Black Cloud Hangs Over McLeod

CEO and CFO quit after revealing ballooning Q2 losses; the CLEC could be heading back into Chapter 11

August 17, 2005

3 Min Read
Black Cloud Hangs Over McLeod

The CEO and CFO of McLeodUSA Inc. (Nasdaq: MCLD) have jumped ship and the struggling CLEC now seems likely to be heading back into Chapter 11 (see McLeod CEO, CFO Resign). This comes after a vote of no confidence from its independent auditor, a delisting notice from the Nasdaq, and second-quarter earnings showing things aren’t improving.

CEO Chris Davis and CFO Ken Burckhardt resigned their posts Friday, the company said in a press release. Davis will remain chairwoman of the McLeod board, the release says, and controller Joe Ceryanec has been named acting CFO.

The company also named Stan Springel of consulting firm Alvarez & Marsal as "chief restructuring officer," and has not named an acting CEO.

Davis’s and Burchhardt’s departures come in the wake of a nasty second quarter in which McLeod reported its losses had widened dramatically to $268 million, compared with a $72.5 million loss a quarter ago (see The Switch Is On for CLECs).

Revenues were $159.7 million compared with $160.5 million in the first quarter of 2005 and $191.9 million in the year earlier quarter.

McLeod's 10-Q filing states the company continues to lose subscribers, and revenues have not increased enough to offset its debt.

The filing says McLeod has been trying to sell itself off for several months now, but no suitable suitor has shown up.

In the interim, the company is working on an arrangement in which its creditors would forgive much of the debt in exchange for ownership of the company. McLeod says it’s not looking into any exit strategies that would provide relief to those who already hold McLeod stock.

McCleod’s revenues have been declining since 2002 when it emerged from Chapter 11, and its second quarter 2005 results make clear the company isn’t recovering. McCleod’s independent auditor stated in an March SEC filing that the CLEC’s chances of remaining a “going concern” were dwindling.

McLeod announced in June it would not appeal the Nasdaq’s determination that the stock be delisted (see Telecom Firms Get Twisted & Delisted). The company’s stock had been trading for less than a dollar for months.

A moment of truth may be approaching for McLeod in the next few weeks. The forbearance agreement the company entered with its lenders on March 16 is scheduled to expire September 9.

“In the event that we cannot reach an agreement with our lender group, it is likely that we will elect to forgo making future principal and interest payments to our lenders,” the company notes in the 10-Q. “Or alternatively, we could be forced to seek protection from our creditors.”

Meanwhile, McLeod’s primary competitor, Qwest, reported narrowed losses in the second quarter (see Qwest's Quest to Ditch Its Debt). Qwest also notes that 48 percent of its customers now buy some kind of a bundle of wireless offering, DSL, local and long-distance voice, or video through DirecTV.

McCleod leases various loop and access unbundled network elements (UNEs) from RBOCs in 25 states, aggregating them through its local access nodes (see Polaris Moons Over McCleodUSA ).

As of June 30, the company had 38 ATM switches, 38 voice switches, 698 collocations, 432 DSLAMs, and approximately 2,072 employees.

— Mark Sullivan, Reporter, Light Reading

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