrier Relations
War1dwide Wholesale Maffiets
March 21 . 2005
Via Overnight Mall
Jam 8S LeBlanc
Vendor Manager
Mcleod USA Telecom
First Piace Tower
15 E. 5th St., Ste. 1500
Tulsa, Oklahoma 74103
Lauraine Harding
Sr. Manager, Interconnect Negotiation
McLeodUSA,lnc.
6400 C Street SW
O. Box 3177
Cedar Rapids. IA 52406-1377
RE: Notice of Demand for 10 Interconnection Agreement S~urity Deposit
Dear Sir/Madam
This letter is to notify you that Owest Corporation rawest") requires a security deposit to continue the
provisioning of services ordered by McLeodUSA Telecommunications Services. Inc. and its CLEC
affiliates (collectively. "McLeod USA") under the Interconnection Agreement between the parties 11 the
State of Idaho. After investigation and review or Mcleod's unsatisfactory creditworthiness. recent
public statements of McLeodUSA concerning its financial condition. history of late payments. and
outSianding balances under the Interconnection Agreement and other agreements. tariffs. or accounts
Qwest demands a deposit, based on Iwo months' average tolal billings under the Interconnection
Agreement in the State of Idaho. to sareguard ONest's financial interests.
The security deposit shall be in the form of a wire transfer of immediately avaifable funds or an
Irrevocable letter of credit in the amount of $971 870.45. It mu5t be received in ten (10) calendar days.
tf the security deposit is not received by 5:00 .m. Mountain Standard Ti'ne on ril1 2005, Qwest will
commence the process of terminating the Interconnection Agreement. suspending order activity,
disconnecting services. and/or any other remedy available to it under law or equity in the State of
Idaho.
If payment is processed by wire. it should be directed to---
First National Bank of Omaha
do Qwest Corporation
Omaha NE 68197
ABA No.04000016
Owes! Bank Acet. No. 36204689
The deposit will be held for a period of at least twelve (12) months and will be maintained 11 accordance
with the terms of the Interconnection Agreement or applicable law. Additional security may be required,
. Page 2 M arct1 21 , 2005
as necessary and allowable under the interconnection Agreement or applicable law. Should
disconnection occur, Qwest will require full payment of all outstanding charges and the posting of the
security deposit, and late payment charges will app1y in accordance with the Interconnection
Agreement. Additionally other charges may apply to have the account re-established. If service order
processing is interrupted. all outstanding charges and the posting of the security deposit, including any
additional past due amounts are due prior to restoration.
OWes' reserves any and all rights and remedies it has under the Interconneclion Asreement and
applicable law, including any remedies it may have if McLeod fails to meet lhe terms set forth abOve.
Owest also reserves the right to request to increase the deposit or request additional deposits from
Mcleod under any other agreements between Qv.rest and McLeod as well as under any other tariffs.
Sincerely,
ite\.-t-.fu~ .'lr~'l-'/ Dti
Steven Hansen
Vice President, Carrier Relations
Cc: Ken Burkhardt. CFO
EXHIBIT B
to Response of Qwest Corporation to McLeodUSA Telecommunications Services, Inc.
Motion for Emergency Relief
"';.. "
Plaintiff
IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF IOWA
CEDAR RAPIDS DIVISION
CASE NO.1 :05-cv-00039-MWB
REPORT TO COURT
REGARDING TRANSFER OF
ACTION TO UNITED STATES
DISTRICT COURT FOR THE
DISTRICT OF COLORADO
MCLEOD USA TELECOMMUNICATIONS
SERVICES, INC.
QWEST CORPORATION AND
QWEST COMMUNICATIONSCORPORATION
Defendant.
REPORT TO COURT REGARDING TRANSFER OF ACTION TO UNITED STATES
DISTRICT COURT FOR THE DISTRICT OF COLORADO
As requested by this Court during the March 30,2005 telephonic hearing on Defendant
Qwest's Motion to Stay or Dismiss, Qwest submits the following Report on its position regarding
transfer to the United States District Court for the District of Colorado:
Qwest and McLeod are currently subject to the terms of the temporary restraining
order ("TRO") issued by this Court on March 23 2005. This TRO is scheduled to expire on
April 12, 2005.
Through its Motion to Stay or Dismiss filed with this Court on March 24, 2005
Qwest has requested that this action be dismissed or stayed pursuant to the ruling of the United
States District Court for the District of Colorado in Qwest's first-filed parallel action, Civil
Action No. 05-WM-506-0ES.
In the March 30, 2005 telephonic hearing on Qwest's Motion to Stay or Dismiss
this Court requested Qwest's position on the following issue: whether, if this Court decides to
transfer this action to the District of Colorado, Qwest agrees to let the TRO issued by this Court
on March 23,2005 to remain in effect until the TRO is modified, extended, or rescinded by the
Colorado court.
Through this Report, Qwest agrees that, if this Court stays this action or transfers
this action to the District of Colorado, the TRO issued by this Court on March 23 , 2005 will
remain in effect until the TRO is modified, extended, or rescinded by the District of Colorado.
Qwest also requests that, as a condition of this agreement, Plaintiff McLeodUSA be required to
cooperate with Qwest and to use its best efforts to ensure that a hearing on the existing TRO is
quickly and expeditiously scheduled in the Colorado court.
Respectfully submitted,
Date: March 30.2005
Isl Amy L. Benson
Sheila K. Tipton (PKOO05551)
Dennis W. Johnson (PKOO02613)
Amy M. Omvig (PKOOI8363)
DORSEY & WHITNEY LLP
801 Grand Avenue, Suite 3900
Des Moines, Iowa 50309
Tel: [phone]
Fax: [phone]
Email: tipton.sheilaCfYdorsey.com
j ohnson. dennisCfYdorsey. com
bj ork.amyCfYdorsey.com
Amy L. Benson (admitted pro hac vice)
Timothy R. Beyer (admitted pro hac vice)
Brownstein Hyatt & Farber, P .
410 17tl1 Street, 22nd Floor
Denver, Colorado 80202
Tel: [phone]
Fax: [phone]
Email: abensonCfYbhf-law.com
tbeyerCfYbhf-Iaw. com
ATTORNEYS FOR DEFENDANTS
5408\256\906196.
CERTIFICATE OF SERVICE
The undersigned certifies that on March 30. 2005 the
foregoing instrument was electronically filed with the
Court using the CM/ECF system and served upon all
parties to the above case and/or to each of the
attorneys of record herein at their respective
addresses disclosed on the pleadings:
By: Electronic Service AND lOR
By: ~ U.S. Mail FAXHand OvernightDelivered CourierE-mail Other
ISI Amy M. Omvig
COPIES TO:
Diane Kutzko
Mark L Zaiger
Richard S. Fry
Shuttleworth & Ingersoll
115 Third Street, SE, Suite 500
O. Box 2107
Cedar Rapids, Iowa 52405-2107
Ky E. Kirby
Richard M. Rindler
Jon Frankel
Swidler Berlin LLP
3000 K. Street, N., Suite 300
Washington, DC 2007
Alan E. Fredregill
Heidman, Redmond, Fredregill, Patterson
Plaza, Dykstra & Prahl, L.
701 Pierce St., Suite 200
PO Box 3086
Sioux City, IA 51101
ATTORNEYS FOR PLAINTIFF
EXHIBIT C
to Response of Qwest Corporation to McLeodUSA Telecommunications Services, Inc.
Motion for Emergency Relief
BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE ST ATE OF COLORADO
Docket No.
IN THE MATTER OF THE COMPLAINT OF MCLEODUSA TELECOMMUNICATIONS
SERVICES, INC.FOR ENFORCEMENT OF AN INTERCONNECTION AGREEMENT
WITH QWEST CORPORATION
MCLEODUSA'S NOTICE OF WITHDRAWAL OF
ITS MOTION FOR EMERGENCY RELIEF
McLeodUSA Telecommunications Services Inc. ("McLeodUSA"), through its
undersigned counsel, hereby provides notice that it may now withdraw its Motion seeking
emergency relief from this Commission in connection with its Complaint filed in this docket.
However, McLeodUSA also provides notice through this pleading that it will be required to seek
separate interim relief from this Commission, albeit on a somewhat less expedited basis.
On March 30, 2005, shortly after the Complaint was filed in this docket, a brief
telephone conference/hearing was held, attended by the chief Administrative Law Judge, counsel
for Qwest, and the undersigned counsel for McLeodUSA. During that telephone call, counsel
for Qwest acknowledged that the Temporary Restraining Order issued by the United States
District Court for the Northern District of Iowa ("Iowa TRO") prevented Qwest from taking the
actions threatened in its March 21, 2005 letter, including the disconnection of Colorado
subscribers served by McLeodUSA. Based upon this representation, and conditional upon
receipt of written confirmation of these representations McLeodUSA agreed to file this
withdrawal.
On the morning of March 31 , 2005 , an additional telephonic hearing was held
between the parties and the chief Administrative Law Judge. During that hearing, Qwest's
counsel reported that Qwest had made assurances to the U.S. District Court Judge presiding over
the federal case in Iowa, the Hon. Mark W. Bennett, that Qwest would continue to honor the
terms of the Iowa TRO should a decision issue to transfer the Iowa federal case to Colorado, at
least until such time as the U.S. District Court in Colorado has an opportunity to rule on a motion
for a new temporary restraining order filcd by McLeodUSA. Qwest's counsel reiterated that a
letter confirming his statements made at the previous afternoon s hearing, as well as this new
information, would be forthcoming.
The undersigned received the letter from Qwest via fax just before noon today.
copy of that letter is attached hereto as Exhibit A. While the letter accurately reflects the
commitments made by Qwest to the Iowa Court in connection with its request to transfer the
federal case in Iowa to Colorado, it contains no mention of the commitments made orally to this
Commission by Qwest counsel yesterday afternoon. Most notably, an oral commitment was
made that Q\vest acknowledged not only the existence of the Iowa TRO, but that the scope of the
Iowa TRO prevented Qwest from taking any action to discontinue the taking of orders from
McLeodUSA or disconnecting services under the parties' Colorado Interconnection Agreement
('"
Agreement"
).
The letter contains no mention of this key commitment.
Notwithstanding this deficiency in the written confirmation provided by Qwest
McLeodUSA will nevertheless withdraw its Motion for Emergency Relief. Qwest counsel'
verbal commitments were clear, and as he correctly pointed out, those commitments were made
by a licensed attorney authorized to bind Qwest to those commitments.While the non-
responsiveness of the letter is frustrating, it is inconceivable that Qwest would willfully violate
the Iowa TRO and the commitments made to this Commission, and intentionally disconnect
service to thousands of Colorado homes and businesses after assuring the Commission it would
not do so.
While the need for immediate Commission intervention has been averted
McLeodUSA will need to seek additional relief from this Commission, albeit on a less expedited
basis, to ensure that any claim of default made by Qwest can be disputed and resolved under the
terms of the agreement. McLeodUSA' s concern is that Qwest may claim default relating back to
its original security deposit demand, and attempt to circumvent the dispute resolution provisions
of the Agreement and this Commission s jurisdiction to protect Colorado subscribers from
disconnection without notice. Such a pleading will be filed as soon as practically possible.
Respectfully submitted
MCLEODUSA TELECOMMUNICATIONS
SERVICES
By:
Andrew R. Newell (#31121)
KRYS BOYLE, P.
600 Seventeenth Street
Suite 2700, South Tower
Denver, Colorado 80202
[phone]
[phone]
anewell~krys boyle. COIn
Counsel for McLeodUSA
CERTIFICATE OF SERVICE
I hereby certify that an original and 15 copies of the foregoing MCLEODUSA'S NOTICE OF
WITHDRAWAL OF ITS MOTION FOR EMERGENCY RELIEF was hand delivered this
31 st day of March, 2005, to the following addressee:
Mr. Doug Dean, Director
COLORADO PUBLIC UTILITIES COMMISSION
Logan Tower, Office Level 2
1580 Logan Street
Denver, CO 80203
and a copy of the foregoing was mailed by depositing same in the U.S. Mail, postage prepaid this
31 st day of March, 2005 , with additional electronic courtesy copies to the chief Administrative
Law Judge, as wen as to the following addressees:
David McGann, Esq.
Qwest Corporation
1005 17th St., Suite 200
Denver, CO 80202
ames Greenwood, Director
Colorado Office of Consumer Counsel
1580 Logan Street, Office Level 7
Denver, CO 80203
Steven Southwick
G. Harris Adams
First Assistant Attorney General
1525 Sherman St.
Denver, CO 80203
Paul Gomez
Gary Witt
Assistant Attorneys General
1525 Sherman St.
Denver, CO 80203
MAR 31 2005 11: 55 FR QWEST 3038966095 TO 930389~Exhibit A
Qwest
Spirit of Service
Owest
1005171h Street, Sw. 21)0
Camet, eolot8do 80202
Prane SM.B98.3892
Fac8lm11e 3O3.896.6C85
Oavld.M~ann.qwlSt.com
David W. McGann
Corporate ColinseJ
March 31, 2004
Via Fax:[phone]
Andrew R. Newell
Krys Boyle, PC
600 Seventeenth Street
Suite 2700, South Tower
Denver Colorado, 80202
Re: McLeodUSA v. Qwest
Dear Mr. Newell:
When I returned. to the office after our conference call yesterday with Judge Isley, I learned some
additional information not known to me at the time of our call.
As I stated on our March 30, 2005 conference caB with Judge Isley, the Temporary Restraining
Order CITRO") was entered on March 23, 2005 by Chief Judge Mark W. Bennett of the United
States District Court for the Northern District of Iowa in Docket Number COS-OO39..MWB. By
its tenns, the TRO is effective up to and including April 12, 2005.
When we spoke I was noi aware of the faCt that yesterday afternoon the Court heard argument on
a motion filed by Qwest to have the Iowa proceeding transferred or stayed under the "first filed"
doctrine. Qwest s '1irst filed" argument is essentially that because Qwest filed a claim in
Colorado before McLeodUSA filed its claim in Iowa, the proper forum to hear the dispute is the
Colorado coun- If the Court grantS the "first filed" motion, by operation of law, the TRO
would be dissolved.
To protect against this result, the Court obtained assurance from Qwest s counsel that if the stay
or transfer to Colorado were granted, the TRO entered on March 23, 2005 would remain in effeCt
until it is modified, extended, or rescinded by the District of Colorado. Qwest requested that, as
a condition of the agreement, McLeodUSA be required to cooperate with Qwest and to use its
best efforts to ensure that a hearing on the existing TRO is quickly and expeditiously scheduled
in the Colorado court.
The Court indicated that it would rule by the end of the week on Qwest's "first filed" motion, and
Qwest expects that if the motion is grante~ the Court win set out each of these stipulated
conditions in the order, or will make some other accommodation to its mling to keep the no
place until the Colorado court has a hearing.
Based upon our discussions, the representations in this letter and Judge Isley s instructions to
you, I understand that you will make a written request to withdraw your motion for emergency
relief.
MAR 31 2005 11: 56 FR QWEST 3038966095 TO 93038932882
Mr. Andrew R. Newell
March 31" 2005
Page 2
Shou1d you have any questions1 do not hesitate to
CC~Doug Hsiao
Paul McDaniel
I .
EXHIBIT D
to Response of Qwest Corporation to McLeodUSA Telecommunications Services, Inc.
Motion for Emergency Relief
Page 1 of 26
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CONFORMED SUBMISSION TYPE: 8-K
PUBLIC DOCUMENT COUNT:
CONFORMED PERIOD OF REPORT: 20050316ITEM INFORMATION: Entry into a Material Definitive AgreementITEM INFORMATION: Results of Operations and Financial Condi tion
ITEM INFORMATION: Financial Statements and ExhibitsFILED AS OF DATE: 20050317DATE AS OF CHANGE: 20050316
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME:
CENTRAL INDEX KEY:
STANDARD INDUSTRIAL CLASSIFICATION:
IRS NUMBER:
STATE OF INCORPORATION:
FISCAL YEAR END:
MCLEODUSA INC
0000919943
RADIO TELEPHONE
421407240
1231
C OMMUNI CAT
FILING VALUES:
FORM TYPE:
SEC ACT:
SEC FILE NUMBER:
FILM NUMBER:
8-K
1934 Act
000-20763
05687016
BUSINESS ADDRESS:
STREET 1:
STREET 2:
CITY:
STATE:
ZIP:
BUSINESS PHONE:
6400 C ST SW
PO BOX 3177
CEDAR RAPIDS
52406
3193640000
MAIL ADDRES S :
STREET 1:
STREET 2:
CITY :
STATE:
ZIP:
6400 C ST SW
PO BOX 3177
CEDAR RAPIDS
52406
FORMER COMPANY:
FORMER CONFORMED NAME:
DATE OF NAME CHANGE:
MCLEOD INC
19960403
~ / SEC - HEADER::.-
~DOCUMENT~
~TYPE:;..8-
~ SEQUENCE~ 1
~FILENAME~ch503970. txt
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Page 2 of 26
.::TEXT;..
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) March 16, 2005
MCLEODUSA INCORPORATED
~ - --- - - - --- -- -------------- - - -- - -- -- - -- - -- -- - ----- -- - - - -- ---- ---- - ---- --- -- ----
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
- -- - -- ---- -- -- - --- -- - ----- - -- - - - - - - - - --- --- - ----- - - - -- -------- -- -- --- -- - - -----
(State or Other Jurisdiction of Incorporation)
20763 42 -1407240
- ----- - - - -- -~------- - --- -- -- -- -- -- -- - - -- -- -- ----~- -- -- -- -- -- ------ ----- ---- --
(Commission File Number)(IRS Employer Identification No.
McLeodUSA Technology Park
4200 C. Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
- ------- - --- -- ---- ------ -- -- -- -- -- -- - - -- ---- - ------ - --------- - ----- - ----- -- ---
(Address of Principal Executive Offices)(Zip Code)
[phone]
- -- --- --------- ---------~---- - --- ------ -- ---- - - ------------ ----------- - --- -----
(Registrant I S Telephone Number, Including Area Code)
- - --- ---- - ---- - ------ ------ - - - - - --- --- - -------- --------- -- - - -- -- ---- - ------ - ---
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of thefollowing provisions (see General Instruction A.2. below):
I Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
! -
1 Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
I Pre-commencement communications pursuant to Rule 14d-2 (b) under the
Exchange Act (17 CFR 240 . 14d-2 (b) )
I Pre-conunencement communications pursuant to Rule 13e-4 (c) under the
Exchange Act (17 CFR 240 .13e-4 (c))
.c:PAGE;..
ITEM 1.ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
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On March 16, 2005, McLeodUSA Incorporated (li the Company") and certain of its
subsidiaries (~I Subsidiary Guarantors ") entered into a Forbearance Agreement,
among the Company, the Subsidiary Guarantors, the lenders thereto (II Lenders
and JPMorgan Chase Bank, N.A. ("Agent"), as Administrative Agent (the
II Forbearance Agreement II ), which is hereby incorporated by reference and
at tached hereto as Exhibit 10.1. The Forbearance Agreement relates to (1) the
Credit Agreement dated as of May 31, 2000, as amended, among the Company, the
Lenders and the Agent (the IICredit Agreementll
),
(2) the Credit Agreement dated
as of April 16, 2002, as amended, among the Company, the Lenders and the Agent
(the "Exit Facility" and, collectively with the Credit Agreement, the "Credit
Facilities ) and (3) the Subsidiary Guarantee Agreement dated as of May 31,
2000, as amended and restated as of April 16, 2002, among the Subsidiary
Guarantors and the Agent.
Pursuant to the Forbearance Agreement, the Lenders have agreed to forbear from
exercising any remedies as a result of certain specified defaults under the
Credit Facilities anticipated by the Company during the forbearance period,
including, without limitation, the failure to make scheduled amortization
payments under the Credit Facilities and interest payments under the Credit
Agreement. The forbearance period, the purpose of which is to enable the
parties to explore possible strategic transactions, runs through May 23, 2005.
Theodore J. Forstmann, director and stockholder of the Company, and a General
Partner in certain funds affiliated with Forstmann Little & Co. which
collectively hold a controlling interest in the Company's voting securities, is
a lender party to the Credit Agreement.
ITEM 2. 02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On March 16, 2005, the Company announced, among other things, its financial and
operating results for the quarter and total year ended December 31, 2004 in
press release, a copy of which is attached hereto as Exhibit 99.
ITEM 9.FINANCIAL STATEMENTS AND EXHIBITS
Exhibi t No.Description
- ----------------------
10.Forbearance Agreement, dated as of March 16, 2005, among
McLeodUSA Incorporated (the "Borrower ), each of the
Subsidiaries of the Borrower listed on Schedule I thereto (the
II Subsidiary Guarantors"), the financial institutions named on
the signature pages thereto (together with their respective
successors and assigns, the participant Lenders ) and
JPMorgan Chase Bank, N.A., as agent for the Lenders (the
Administrative Agent-
99.Press Release, dated March 16, 2005
..::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 hereunto duly authorized.
MCLEODUSA INCORPORATED
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Da ted: March 16 , 2 005 By:1st G. Kenneth Burckhardt
-- -- --- - -- --- -- --- -- -- - ---- ---
Name: G. Kenneth Burckhardt
Title: Executive vice President andChief Financial Officer
~PAGE"
EXHIBIT INDEX
Exhibi t No.Description
- ----------------------
10.Forbearance Agreement, dated as of March 16, 2005, among
McLeodUSA Incorporated (the " Borrower"), each of the
Subsidiaries of the Borrower listed on Schedule I thereto (the
Subsidiary Guarantors"), the financial institutions named on
the signature pages thereto (together with their respective
successors and assigns, the "participant Lenders ) and
JPMorgan Chase Bank, N.A., as agent for the Lenders (the
Administrative Agentll
99.
..::
TEXT,.
..::
DOCUMENT::-
..::DOCUMENT,.
c:::TYPE,.EX-
"'SEQUENCE::-2
c:::FILENAME"chi504388. txt
c:::DESCRIPTION,.EXHIBIT 10.
c:::TEXT::-
Press Release, dated March 16, 2005
Exhibit 10.
FORBEARANCE AGREEMENT
FORBEARANCE AGREEMENT, dated as of March 16, 2005 (this IIAgreement"
among (1) McLeodUSA Incorporated, a Delaware corporation (the "Borrower"
),
(2)
each of the subsidiaries of the Borrower listed on Schedule I hereto (the
Subsidiary Guarantors"
),
(3) the financial institutions named on the
signature pages hereto (together with their respective successors and assigns,
the II Participant Lenders ) and (4) JPMorgan Chase Bank, N .A., as agent for the
Lenders (the "Administrative Agent"
) .
WITNESSETH:
A. WHEREAS, the Borrower, certain Participant Lenders, the
Administrative Agent and certain other financial institutions are parties to a
Credit Agreement dated as of May 31, 2000 (as amended, the 112000 Credit
Agreement"
) ;
B. WHEREAS, the Borrower, certain Participant Lenders, the
Administrative Agent and certain other financial institutions are parties to a
Credit Agreement dated as of April 16, 2002 (as amended, the "2002 Credit
Agreement," together with the 2000 Credit Agreement, the .Credit Agreements"
C. WHEREAS, the Subsidiary Guarantors and JPMorgan Chase Bank, N .A. ,
as Collateral Agent for the Secured Parties, are parties to a Subsidiary
Guarantee Agreement dated as of May 31, 2000, as amended and restated as ofApril 16, 2002 (the "Guarantee Agreement"
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D. WHEREAS, the Borrower and the Subsidiary Guarantors have (i)
advised the Participant Lenders they intend to retain as an officer of the
Borrower a person reasonably acceptable to the Participant Lenders with the
requisite expertise and scope of duties to validate and provide information
regarding the Borrower and its Subsidiaries to the Lenders, prospective buyers
and other parties, and to assist the Borrower in developing strategies
relating to any restructuring or other strategic transactions (the
Restructuring Officer ") and (ii) proposed a restructuring plan that is under
discussion with the Participant Lenders (as such plan may be modified, the
II Plan" ) ;
E. WHEREAS, the Borrower has advised the Administrative Agent and the
Lenders that the Specified Defaults (as defined in section I (b) below),
including, without limi tation, the failure to make scheduled amortization
payments under the Credit Agreements and interest payments under the 2000
Credit Agreement, will be occurring during the Forbearance Period (as defined
in section 1 (a) below); and
F. WHEREAS, in order to permit completion of the negotiation of the
Plan and exploration of other possible strategic transactions, the Borrower
and the Subsidiary Guarantors have asked the Participant Lenders, and the
Participant Lenders are willing, to forbear from exercising certain
default-related remedies against the Borrower and the Subsidiary Guarantors on
account of the Specified Defaults for a limited period of time and upon the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing, the covenants and
condi tions contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows~
Section 1. Defined Terms. Unless otherwise specifically defined
herein, each term used herein which is defined in the Credit Agreements has
the meaning assigned to such term in the Credit Agreements. As used in this
Agreement, the following terms have the meanings specified below:
(a) "Forbearance Period" means the period beginning on the date
hereof and ending on the earliest to occur of (any such occurrence being a
Termination Event"
) :
(i) May 2 3, 2005;
(ii) the occurrence of any Event of Default other than a
Specified Default;
(iii) any holder of Indebtedness or other obligations of $7
million or more of the Borrower or any of its subsidiaries shall take
any action to collect or enforce any claim or to create or enforce
any lien against the Borrower or any of its Subsidiaries, excluding
the making of a demand or the assertion of a claim by a vendor or
customer that is disputed in good faith by the Borrower or such
Subsidiary in the ordinary course of business and with respect to
which such vendor or customer has not obtained a lien or otherwise
obtained the abili ty to collect or enforce such claim; and
(iv) a breach of any term, condition or representation
contained in this Agreement by the Borrower or the Subsidiary
Guarantors.
(b) "Specified Defaults " means existing or anticipated Events of
Default, as listed in Schedule II hereto.
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Section 2. Acknowledgements and Undertakings.
(a) The Borrower and the Subsidiary Guarantors agree and acknowledge
that the Specified Defaults will occur during the Forbearance Period and that
certain of the Specified Defaults will constitute material Events of Default.
(b) In addition to the information required to be furnished under the
Loan Documents to the Administrative Agent and the Lenders (and without
prejudice to sections 5.01 or any other provision of the Credit Agreements),
the Borrower shall, as promptly as practicable, provide to the Administrative
Agent any information reasonably requested by the Administrative Agent or the
Lenders. Without limiting the generality of the foregoing, the Borrower shall
promptly provide to the Administrative Agent, in a form acceptable to the
Administrative Agent,
(i) on Tuesday of each week, a detailed forecast of receipts
and disbursements for the Borrower and the Subsidiary Guarantors
providing, on a weekly basis, the Borrower I s good faith estimate of
projected receipts and disbursements for the 13 weeks commencing wi
the immediately following week, together with a reconciliation of
such forecast against the forecast delivered the previous week and a
reasonably detailed explanation of any variance between the current
forecast and such previously delivered forecast;
(ii) not later than the tenth day following the end of each
calendar month, an operational report, including management's good
fai th estimate of receipts and disbursements for such month, the cash
balances of the Borrower and Subsidiary Guarantors as of the end of
such calendar month, and an analysis of performance against projected
performance as set forth in the phased business plan dated March 9
2005 previously delivered to the participant Lenders;
(iii) on request of the Administrative Agent, and in any
event on Monday of each week I a written update addressed to the
financial advisor of the Administrative Agent regarding the status of
the Borrower I S ef forts to sell all or any portion of its business,
including, without limitation, a list of all contacts made with
potential purchasers (including the identities of those contacted and
the dates of such contacts), copies (if in writing) or descriptions
(if not in writing) of any proposals, offers or indications of
interest received by the Borrower or its attorneys or financial
advisors, and any responses thereto by the Borrower or any such
attorney or financial advisor i and
(iv) direct access to the officers and employees, and books
and records of the Borrower and its Subsidiaries (including the
Restructuring Officer retained by the Borrower) to obtain such
information as the Participant Lenders deem reasonably necessary to
evaluate, negotiate and implement any restructuring plan and to
verify and analyze to the reasonable satisfaction of the participant
Lenders the matters referred to in subparagraphs (i), (ii) and (iiil
above.
(c) As promptly as possible, and, in any event, not later than March
31, 2005 I the Borrower shall retain (and identify to the Administrative Agent)
the Restructuring Officer. The scope of the Restructuring Officer I s engagement
shall be reasonably acceptable to the Participant Lenders. From and after such
retention, the Restructuring Officer shall continue to be actively employed by
the Borrower at all times during the Forbearance Period and shall have direct
access to all information I personnel and other resources necessary to the
performance of his or her duties.
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(d) The Borrower shall make all scheduled interest payments under the
2002 Credit Agreement at the non-default contract rate.
(e) On or prior to the Forbearance Effective Date (as defined
section 12 below), the Borrower shall pay to the Administrative Agent an
advance of $1.5 million (the "Advance"~ on account of the Borrower
obligations to pay expenses and other amounts under sections 9.03 of the
Credit Agreements. The Administrative Agent shall be entitled to pay such
amounts as they come due, including, without limitation, (i) the reasonable
fees and expenses of counsel and financial advisors provided for in such
sections and (ii) travel and other incidental expenses of Lenders actively
participating with the Administrative Agent in restructuring discussions with
the Borrower. The Borrower shall from time to time make further advances to
the Administrative Agent, upon demand (and in any event within three business
days), to restore the balance of the Advance held by the Administrative Agent
to $1.5 million.
(f) The Borrower shall furnish to the Administrative Agent prompt
written notice of the occurrence of a Termination Event.
(g) The Borrower and the Subsidiary Guarantors acknowledge and agree
that, under the Credit Agreements r as amended, they are not currently enti tIed
to request any new Loans or Let ters of Credit.
Section 3. Forbearance.
(a) The participant Lenders agree that until the expiration of the
Forbearance Period, the Participant Lenders will temporarily forbear (subject
to the terms hereof) from the exercise of their default-related remedies under
the Credit Agreements, Loan Documents or otherwise, against the Borrower and
the Subsidiary Guarantors solely to the extent the availability of such
remedies arises exclusively from the Specified Defaults; provided that the
Borrower and the Subsidiary Guarantors shall comply during the Forbearance
Period with all provisions, limitations, restrictions or prohibitions that
would otherwise be effective or applicable under any of the Loan Documents
during the continuance of any Default or Event of Default; provided further
that the agreement of the Participant Lenders temporarily to forbear shall not
apply to nor preclude any remedy available to the Administrative Agent or the
Lenders in connection with any proceeding commenced under any bankruptcy or
insolvency law, including without limitation, to any relief in respect of
adequate protection or relief from any stay imposed under such law.
(b) Upon a Termination Event, the agreement of the Participant
Lenders hereunder to forbear from exercising their default-related remedies
shall immediately terminate without the requirement of any demand,
presentment, protest or notice of any kind, all of which the Borrower and the
Subsidiary Guarantors hereby waive. The Borrower and the Subsidiary Guarantors
agree that the Administrative Agent and the Lenders may at any time thereafter
proceed to exercise any and all of their respective rights and remedies under
any or all of the Loan Documents and/or applicable law, including, without
limitation, their respective rights and remedies in connection with any or all
of the Defaults and Events of Default including, wi thout limitationl the
Specified Defaults.
(c) For the avoidance of doubt. nothing herein limits the right of
the Administrative Agent or the Lenders, including during the Forbearance
Period, to take any action to preserve or exercise rights or remedies against
parties other than the Borrower and the Subsidiary Guarantors (RThird Party
Rights II ). For purposes of the foregoing, the Borrower and the Subsidiary
Guarantors acknowledge and agree that execution and delivery of this Agreement
shall constitute the making of any necessary demand or the giving of any
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necessary notice for purposes of preserving and/or permitting the exercise of
any such Third Party Rights of the Administrative Agent and the Lenders.
(d) Execution of this Agreement constitutes a direction by the
Participant Lenders that the Administrative Agent act in accordance with its
terms. Each participant Lender agrees that, notwithstanding anything to the
contrary in the Credit Agreements, the Administrative Agent shall not be
required to act if directed against the Borrower or the Subsidiary Guarantors
if such action is contrary to the terms of this Agreement.
(e) The Borrower and the Subsidiary Guarantors acknowledge and agree
that the agreement of the Participant Lenders hereunder to forbear from
exercising their default-related remedies with respect to the Specified
Defaults shall not constitute a waiver of such Specified Defaults and that the
Lenders expressly reserve all rights and remedies that the Administrative
Agent and the Lenders now or may in the future have under any or all of the
Loan Documents and/or applicable law in connection with all Defaults and
Events of Default (including without limitation the Specified Defaults)
Section 4. Interest Rate During the Forbearance Period.
(a) The parties acknowledge that upon the occurrence of an Event of
Defaul t, the Lenders have the right to accelerate the due date of the Loans
under the Credit Agreements. In consideration of the forbearance provided
hereunder, and notwithstanding any failure to accelerate the due date of the
Loans, from and after the occurrence of any Event of Default (including any
Specified Defaults) I principal of and interest on the Loans and all fees and
other amounts payable by the Borrower shall bear interest at the default rate,
as set forth in sections 2 .13 (c) of the Credit Agreements.
(b) Notwithstanding the foregoing, the Participant Lenders are hereby
advised that, during the Forbearance Period (i) the Borrower does not intend
to pay interest in cash on a current basis under the 2000 Credit Agreement,
and (ii) the Borrower intends to pay interest in cash under the 2002 Credit
Agreement only at the pre-default rate.
(c) Any interest accrued under the Credit Agreements that has not
been paid in cash shall compound on each Interest Payment Date until paid.
Section 5. Reference to and Effect upon the Credit Agreements.
ta) Except as expressly set forth herein, all terms, conditions,
covenants, representations and warranties contained in the Credit Agreements,
and any other Loan Document, and all rights of the Administrative Agent and
the Lenders and all obligations of the Borrower and the Subsidiary Guarantors
thereunder, shall remain in full force and effect. The Borrower and the
Subsidiary Guarantors hereby confirm that the Credit Agreements, and the other
Loan Documents are in full force and effect.
(b) Except as expressly provided herein, nothing contained in this
Agreement and no action by, or inaction on the part of, any Lender or the
Administrative Agent shall, or shall be deemed to, directly or indirectly (i)
constitute a consent to or waiver of any past, present or future violations of
any provisions of the Credit Agreements, or any other Loan Document, (ii)
amend, modify or operate as a waiver of any provision of the Credit
Agreements, or any other Loan Document, except as expressly set forth herein,
of any right, power or remedy of the Administrative Agent or any Lender
thereunder or (iii) consti tute a course of dealing or other basis for altering
any obligations of the Borrower under the Loan Documents, or any other
contract or instrument.
(c) This Agreement shall constitute a Loan Document.
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Section 6. Representations and Warranties. To induce the
Administrative Agent and the Participant Lenders to execute and deliver this
Agreement, the Borrower and the Subsidiary Guarantors represent and warrantthat:
(a) The execution, delivery and performance by the Borrower and the
Subsidiary Guarantors of this Agreement have been duly authorized by all
necessary corporate action. This Agreement constitutes the legal, valid and
binding obligations of the Borrower and the Subsidiary Guarantors, enforceable
against the Borrower and the Subsidiary Guarantors in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws af fecting the enforcement of creditors I rights
generally or by equitable principles relating to enforceability.
(b) No approval, consent, exemption, authorization, or other action
by, or notice to, or filing with, any Governmental Authority is necessary or
required in connection with the execution, del i very or performance by, or
enforcement against, the Borrower or the Subsidiary Guarantors of this
Agreement.
(c) As of the Forbearance Effective Date (as defined in section 12
below), no Defaults or Events of Default exist, other than the Specified
Detaul ts.
Section 7. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of New York.
Section 8. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
Section 9. Severability. The invalidity, illegality or
unenforceability of any provision in or obligation under this Agreement in any
jurisdiction shall not affect or impair the validity I legality or
enforceability of the remaining provisions or obligations under this Agreement
or of such provision or obligation in any other jurisdiction.
Section 10. Further Assurances. The Borrower and the Subsidiary
Guarantors agree to take all further actions and execute all further documents
as the Administrative Agent may from time to time reasonably request to carry
out the transactions contemplated by this Agreement.
Section 11. Notices. All notices, requests and demands to or upon
the respective parties hereto shall be given in accordance with sections 9.
of the Credit Agreements.
Section 12. Effectiveness. This Agreement shall become effective as
of the date hereof on the date (the ~Forbearance Effective Date~) when the
following conditions are satisfied:
(a) the Administrative Agent shall have received from the Borrower,
the Subsidiary Guarantors, and the Required Lenders under each Credit
Agreement a counterpart hereof signed by such party or facsimile or other
written confirmation (in fo~ satisfactory to the Administrative Agent) that
such party has signed a counterpart hereof;
(b) the Administrative Agent shall have received certificates of the
chief financial officer of the Borrower and the Subsidiary Guarantors
certifying that, to the best of his knowledge, the representations and
warranties made by the Borrower and the Subsidiary Guarantors pursuant to
section 6 of this Agreement are true and correct on and as of the date of this
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Page 10 of 26
Agreement; and
(c) the Borrower shall have paid to the Administrative Agent in full
the Advance referred to in section 2 (f) above.
Section 13. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A
TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THI S AGREEMENT (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED r EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PARTY WOULD NOT IN THE EVENT OF LITIGATION r SEEK TO ENFORCE THE
FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO
HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS THE
MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
Section 14. No Third Party Beneficiaries. This Agreement shall be
binding upon and inure to the benef i t of the Borrower, the Subs idiary
Guarantors, the Administrative Agent and the Lenders and their respective
successors and assigns; provided that the Lenders (other than the Participant
Lenders and their respective successors and assigns) shall not be bound by the
forbearance granted hereunder. No Person other than the parties hereto and any
other Lender and their successors and assigns s~all have any rights hereunder
or be entitled to rely on this Agreement, and all third-party beneficiaryrights (other than the rights of any other Lender and its successors and
assigns) are hereby expressly disclaimed.
Section 15. Limitation on Assignments. In addition to, and without
limi ling the requirements set forth in sections 9.04 of the Credit Agreements
each Participant Lender agrees that it will not assign all, or any ratable
part, of its Loans, commitments or other rights or obligations under the Loan
Documents to any Person (other than a participant Lender) unless such Person
shall have agreed to be bound by this Agreement (including the forbearance
granted hereunder). Each Participant Lender agrees that, notwithstanding
anything to the contrary in the Credit Agreements, the Administrative Agent
shall be entitled to withhold its consent to, and shall not be required to
give effect to, any purported assignment of such Participant Lender I s Loans,
Commitments or other rights or obligations under the Loan Documents if the
conditions set forth in the previous sentence are not satisfied.
~PAGE:;.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
MCLEODUSA INCORPORATED
By: Is/ G. Kenneth Burckhardt
---- - ----~--- -- -------- --------
Name:
Ti tIe:G. Kenneth BurckhardtExecutive Vice President
and Chief Financial Officer
.c;: P AGE::-
MCLEODUSA HOLDINGS, INC.
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Page 11 of 26
By: /sl G. Kenneth Burckhardt
----- - ----- - - ---- -------- -- -------
Name:
Ti tle;G. Kenneth Burckhardt
Executive Vice President andChief Financial Officer
oe::PAGE,.
MCLEODUSA TELECOMMUNICATIONS SERVICES, INC.
By: /s/ G. Kenneth Burckhardt
-- ---- - --- -- -- - - - - ---- - - - -- ~- -- ---
Name:Title:G. Kenneth Burckhardt
Execut i ve Vice President andChief Financial Officer
~PAGE~
MCLEODUSA NETWORK SERVICES, INC.
By: /s/ G. Kenneth Burckhardt
------- - --- -- -- ---- -- -- - ---- - - -- ---
Name:Title:G. Kenneth Burckhardt
Executive Vice President and
Chief Financial Of f icer
.c:PAGE,.
MCLEODUSA PURCHASING L. L. C .
By: /s/ G. Kenneth Burckhardt
-- ----- -- ---- -------- ----- -- ---- ---
Name:Title:G. Kenneth Burckhardt
Executive Vice President and
Chief Financial Officer
.c:PAGE~
MCLEODUSA INFORMATION SERVICES, INC.
By:/s/ G. Kenneth Burckhardt
---- -- -- -- ---- --------- -- - - -- -- -----
Name:
Ti tIe:G. Kenneth Burckhardt
Executive Vice President andChief Financial Officer
.c: PAGE~
JPMORGAN CHASE BANK, N. A., as Administrative
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Page 12 of 26
Agent
By: /s/ Susan E. Atkins
- -- - -- - - --- ---- - --- -- - - - -~ -- - - -----
Name: Susan E. Atkins
Title: Managing Director
JPMorgan Chase Bank NA
--- - -------- - - -- ---- - --- - -- - - -- -- - - - - - ---
Print Name of Lender
By: s / Susan E. Atkins
-------- - - - ----- - - -- -- -- - - -- - -- - --- ---
Name:
Ti tIe:Susan E. Atkins
Managing Director
Credi t Suisse First Boston
- --------------------------- -------- ----
Print Name of Lender
By: /s/ Didier Siffer
- - - - -- -- -- - - -- ---- - - --- -- - - - - --- ----
Name:Title:Didier Siffer
Director
Credit Suisse First Boston
---- -- - -------- - --- -- ------ -- --- -- -----
Print Name of Lender
By: /s/ Michael A. Crisci to
--------- -- ---- ----- - ----- - ---- - --~--
Name:Title:Michael A. Crisci to
Managing Director
Bayerische Hypo-und Vereinsbank AG
------- - - - ---- ---- -- ----- - -- ---- --- ---- ---
Print Name of Lender
By: Isl Kimberly Sousa
-- -- -- ------ -- ---------- -- -- ---- --- ----
Name:Title:Kimberly Sousa
Director
Bayerische Hypo-und Vereinsbank AG
- - - ---- -------- --- --- ---- - --- ---- -- ---- - ---
Print Name of Lender
By: s/ Salvatore Esposito
- -- --- - - ----- - ------ - -- -- -------- -- ---
Name:Title:Salvatore Esposito
Managing Director
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Bane of America Strategic Solutions, Ine.
- -- - -- - - - -- -- -- - --- -- --- - -- -- -- - - -- --- - - -- --
Print Name of Lender
By: / s I Thomas Biagg i
--- - ---- -- -- - --- ----- - -- -- -- -- ---- - -- - --
Name:
Ti tIe:Thomas Biaggi
Senior vice President
Commonwealth of Massachusetts Pension
Reserves Investment Managemetn Board
Pension Investment Committee of General
Motors for General Motors Employees
Domestic Group penion Trust
Fidelity Management Trust Company, as
Investment Advisor
--- - - -- -- -- -- --- - -------- - - - -- -- - - -- --- ---
pr i n t Name 0 Lender
By: /s/ Geoffrey Johnson
- - - ~ ---- - - - --- -- ---- -- -- -- -- -- - --- -----
Name:Title;Geoffrey Johnson
Vice President
Fidel i ty Advisor Series I: Fidelity Advisor
Leveraged Company Stock Fund
Fidelity Securities Fund: Fidelity Leveraged
Company Stock Fund
Fideli ty Advisor Series II: Fidelity Advisor
High Income Advantage Fund
------ - ----- - - -- -- - - -- - --------- --- - ~ - -- ---
Print Name of Lender
By:Isl John H. Costello
---- --- -- -------------------- -- -- -----
Name:
Ti tIe:
John H. Costello
Assistant Treasurer
Jefferies & Co., Ine.
- - ------- -------- - ------- - --- - - - - -- --- -- ---
Print Name of Lender
By:Is! Harrison A. Bubrosky
----------- ---------- - - -- --- - --- -- --~-
Name:
Ti tIe:
Harrison A. BubroskyExecutive Vice President
Bane of America Securities
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LLC as Agent for Bank of
America, N.
- - - -- ---- - -- -- -- - - -------- --- -- - - ---- --- --
Print Name of Lender
By; /s/Toby Gi Ibert
-- -- - - -- -- -- - --- ---- -- - ----- - --- -- ---
Name:
Ti tIe:
Toby Gi Ibert
Associa te
'" PAGE~
Theodore J. Fors tmann
--- - --- -- - - - - ---- - - - - -- -- -- - - ----------
Pint Name of Lender
By: 1st Theodore J. Forstmann
---- --- - - ---- -- - -- -- -- --~- ----- ---
Name:Title:
-::PAGE:;..
SCHEDULE I
Subsidiary Guarantors
1. McLeodUSA Holdings, Ine.
2. McLeodUSA Telecommunications Services, Inc.
3. McLeodUSA Network Services, Inc.
4. McLeodUSA purchasing L. L. C .
5. McLeodUSA Information Services, Ine.
-:::PAGE:;..
SCHEDULE I I
SPECIFIED DEFAULTS
Section 2.05 (j). Any Default or Event of Default occurring underei ther Credit Agreement as a resul t of the failure by the Borrower to
deposit cash in an account with the Administrative Agent pursuant to
Section 05 (j) of such Credit Agreement.
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10.
11.
Page 15 of 26
Section 2.09. Any Default or Event of Default occurring under the
2000 Credit Agreement as a result of the failure by the Borrower to
pay to the Administrative Agent for the account of each Lender when
due the then unpaid principal amount of each Term Loan of such Lenderas provided in Section 2.10 of the 2000 Credi t Agreement.
Section 2.10. Any Default or Event of Default occurring under the
2000 Credit Agreement as a result of the failure by the Borrower to
repay Term Loans on the dates set forth in Section 2.10 of the 2000
Credit Agreement.
Section 2.13. (a) Any Default or Event of Default occurring under the
2000 Credit Agreement as a result of the failure by the Borrower to
pay accrued interest on the dates and/or in the amounts specified in
Section 2.13 of the 2000 Credi t Agreement.
(b) Any Default or Event of Default occurring under the 2002
Credit Agreement as a result of the failure by the Borrower to pay on
a current cash pay basis that portion of the interest representing
the default rate interest required by Section 2.13 (c) of the 2002
Credi t Agreement.
Section 5.01 (a). Any Default or Event of Default occurring under
either Credit Agreement as a result of the failure by the Borrower to
furnish to the Administrative Agent and each Lender financial
statements reported on by independent public accountants of
nationally recognized standing without a "going concern" or like
qualification or exception and without any qualification or exception
as to the scope of audit I as required by Section 5.01 (a) of such
Credit Agreement.
Section 5.01 (d). Any Default or Event of Default occurring under
either Credit Agreement as a result of the failure by the Borrower to
furnish to the Administrative Agent and each Lender a certificate ofaccounting firm as required by Section 5.01 (d) of such Credit
Agreemen t .
Section 5.01 (e). Any Default or Event of Default occurring under
either Credit Agreement as a result of the failure by the Borrower to
furnish to the Administrative Agent and each Lender a budget asrequired by Section 5.01 (e) of such Credit Agreement.
Section 5.02 (a). Any Default or Event of Default occurring under
either Credit Agreement as a result of the failure by the Borrower to
furnish to the Administrative Agent and each Lender prompt written
notice of any Specified Default.
Section 5. 02(c). Any Default or Event of Default occurring under
either Credit Agreement as a result of the failure by the Borrower to
furnish to the Administrative Agent and each Lender prompt written
notice of any development occurring after the Forbearance Effective
Date as a consequence of the public disclosure of this Forbearance
Agreement or any of the Specified Defaults that results in, or could
reasonably be expected to result in, a Material Adverse Effect.
Section 6.13. Any Default or Event of Default occurring after the
Forbearance Effective Date under either Credit Agreement as a result
of the failure by the Borrower to satisfy the requirements of Section
13 of such Credit Agreement.
Section 6.17. Any Default or Event of Default occurring after the
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12.
13.
14.
15.
Page 16 of 26
Forbearance Effective Date under either Credit Agreement as a result
of the failure by the Borrower to satisfy the requirements of Section
17 of such Credit Agreement.
Article VII, clause (a). Any Default or Event of Default occurring
under either Credit Agreement of the type described in clause (a) of
Article VII of such Credit Agreement arising from the failure to make
any payment when due after the Forbearance Effective Date.
Article VII, clause (b). (a) Any Default or Event of Default
occurring under the 2000 Credit Agreement of the type described inclause (b) of Article VII of such Credit Agreement arising from the
failure to pay interest when due after the Forbearance Effective
Date.
(b) Any Default or Event of Default occurring under the 2002
Credit Agreement of the type described in clause (b) of Article VII
of such Credit Agreement, but solely to the extent of the additional
interest required to be paid hereunder and pursuant to Section
13 (c) of the 2002 Credit Agreement.
(a) Any Default or Event of Detaul t occurring under the 2000 Credit
Agreement as a result of a Specified Default occurring under the 2002
Credit Agreement, or (b) any Default or Event of Default occurring
under the 2002 Credit Agreement as a result of a Specified Default
occurring under the 2000 Credit Agreement.
Any Default or Event of Default occurring under either Credit
Agreement as a result of the failure by any Subsidiary Loan Party to
make any required payments under the Subsidiary Guarantee Agreement
during the Forbearance Period as a consequence of another Specified
Defaul t .
.c:; /TEXT-;:.
~ / DOCUMENT-;:.
~DOCUMENT"
~TYPE;,.EX-9 9
.c:; SEQUENCE" 3
.c:;FILENAME;,.mc99. txt
.c:;DESCRIPTION;,.EXHIBIT 99.
.c:;TEXT-;:.
r GRAPHIC OMITTED)
Exhibit 99.
McLeodUSA Reports Fourth Quarter and
Total Year 2004 Results
Continued strong operational performance but revenue declines
Actively pursuing strategic partner or sale of the Company
Entered forbearance agreement with Lenders to maintain liquidity
Discussions for debt restructuring underway wi th Lender Commi ttee
where recovery for preferred or common stockholders is unlikely
CEDAR RAPIDS, Iowa - March 16, 2005 - McLeodUSA Incorporated (Nasdaq: MCLD)
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Page 17 of 26
one of the nation I s largest independent, competitive telecommunications
services providers, today reported financial and operating results for the
quarter and total year ended December 31, 2004.
Total revenues for the quarter ended December 31,2004 were $162.6 million
compared to $168.1 million in the third quarter of 2004 and $209.5 million in
the fourth quarter of 2003. Revenues were down from the third quarter of 2004
due to a reduction in total access lines as new retail sales did not offset
existing customer turnover; as well as, lower IRU sales and the impact of
normal fourth quarter seasonality on long distance volume.
Gross margin (1) for fourth quarter 2004 was $75.8 million compared to $74.
million in the third quarter of 2004 and $93.5 million in the fourth quarter
of 2003. Gross margin in the fourth quarter included approximately $6.
million of rate settlements. Gross margin as a percent of revenue, including
the impact of the rate settlements, was 46.6% versus 44.0% in the third
quarter of 2004 and 44.6% in the fourth quarter of 2003.
SG&A expenses for the fourth quarter of 2004 were $61.7 million compared to
$62.5 million in the third quarter of 2004 and $77.0 million in the fourth
quarter of 2003 as the Company continued to realize the benefit of its ongoing
expense reduction programs. Adjusted EBITDA1 in the fourth quarter of 2004 was
$14.1 million, including the $6.2 million of rate settlements, versus $11.
million in the third quarter of 2004 and $16.5 million in the fourth quarter
of 2003. Net loss from continuing operations for the quarter was $ (98.mill ion, or a loss per common share of $ (0.32), versus $ (352.8) million in the
third quarter of 2004, which included a non-cash charge of $263.1 million
related to the impairment of goodwill and intangible assets, and $ (56.
million in the fourth quarter of 2003.
The Company s strong operational performance continued in the fourth quarter
of 2004. The customer satisfaction rating was 93%, billing accuracy was 99.
and the Company continued to consistently achieve 99.999% network reliability,
all in line with Company goals.
Customer platform mix at the end of the fourth quarter 2004 was 71% UNE-L, 4%
resale and 25% UNE-P versus 70%, 4% and 26%, respectively, at the end of the
third quarter of 2004 and 65%, 5% and 30%, respectively, at the end of the
fourth quarter 2003. The Company continued to migrate resale and UNE-
customers to UNE-L and add new customers to the more profi table UNE-L
platform. In January 2005, the Company reached an agreement with Qwest
Communications for the continued provisioning and service of its UNE-P lines.
Customer line turnover in the fourth quarter was 2.2% versus 2.4% in the third
quarter of 2004 and 2.1% in the fourth quarter of 2003. Business customer lineturnover was 2.0% in the fourth quarter of 2004 compared to 1.8% in the fourth
quarter of 2003.
Total revenues for the year ended December 31, 2004, were $716.2 million
versus $869.0 million for the year 2003 primarily driven by the federally
mandated access rate reductions of $43.3 million, lower long distance rates
and volume of $40.1 million, and the decline in price and volume of local
services of $48.0 million. Gross margin for the year ending December 31, 2004was $322.4 million versus $370.1 million in 2003 driven by the decline in
revenues offset by increased profitability associated with the migration of
the business to UNE-L and the favorable impact of the Company ongoing cost
reduction initiatives. Gross margin as a percent of revenue for the year was
45.0% versus 42.6% in 2003. Total SG&A expenses for the year were $268.
million and $312.2 million in 2004 and 2003, respectively, as the Company
successfully executed its expense reduction and productivity improvement
plans. Adjusted EBITDA was $54.0 million for year 2004 versus $57.9 million in
2003. Net loss for the year ended December 31, 2004 was $ (624.5) million
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versus $(295.7) million for the year ended December 31, 2003. Net loss for
2004 included a non-cash impairment charge of $263.1 million to recognize full
impairment of goodwill and a partial impairment of the McLeodUSA trade name.
The Company ended the year with $50.0 million of cash on hand which included a
planned $20 million withdrawal from the exit credit facility in the fourth
quarter. At December 31, 2004 the Company bad withdrawn a total of $100
million and had issued approximately $8 million of letters of credit against
the $110 million funded exit credit facility. The Company was in compliance
with all financial covenants at December 31, 2004. The Company's cash balancewas approximately $45 million as of March 15, 2005.
Pursuit of Strategic Alternatives
- -------- --- ----- - -------- --- ----
As an independent communications services provider, realizing the revenue
growth benefi ts of operational excellence continues to be a challenge for the
Company as it competes against large, financially strong competi tors wi well-known brands. Most recently, the FCC has finalized its unbundling rules
and the communications industry consolidation has accelerated. With the recent
merger announcements in the industry, the Company believes that the large
telecommunications providers will likely become even more aggressive upon the
closing of these transactions further challenging the Company s ability togrow revenue.
In response, the Company s Board of Directors has authorized the Company topursue strategic al ternati ves. In support of these initiatives, the Company
has hired Miller Buckfire Ying & Co., LLC and Gle~cher Partners, LLC as its
financial advisors. The Company is now actively pursuing a strategic partner
or a sale of the Company while also taking steps to maintain future liquidity,
including evaluating a capital restructuring to reduce the current debt level
enabling the Company to achieve posi ti ve cash flow going forward.
The Company believes that its operational excellence combined with a highly
trained workforce, state of the art product offerings and expansive network
could provide strategic benefits to existing multi-state and regional telecom
services providers. In addition, through the extensive cost reduction
programs, which have been implemented over the past several years, the Company
believes its wholesale product suite offers an attractive alternative to UNE-P
providers for local access lines and competitive long distance services.
In the interim, the Company has entered a forbearance agreement with its
Lenders with respect to scheduled principal and interest payments on its loans
under which the Lenders have agreed not to take any action as a result of
non-payment by the Company of approximately $18.1 million of scheduled
principal amortization and interest payments due on or before March 31, 2005
and any related events of default through May 23, 2005.
Financial Restructuring
- -----------------------
In light of the revenue outlook and the Company I s on-going cash requirements,
the Company has also begun discussions related to a capital restructuring with
its agent bank and a group of lenders acting as a steering committee for the
lenders under its credit facilities. The Company and this committee are in
negotiations related to terms of a capital restructuring which includes the
conversion of a significant portion of the Company I s current ou~st~nding debt
into equity. Under such a restructuring, the holders of the Company I s currentdebt would become equi ty shareholders of the Company with the current holders
of the preferred and common stock unlikely to receive any recovery.
There can be no assurance that the Company will be able to reach an agreement
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Page 19 of 26
with its lenders regarding a capi tal restructuring or continued forbearance
and covenant relief prior to the end of the initial forbearance period on May
, 2005. There also can be no assurance that the Company will be able to
identify a suitable strategic partner or buyer or reach agreement with any
such strategic partner or buyer on terms and conditions acceptable to the
Company prior to the end of the initial forbearance period. In the event these
alternatives are not available to the Company, it is likely that the Company
will elect to forgo making future principal and interest payments to its
lenders while it continues to seek an extended forbearance period or permanent
capital restructuring from its lenders, or alternatively, the Company could be
forced to seek protection from its creditors.
While the Company continues to explore a variety of options with a view toward
maximizing value for all of its stakeholders, none of the options presented to
date have suggested that there wi 11 be any meaningful recovery for the
Company 1 s current preferred stock or common stock holders. Accordingly, it is
unlikely that holders of the Company's preferred stock or common stock will
receive any recovery in a capital restructuring or other strategic
transaction.
The Company believes that by not making principal and interest payments on the
credit facilities, cash on hand together with cash flows from operations is
sufficient to maintain operations in the ordinary course without disruption of
services. The Company does not expect that the exploration of the alternatives
described above will negatively impact its customers or vendors. The Company
remains committed to continuing to provide the highest level of service to its
customers and to maintaining its strong supplier relationships.
As a result of the activities described above the Company has delayed the
filing of its Form lO-K with the SEC. The Company has completed its internal
control review as required under Section 404 of the Sarbanes-Oxley Act and
prepared to issue its Management I s Report on Internal Control Over Financial
Reporting stating that based on management I s assessment, management believes
that as of December 31, 2004, the Company s internal control over financial
reporting is effective. The Company expects that the Independent Registered
Public Accounting Firm Report that will be issued in connection with the
filing of Form 10-K will include comments with respect to the Company
ability to continue as a going concern.
Other recent highlights include:
Ixl On January 3, 2005, the Company announced a five-year extension to
its contract with the State of Iowa for operation and maintenance of
the Iowa Communications Network. McLeodUSA will continue to operate
the network from its Operations Center near Des Moines, perform
field services and conduct network locate services statewide. This
contract extension, expiring December 9, 2009, will result in
recurring revenue to McLeodUSA of approximately $5 million annually.
Ix I On December 20, 2004, McLeodUSA announced that its Preferred
Advantage (R) Dynamic Integrated Access, which utilizes the next
generation Voice-over-Internet Protocol (VoIP) switching
architecture, is now generally available for sale. The service has
been initiated in 24 markets to date and the Company s efforts are
on track to provide service in 37 markets by April 30, 2005. The
McLeodUSA Integrated Access product uses a secure IP network to
offer integrated voice and data communications services over a
single T-1 facility to customer locations. Customers receive up to
544 Mbps Internet access, high qual! ty voice service, 17 local
calling features, the convenience of an easy-to-use web-based
control panel , and the ability to add or change features andgenerate reports.
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Page 20 of 26
Ixl On December 16, 2004, the Company announced a three-year renewable
wholesale agreement wi th Mcr whereby McLeodUSA will enable MC! to
provide local telephone services to its residential customers using
McLeodUSA facilities. The agreement provides for MCr and McLeodUSA
to migrate a minimum of 200,000 local lines onto the McLeodUSA UNE-L
network by October 31, 2005.
Abou t McLeodUSA
- ---------------
McLeodUSA provides integrated communications services, including local
services, in 25 Midwest, Southwest, Northwest and Rocky Mountain states. The
Company is a facili ties-based telecommunications provider with, as of December
31, 2004, 38 ATM switches, 39 voice switches, 699 collocations , 432 DSLAMs and
426 employees. As of April 16 2002, Forstmann Little & Co. became a 58%
shareholder in the Company. Visit the Company s Web site at www.rncleodusa.corn
(1) Non-GAAP Financial Measures
- -----------------------~------
To provide further clarification, the Company has begun using the term
Adjusted EBITDA as a replacement for EBITDA. Adjusted EBITDA is a non-GAAP
financial measure used by management to evaluate the effectiveness of the
Company s operating performance and to enhance the comparability between
periods. EBITDA is an acronym for earnings before interest, taxes,
depreciation and amortization. Adjusted EBITDA, as defined by McLeodUSA,
further removes the effects of other income and expense, restructuring
adjustments and impairment charges. Management removes the effects of other
income and expense, restructuring adjustments and impairment charges from
Adjusted EBITDA because it does not believe that such items are representative
of the core operating results of the Company's ongoing competitive
telecommunications activities. For a facilities-based telecommunications
services provider like McLeodUSA with high initial capital investments
required in order to gain entry to the industry, management believes that
omitting depreciation and amortization from Adjusted EBITDA provides a
relevant and useful measure of the Company' s core operating performance and
enhances comparability between periods. Management believes that non-GAAP
measures such as Adjusted EBITDA are commonly reported and used by analysts,
investors and other interested parties in the telecommunications industry.
Adjusted EBITDA is reconciled to net loss, the most comparable GAAP measure,
within the table presented below. McLeodUSA' s use of Adjusted EBITDA may not
be cDmparable to similarly titled measures used by other companies in the
telecommunications industry. The use of Adjusted EBITDA is not intended to
replace measures of financial performance reported in accordance with
accounting principles generally accepted in the United States.
oe::TABLE~
...:CAPTION~
Thre
- - -- ---- -- ---- - ----- - ---
(In millions)Dee 31, 2004
-------- - ----- - - ---
oe::s:::-oe::c~
Reconciliation of Adjusted EBITDA:
Net loss......
....... ......... .......................
(98.
13.Interest expense.....................................
Other nonoperating expense.................
. . . . . . . . . .
Restructuring adjustment.............................
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Page 21 of 26
Impairment charge....................................
Depreciat ion and amortization.
. . . . . . . . . . . . . . . . . . . . . . .
89.
---------- ---------
Adjusted EBITDA..................................14.
-------------------------~~----~---------
(In millions)Dee 31, 2004
- - -- - -- - - -- -- ------ - --- -- - ----- - ---
Reconciliation of Adjusted EBITDA:
Net loss..................................................
Interest expense............................................
Other nonoperating expense...........
. . . . . . . . . . . . . . . . . . . . . . .
Restructuring adjustment.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charge....................
. . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
( 624
( 0
263
356
Adjusted EBITDA..................
...... .................------ - - - - ---- - ------------------------------------
~ / T ABLE~
Gross margin is another financial measure that management uses to evaluate
operating performance. Gross margin, which is calculated as revenues less cost
of service, excludes depreciation and amortization expenses. Cost of service
includes expenses directly associated wi th providing telecommunications
services to its customers. Costs classified as cost of service include, among
other items, the cost of connecting customers to the McLeodUSA network via
leased facilities, the costs paid to third party providers for interconnect
access and transport services, the costs of leasing components of network
facilities and the cost of fiber related to sales and leases of networkfacili ties. Gross margin is reconciled to net loss, the most comparable GAAP
measure, within the table presented below.
c::TABLE~
~CAPTION::.-
Thre
(In millions)Dee 31, 2004
------- ------------ --- ----- ------ - ------ - ---
c::S,..c:::C::.-
Reconciliation of Gross Margin:
Net loss.............................................(9B.
13.Interest expense.....................
. . . . . . . . . . . . . . . .
Other nonoperating expense.. .
. . . . . . . . . . . . . . . . . . . . . . . .
Restructuring adj ustment . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Impairment chargeDepreciation and amortization.. .
. . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative..
. . ... ... .. .. .. ..
89.
61.
----------- --------
Gross Marg in. .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75.
----------------- ------------------- ------
(In millions)Dee 31, 2004
---- - -------- -------- - ---- -- --------
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Page 22 of 26
Reconciliation of Gross Margin:
Net loss..................................................
Interest expense............................................
Other nonoperating expense.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring adjustment...............
. . . . . . . . . . . . . . . . . . . . .
Impairment charge...........................................
Depreciation and amortization...
.... .... ....................
Selling, general and adminis trati ve.
. . . . . . . . . . . . . . . . . . . . . . . .
( 624
( 0
263
356
268
Gross Margin............................................
------- -- -- ------
322
------------------------------------
.r.: /TABLE::..
Some of the statements in this press release include statements about our
future expectations. Statements that are not historical facts are
"forward-looking statements " for the purpose of the safe harbor provided by
Section 21E of the Exchange Act and Section 27A of the Securities Act. Such
statements may include projections of financial and operational results and
goals, including revenue, EBITDA, Adjusted EBITDA, profitability, savings and
cash. In some cases, you can identify these so-called .. forward-looking
statements" by our use of words such as II may , " 1I will,II should, Ir "expect
plan,
" "
anticipate," "believe,1I "estimate,
" "
predict, II "project, II "intend" or
potential" or the negative of those words and other comparable words. These
forward-looking statements are subject to known as well as unknown risks and
uncertainties that may cause actual results to differ materially from our
expectations. Our expectations are based on various factors and assumptions
and reflect only our predictions. Factors that could cause actual results to
differ materially from the forward-looking statement include technological,
regulatory, public policy or other developments in our industry, availability
and adequacy of capital resources, current and future economic conditions, the
existence of strategic alliances, our ability to generate cash, our ability to
implement process and network improvements, our ability to attract and retain
customers, our ability to migrate traffic to appropriate platforms and changes
in the competitive climate in which we operate. These and other risks are
described in more detail in our most recent Annual Report on Form lO-K filedwith the SEC. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of future events, new
information or otherwise.
Contact:
McLeodUSA Incorporated, Cedar Rapids, IA
Investor Contact: Bryce NemitzPress Contact: Bruce TiemannPhone: ( 319 ) 790 - 7800
~PAGE~
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations(In millions, except per share data)
(UNAUDITED)
.(TABLE~
"'CAPTION~
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Thr
3/31/2005
Page 23 of 26
---------~- -----
December 31 , 2
- - - - - -- ---------
.(; S :..(;c~
Revenue 162.
Operating expenses:
Cost of service (exclusive of depreciation
and amortization shown separately below)
Selling, general and administrative
Depreciation and amortization
Restructuring adjustment
86.
61.
89.
----------------
Total operating expenses 237 . 9
--- -------------
Operating loss (75.
----------------
Nonoperating (expense) income:
Interest expense, net of amounts capi ta1izedOther (expense) income
(13.
(9.
-- --------------
Total nonoperating (expense) income (22.
-- - - --- --- - ----
Net loss (98.
-- -- --- --- ------
Preferred stock dividend (0.
-- - ------ - -- ----
Net loss applicable to common shares (98.
--------------------------------
Basic and diluted loss per common share (0.
--------------------~-----------
Weighted average common shares outstanding 304.
----------------------- --------.(; /
TABLE:.
.(;PAGE~
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations(In millions, except per share data)
.c:TABLE~
.(;CAPTION~
----------------
December 31,
--------------- -
(unaudited)
.::5)0 .(; C :.
Revenue 716.
Operating expenses:
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Page 24 of 26
Cost of service (exclusive of depreciation
shown separately below)
Selling, general and administrative
Depreciation and amortization
Impairment charge
Restructuring adjustment
and amortization
393.
268.
356.
263.
(0.
------------
Total operating expenses 281.
------------
Operating loss (565.
------------
Nonopera t ing expense:
Interest expense, net of amounts capitalizedOther (expense) income
(48.
(10.
------------
Total nonoperating expense (58.
-- -- ---- - ---
Net loss (624 .
------------
Preferred stock dividend (2.
- - -- --- - ----
Net loss applicable to common shares (627.
------------------------
Basic and diluted loss per common share (2 . 12
-----------------------
Weighted average cornmon shares outstanding 296.
---------~--------------
.c;:: / TABLE::.
.c;::PAGE::.
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)
..:::TABLE::o
-c:CAPTION~
December 31, 2004
----- --- ------------
(unaudi ted)
ASSETS
Current Assets
c::S::.c:: C ;:.
Cash and cash equivalents
Trade receivables, net
Prepaid expense and otherAssets held for sale
50.
58.
19.
--------------
Total Current Assets 128.
--------------
Non-current Assets
Property and equipment, net
Goodwill and other intangibles, net
Other non-current assets
728.
144.
23.
--------------
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Page 25 of 26
Total Non-current Assets 897 .
--------------
Total Assets 025.
----------------------------
LIABILITIES AND EQUITY
Current Liabi Ii ties
Current maturities of long-term debt
Accounts payable
Deferred revenue, current portion
Other current liabilitiesLiabili ties related to discontinued
49.
39.
95.operations
--------------
Total Current Liabilities 191.
--------------
Long-term Liabilities
Long-term debt, excluding current rnaturi ties
Deferred revenue less current portion
Other long-term liabilities
727 .
17.
61.
--------------
Total Long-term Liabilities B06.
--------------
Redeemable Convertible Preferred Stock 75.
Stockholders ' (Deficiency) Equity (46.
--------------
Total Liabilities and Stockholders (Deficiency) Equity 025.
----------------------------
~ /TABLE::o-
c:; PAGE:;..
McLeodUSA Incorporated and Subsidiaries
Selected Telecommunications Statistical Data
c:;TABLE:;..
~CAPTION::-
--------- ---- -----------
12/31/03.
--- ---~-- ---------------
c:; S:;..c:;C::-
Active central offices 724
Collocations 663
Swi tches owned
CO
ATM / Frame Relay
DSLAMs installed 435
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Page 26 of 26
Total Competitive:
Customers
Access Units / Customer
395,641
Revenue per Customer / Month
Local
Long di stance
Private line & data
111.
31.
29.
- - -- - -- - - -- --- --- - - -----
Total 172.
------------------------------------------~----
Platform Distribution
Resale
UNE-M/ P
UNE - L
30%
65%
------------------------
Total 100%
---------------------------------~------------
Excluding impact of federally mandated access rate reduction local revenue per c
TABLE;:.
..:/TEXT::--
DOCUMENT::--
.:; I SEC-DOCUMENT::--
-----END PRIVACY-ENHANCED MESSAGE-----
http://www .see.goy! Arc hi ves/edgar/data/919943/0000950 17205000823/0000950 172-05-0...3/31/2005
XHIB IT E
to Response of Qwest Corporation to McLeodUSA Telecommunications Services, Inc.
Motion for Emergency Relief
cIeod USA~
FOR IMMEDIA TE RELEASE
McLeodUSA Reports Fourth Quarter and
Total Year 2004 Results
Continued strong operational performance but revenue declines
Actively pursuing strategic partner or sale of the Company
Entered forbearance agreement with Lenders to maintain liquidity
Discussions for debt restructuring underway with Lender Committee
where recovery for preferred or common stockholders is unlikely
CEDAR RAPIDS, Iowa - March 16, 2005 McLeodUSA Incorporated (Nasdaq:
MCLD), one of the nation s largest independent, competitive telecommunications
services providers, today reported financial and operating results for the quarter and
total year ended December 31 2004.
Total revenues for the quarter ended December 31, 2004 were $162.6 million
compared to $168.1 million in the third quarter of 2004 and $209.5 million in the
fourth quarter of 2003. Revenues were down from the third quarter of 2004 due to a
reduction in total access lines as new retail sales did not offset existing customer
turnover; as well as, lower IRU sales and the impact of normal fourth quarter
seasonality on long distance volume.
Gross marginl for fourth quarter 2004 was $75.8 million compared to $74.0 million in
the third quarter of 2004 and $93.5 million in the fourth quarter of 2003. Gross margin
in the fourth quarter included approximately $6.2 million of rate settlements. Gross
margin as a percent of revenue, including the impact of the rate settlements, was
46.6% versus 44.0% in the third quarter of2004 and 44.6% in the fourth quarter of
2003.
SG&A expenses for the fourth quarter of 2004 were $61.7 million compared to $62.
million in the third quarter of 2004 and $77.0 million in the fourth quarter of 2003 as
the Company continued to realize the benefit of its ongoing expense reduction
programs. Adjusted EBITDAl in the fourth quarter of 2004 was $14.1 million
including the $6.2 million of rate settlements, versus $11.5 million in the third quarter
of 2004 and $16.5 million in the fourth quarter of2003. Net loss from continuing
operations for the quarter was $(98.1) million, or a loss per common share of $(0.32),
versus $(352.8) million in the third quarter of 2004, which included a non-cash charge
of $263.1 million related to the impairment of goodwill and intangible assets, and
$(56.6) million in the fourth quarter of 2003.
The Company s strong operational performance continued in the fourth quarter of 2004.
The customer satisfaction rating was 93%, billing accuracy was 99.9% and the Company
continued to consistently achieve 99.999% network reliability, all in line with Company
goals.
Customer platform mix at the end of the fourth quarter 2004 was 71 % UNE-, 4%
resale and 25% UNE-P versus 70%, 4% and 26%, respectively, at the end of the third
quarter of 2004 and 65%, 5% and 30%, respectively, at the end of the fourth quarter
2003. The Company continued to migrate resale and UNE-P customers to UNE-L and
add new customers to the more profitable UNE-L platform. In January 2005, the
Company reached an agreement with Qwest Communications for the continued
provisioning and service of its UNE-P lines.
Customer line turnover in the fourth quarter was 2.2% versus 2.4% in the third quarter
of 2004 and 2.% in the fourth quarter of 2003. Business customer line turnover was
0% in the fourth quarter of 2004 compared to 1.8% in the fourth quarter of 2003.
Total revenues for the year ended December 31 , 2004, were $716.2 million versus
$869.0 million for the year 2003 primarily driven by the federally mandated access
rate reductions of $43.3 million, lower long distance rates and volume of $40.
million, and the decline in price and volume of local services of $48.0 million. Gross
margin for the year ending December 31 , 2004 was $322.4 million versus $370.
million in 2003 driven by the decline in revenues offset by increased profitability
associated with the migration of the business to UNE-L and the favorable impact of the
Company s ongoing cost reduction initiatives. Gross margin as a percent of revenue
for the year was 45.0% versus 42.6% in 2003. Total SG&A expenses for the year
were $268.4 million and $312.2 million in 2004 and 2003 , respectively, as the
Company successfully executed its expense reduction and productivity improvement
plans. Adjusted EBITDA was $54.0 million for year 2004 versus $57.9 million in
2003. Net loss for the year ended December 31 , 2004 was $(624.5) million versus
$(295.7) million for the year ended December 31 , 2003. Net loss for 2004 included a
non-cash impairment charge of $263.1 million to recognize full impairment of
goodwill and a partial impairment of the McLeodUSA trade name.
The Company ended the year with $50.0 million of cash on hand which included a
planned $20 million withdrawal from the exit credit facility in the fourth quarter.
December 31 , 2004 the Company had withdrawn a total of $100 million and had
issued approximately $8 million of letters of credit against the $110 million funded
exit credit facility. The Company was in compliance with all financial covenants at
December 31 2004. The Company s cash balance was approximately $45 million as
of March 15 2005.
Pursuit of Strate!!ic Alternatives
As an independent communications services provider, realizing the revenue growth
benefits of operational excellence continues to be a challenge for the Company as it
competes against large, financially strong competitors with well-known brands. Most
recently, the FCC has finalized its unbundling rules and the communications industry
consolidation has accelerated. With the recent merger announcements in the industry, the
Company believes that the large telecommunications providers will likely become even
more aggressive upon the closing of these transactions further challenging the
Company s ability to grow revenue.
In response, the Company s Board of Directors has authorized the Company to pursue
strategic alternatives. In support of these initiatives, the Company has hired Miller
Buckfire Ying & Co., LLC and Gleacher Partners, LLC as its financial advisors. The
Company is now actively pursuing a strategic partner or a sale of the Company while
also taking steps to maintain future liquidity, including evaluating a capital
restructuring to reduce the current debt level enabling the Company to achieve
positive cash flow going forward.
The Company believes that its operational excellence combined with a highly trained
workforce, state of the art product offerings and expansive network could provide
strategic benefits to existing multi-state and regional telecom services providers.
addition, through the extensive cost reduction programs, which have been
implemented over the past several years, the Company believes its wholesale product
suite offers an attractive alternative to UNE-P providers for local access lines and
competitive long distance services.
In the interim, the Company has entered a forbearance agreement with its Lenders with
respect to scheduled principal and interest payments on its loans under which the Lenders
have agreed not to take any action as a result of non-payment by the Company of
approximately $18.1 million of scheduled principal amortization and interest payments
due on or before March 31 2005 and any related events of default through May 23, 2005.
Financial Restructurin!!
In light of the revenue outlook and the Company s on-going cash requirements, the
Company has also begun discussions related to a capital restructuring with its agent bank
and a group of lenders acting as a steering committee for the lenders under its credit
facilities. The Company and this committee are in negotiations related to terms of a
capital restructuring which includes the conversion of a significant portion of the
Company s current outstanding debt into equity. Under such a restructuring, the holders
of the Company s current debt would become equity shareholders of the Company with
the current holders of the preferred and common stock unlikely to receive any recovery.
There can be no assurance that the Company will be able to reach an agreement with its
lenders regarding a capital restructuring or continued forbearance and covenant relief
prior to the end of the initial forbearance period on May 23 , 2005. There also can be no
assurance that the Company will be able to identify a suitable strategic partner or buyer
or reach agreement with any such strategic partner or buyer on terms and conditions
acceptable to the Company prior to the end of the initial forbearance period. In the event
these alternatives are not available to the Company, it is likely that the Company will
elect to forgo making future principal and interest payments to its lenders while it
continues to seek an extended forbearance period or permanent capital restructuring from
its lenders, or alternatively, the Company could be forced to seek protection from its
creditors.
While the Company continues to explore a variety of options with a view toward
maximizing value for all of its stakeholders, none of the options presented to date have
suggested that there will be any meaningful recovery for the Company s current preferred
stock or common stock holders. Accordingly, it is unlikely that holders of the
Company s preferred stock or common stock will receive any recovery in a capital
restructuring or other strategic transaction.
The Company believes that by not making principal and interest payments on the credit
facilities, cash on hand together with cash flows from operations is sufficient to maintain
operations in the ordinary course without disruption of services. The Company does not
expect that the exploration of the alternatives described above will negatively impact its
customers or vendors. The Company remains committed to continuing to provide the
highest level of service to its customers and to maintaining its strong supplier
relationships.
As a result of the activities described above the Company has delayed the filing of its
Form 10-K with the SEC. The Company has completed its internal control review as
required under Section 404 of the Sarbanes-Oxley Act and is prepared to issue its
Management's Report on Internal Control Over Financial Reporting stating that based on
management's assessment , management believes that as of December 31 , 2004, the
Company s internal control over financial reporting is effective. The Company expects
that the Independent Registered Public Accounting Firm Report that will be issued in
connection with the filing of Form 10-K will include comments with respect to the
Company s ability to continue as a going concern.
Other recent highlights include:
On January 3 , 2005 , the Company announced a five-year extension to its
contract with the State of Iowa for operation and maintenance of the Iowa
Communications Network. McLeodUSA will continue to operate the network
from its Operations Center near Des Moines, perform field services and
conduct network locate services statewide. This contract extension, expiring
December 9, 2009, will result in recurring revenue to McLeodUSA of
approximately $5 million annually.
On December 20 2004, McLeodUSA announced that its Preferred Advantage(A)
Dynamic Integrated Access, which utilizes the next generation Voice-over-
Internet Protocol (VoIP) switching architecture, is now generally available for
sale. The service has been initiated in 24 markets to date and the Company
efforts are on track to provide service in 37 markets by April 30, 2005. The
McLeodUSA Integrated Access produCt uses a secure IP network to offer
integrated voice and data communications services over a single T-l facility to
customer locations. Customers receive up to 1.544 Mbps Internet access, high
quality voice service, 17 local calling features, the convenience of an easy-to-
use web-based control panel, and the ability to add or change features and
generate reports.
On December 16, 2004, the Company announced a three-year renewable
wholesale agreement with MCI whereby McLeodUSA will enable MCI to
provide local telephone services to its residential customers using McLeodUSA
facilities. The agreement provides for MCI and McLeodUSA to migrate a
minimum of 200 000 local lines onto the McLeodUSA UNE-L network by
October 31 2005.
About McLeodUSA
McLeodUSA provides integrated communications services, including local services, in
25 Midwest, Southwest, Northwest and Rocky Mountain states. The Company is a
facilities-based telecommunications provider with, as of December 31 2004, 38 ATM
switches, 39 voice switches, 699 collocations, 432 DSLAMs and 2 426 employees. As
of April 16, 2002, Forstmann Little & Co. became a 58% shareholder in the Company.
Visit the Company s Web site at www.mcleodusa.com
Non-GAAP Financial Measures
To provide further clarification, the Company has begun using the term Adjusted EBITDA as a
replacement for EBITDA. Adjusted EBITDA is a non-GAAP fmancial measure used by management to
evaluate the effectiveness of the Company s operating performance and to enhance the comparability
between periods. EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization.
Adjusted EBITDA, as defined by McLeodUSA, further removes the effects of other income and expense
restructuring adjustments and impairment charges. Management removes the effects of other income and
expense, restructuring adjustments and impairment charges from Adjusted EBITDA because it does not
believe that such items are representative of the core operating results of the Company s ongoing
competitive telecommunications activities. For a facilities-based telecommunications services provider like
McLeodUSA with high initial capital investments required in order to gain entry to the industry,
management believes that omitting depreciation and amortization from Adjusted EBITDA provides a
relevant and useful measure of the Company s core operating performance and enhances comparability
between periods. Management believes that non-GAAP measures such as Adjusted EBITDA are
commonly reported and used by analysts, investors and other interested parties in the telecommunications
industry. Adjusted EBITDA is reconciled to net loss, the most comparable GAAP measure, within the
table presented below. McLeodUSA's use of Adjusted EBITDA may not be comparable to similarly titled
measures used by other companies in the telecommunications industry. The use of Adjusted EBITDA is
not intended to replace measures of fmancial perfonnance reported in accordance with accounting
principles generally accepted in the United States.
(In millions)
Reconciliation of Adjusted EBITDA:
Net loss....................................................................... $
Interest expense ..........................................................
Other nonoperating expense
'.'.""""".'."'.""'."""'."'.
Restructuring adjustment............................................
Impainnent charge......................................................
Depreciation and amortization....................................
Adjusted EBITDA
................................................ $
Dec 31, 2004
(98.1 )
13.
89.4
14.
(In millions)
Reconciliation of Adjusted EBITDA:
Net loss.... ...
......... ...... ...... .................. ..... ....... ..... ............ .........
Interest expense .......................................................................
Other nonoperating expense
".'.""'.""""""""""'.'."""""""'.'
Restructuring adjustment.........................................................
Impainnent charge...................................................................
Depreciation and amortization.................................................
Adjusted EBITDA
............................................................. $
Three months ended
Sept 30, 2004 Dec 31, 2003
(352.
11.9
(56.
(23. 1)
(0.
263.
88.
11.
86.
16.
(624.
48.
10.
(0.
263.
356.
54.
Year endedDec 31, 2004 Dec 31, 2003
(295.
35.
(22.
(0.
340.
57.
Gross margin is another fmancial measure that management uses to evaluate operating performance.
Gross margin, which is calculated as revenues less cost of service, excludes depreciation and
amortization expenses. Cost of service includes expenses directly associated with providing
telecommunications services to its customers. Costs classified as cost of service include, among other
items, the cost of connecting customers to the McLeodUSA network via leased facilities, the costs paid
to third party providers for interconnect access and transport services, the costs of leasing components of
network facilities and the cost of fiber related to sales and leases of network facilities. Gross margin is
reconciled to net loss, the most comparable GAAP measure, within the table presented below.
(In millions)
Reconciliation of Gross Margin:
Net loss....................................................................... $
Interest expense ..........................................................
Other nonoperating expense .......................................
Restructuring adjustment............................................
Impainnent charge ...............................,.....................
Depreciation and amortization....................................
Selling, general and administrative.......
"".""."""."'"
Gross Margin """'.."""""""""""."""""""""""" $
Dec 31, 2004
(98.1)
13.
Three months ended
Sept 30, 2004
89.4
61.7
75.
Dee 31, 2003
(352.(56.
11.9
(23.
(0.
263.
88.86.
62.77.
74.93.
(In millions)
Year ended
Dec 31, 2004 Dec 31, 2003
Reconciliation of Gross Margin:
Net loss.................................................................................... $
Interest expense ......................................................"""""""'"
Other nonoperating expense ....................................................
Restructuring adjustment.... """""'" ............
............. """""" ...
Impairment charge................................................."""""""""
Depreciation and amortization..........................................."""
Selling, general and administrative..........................................
Gross Margin
..................................................................... $
(624.
48.
10.
(0.
263.
356.
268.4
322.
340.
312.
370.
(295.
35.
(22.
(0.
Some of the statements in this press release include statements about our future expectations. Statements that
are not historical facts are "forward-looking statements" for the purpose of the safe harbor provided by
Section 21 E of the Exchange Act and Section 27 A of the Securities Act. Such statements may include
projections of fmancial and operational results and goals, including revenue, EBITDA, Adjusted EBITDA
profitability, savings and cash. In some cases you can identify these so-called "forward-looking statements
our use of words such as "
" "
will" "should" "ect" "lan
" "
antici ate
" "
believe
" "
estimate
predict
" "
project
" "
intend" or "potential" or the negative of those words and other comparable words.
These forward-looking statements are subject to known as well as unknown risks and uncertainties that may
cause actual results to differ materially from our expectations. Our expectations are based on various factors
and assumptions and reflect only our predictions. Factors that could cause actual results to differ materially
from the forward-looking statement include technological, regulatory, public policy or other developments in
our industry, availability and adequacy of capital resources, current and future economic conditions, the
existence of strategic alliances, our ability to generate cash, our ability to implement process and network
improvements, our ability to attract and retain customers, our ability to migrate traffic to appropriate
platforms and changes in the competitive climate in which we operate. These and other risks are described in
more detail in our most recent Annual Report on Form lO-K filed with the SEC. The Company undertakes
no obligation to update publicly any forward-looking statements, whether as a result of future events, new
information or otherwise.
Contact:
McLeodUSA Incorporated, Cedar Rapids, IA
Investor Contact: Bryce Nemitz
Press Contact: Bruce Tiemann
Phone: [phone]
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(UNAUDITED)
Revenue
Operating expenses:
Cost of service (exclusive of depreciation and amortization
shown separately below)
Selling, general and administrative
Depreciation and amortization
Restructuring adjustment
Total operating expenses
Operating loss
Nonoperating (expense) income:
Interest expense, net of amounts capitalized
(ijher (expense) income
Total nonoperating (expense) income
Net loss
Preferred stock dividend
Net loss applicable to common shares
Basic and diluted loss per common share
Weighted average common shares outstanding
Three months ended
December 31 2004 December 31,2003
162.209.
86.
61.7
89.4
116.
77.
86.
(0.2)
279.4
(69.
237.
(75.
(13.(9.
9.2 23.
(22.13.3
98.1 (56.
(1.0)
(98.57.
(0.32)(0.20)
304.287.
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(In millions, except per share data)
Revenue
Operating expenses:
Cost of service (exclusive of depreciation and amortization
shown separately below)
Selling, general and administrative
Depreciation and amortization
Impairment charge
Restructuring adjustment
Total operating expenses
Operating loss
Nonoperating expense:
Interest expense, net of amounts capitalized
~her ( expense) income
Total nonoperating expense
Net loss
Preferred stock dividend
Net loss applicable to common shares
Basic and diluted loss per common share
Weighted average common shares outstanding
Year ended
December 31,2004 December 31, 2003
(unaudited)
716.869.
393.
268.4
356.
263.
(0.2)
281.9
(565.
498.
312.2
340.
(0.2)
151.4
(282.4)
(48.2)(35.
22.
58.(13.3)
624.(295.
(4.
627.4 (300.3)
(1.07)
296.280.4
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)
December 31, 2004 December 31, 2003
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents 50.56.
Trade receivables, net 58.65.
Prepaid expense and other 19.22.4
Assets held for sale
Total Current Assets 128.146.
Non-current Assets
Property and equipment, net 728.007.
Goodwill and other intangibles, net 144.446.
Other non-current assets 23.29.
Total Non-current Assets 897.1,484.
Total Assets 025.630.
LIABILITIES AND EQUITY
Current Liabilities
Current maturities of long-term debt 49.27.
Accounts payable 39.30.
Deferred revenue, current portion
Other current liabilities 95.121.5
Liabilities related to discontinued operations 1.1
Total Current Liabilities 191.0 187.
Long-term Liabilities
Long-term debt, excluding current maturities 727.717.
Deferred revenue less current portion 17.15.
Other long-term liabilities 61.4 58.
Total Long-term Liabilities 806.790.
Redeemable Convertible Preferred Stock 75.4 131.1
Stockholders' (Deficiency) Equity 46.521.7
Total Liabilities and Stockholders' (Deficiency) Equity 025.630.
McLeodUSA Incorporated and Subsidiaries
Selected Telecommunications Statistical Data
12/31/03 9/30/04 12/31/04
724 705 683
663 696 699
Active central offices
Collocations
Switches owned
CO / LD
ATM / Frame Relay
DSLAMs installed 435 435 432
Total Competitive:
Customers
Access Units / Customer
395 641 356 938 348 258
Revenue per Customer / Month
Local 111.18 102.04*99.
Long distance 31.53 29.31.
Private line & data 29.31.70 33.
Total 172.163.164.
Platform Distribution
Resale
UNE - M/P
UNE-
Total
30%
65%
100%
26%
70%
100%
25%
71%
100%
Excluding impact of federally mandated access rate reduction, local revenue per customer was
$104.