<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1996
REGISTRATION NO. 333-3112
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT
NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MCLEOD, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4812 58-421407240
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
221 THIRD AVENUE SE, SUITE 500
CEDAR RAPIDS, IA 52401
(319) 364-0000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CLARK E. MCLEOD
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MCLEOD, INC.
221 THIRD AVENUE SE, SUITE 500
CEDAR RAPIDS, IA 52401
(319) 364-0000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
KIMBERLEY E. THOMPSON, ESQ. JAMES J. JUNEWICZ, ESQ.
HOGAN & HARTSON L.L.P. MAYER, BROWN & PLATT
555 THIRTEENTH STREET, N.W. 190 SOUTH LASALLE STREET
WASHINGTON, D.C. 20004 CHICAGO, IL 60603
(202) 637-5600 (312) 782-0600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE FEE
- -----------------------------------------------------------------------------------------------------------
Class A Common Stock,
$.01 par value..................... 11,500,000 $18.00 $207,000,000(1) $71,379.31(2)
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee.
(2) $64,655.17 previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MCLEOD, INC.
------------------------
CROSS-REFERENCE SHEET PURSUANT TO REGULATION S-K, ITEM 501(b)
<TABLE>
<CAPTION>
ITEM NO. LOCATION IN PROSPECTUS
- ------------------------------------------------ ---------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page
of Prospectus............................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus...................... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............. Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page; Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... *
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Securities to Be
Registered............................... Outside Front Cover Page; Prospectus Summary;
Capitalization; Description of Capital Stock;
Shares Eligible for Future Sale
10. Interests of Named Experts and Counsel..... *
11. Information with Respect to the
Registrant............................... Outside Front Cover Page; Prospectus Summary;
Risk Factors; Use of Proceeds; Dividend
Policy; Capitalization; Selected Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management; Certain
Transactions; Principal Stockholders;
Description of Capital Stock; Shares Eligible
for Future Sale; Consolidated Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. *
</TABLE>
- ---------------
* Item is omitted because response is negative or item is inapplicable.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
MAY 15, 1996
PROSPECTUS
10,000,000 SHARES
MCLEOD, INC.
CLASS A COMMON STOCK
($.01 PAR VALUE) [MCLEOD, INC. CORPORATE LOGO]
All of the shares of Class A Common Stock, $.01 par value per share (the "Class
A Common Stock"), offered hereby are being sold by McLeod, Inc. (the "Company").
Certain investors, including Clark E. McLeod, the Company's Chief Executive
Officer (the "Investors"), have indicated an interest in purchasing shares of
Class A Common Stock having an aggregate value of $37 million at the Price to
Public. No Underwriting Discount is to be paid with respect to any shares
purchased by the Investors. See "Underwriting."
Prior to this offering (the "Offering"), there has been no public market for the
Class A Common Stock. It is currently estimated that the initial public offering
price of the Class A Common Stock will be between $16.00 and $18.00 per share.
See "Underwriting" for factors to be considered in determining the initial
public offering price.
The Company has two classes of common stock, the Class A Common Stock and Class
B Common Stock, $.01 par value per share (the "Class B Common Stock" and,
together with the Class A Common Stock, the "Common Stock"). The rights of the
Class A Common Stock and the Class B Common Stock are substantially identical,
except that holders of the Class A Common Stock are entitled to one vote per
share and holders of the Class B Common Stock are entitled to .40 vote per
share. The Class B Common Stock is fully convertible into Class A Common Stock,
at the option of the holder, on a one-for-one basis. Both classes of Common
Stock vote together as one class on all matters generally submitted to a vote of
stockholders, including the election of directors. See "Description of Capital
Stock."
The Class A Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "MCLD."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN MATTERS THAT
SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C>
Per Share(2)..................... $ $ $
Total(3)(4)...................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Before deducting offering expenses payable by the Company, estimated at
$1,400,000.
(2) Excludes the shares of Class A Common Stock that the Investors have
indicated an interest in purchasing directly from the Company at the Price
to Public without payment of any Underwriting Discount. See "Underwriting."
(3) Includes the shares of Class A Common Stock that the Investors have
indicated an interest in purchasing directly from the Company without
payment of any Underwriting Discount. If the Investors do not purchase any
of such shares, the total Price to Public and Proceeds to Company will be
$ and $ , respectively.
(4) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 1,500,000 additional shares of Class A Common Stock at
the Price to Public, less Underwriting Discount, solely to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
The shares of Class A Common Stock (other than any that may be sold to the
Investors) are offered subject to receipt and acceptance by the Underwriters, to
prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York or through the facilities of The
Depository Trust Company, on or about , 1996.
SALOMON BROTHERS INC
BEAR, STEARNS & CO. INC.
MORGAN STANLEY & CO.
INCORPORATED
The date of this Prospectus is , 1996.
<PAGE> 4
[MCLEOD, INC. CORPORATE LOGO]
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by independent certified
public accountants and with quarterly reports containing unaudited financial
information for each of the first three quarters of each fiscal year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S CLASS
A COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE> 5
McLEOD MARKET AREA GRAPHIC
A map representing the Company's current and target market areas,
comprising portions of the states of Iowa, Illinois, Nebraska, Minnesota, South
Dakota and Wisconsin, is included on a fold-out inside front cover. Sales
cities and proposed sales cities are represented by solid dots; switch
locations and proposed switch locations are represented by solid dots
surrounded by a circle; all dots are linked by solid lines. The solid lines
indicate the three phases of the Company's network development, annotated with
estimated completion dates.
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements of the Company, the Notes
thereto and the other financial data contained elsewhere in this Prospectus.
Prospective investors should carefully consider the factors set forth herein
under the caption "Risk Factors" and are urged to read this Prospectus in its
entirety. Unless otherwise indicated, references herein to the "Company" include
the Company's predecessor, the Company and the Company's wholly owned
subsidiaries. Unless otherwise indicated, the information in this Prospectus (1)
reflects the recapitalization, effective May 2, 1996, in which shares of Class A
Common Stock and Class B Common Stock were split on the basis of 3.75 for one
(the "Recapitalization"), (2) assumes the purchase by the Investors of all of
the shares of Class A Common Stock that they have expressed an interest in
purchasing having an aggregate value of $37 million at the Price to Public (the
"Investor Shares") and (3) assumes no exercise of the Underwriters'
over-allotment option. Unless otherwise indicated, dollar amounts over $1
million have been rounded to one decimal place and dollar amounts less than $1
million have been rounded to the nearest thousand. This Prospectus includes
product names and trademarks of the Company and of other organizations. See the
"Glossary" appearing elsewhere herein for definitions of certain terms used in
this Prospectus.
THE COMPANY
The Company is a provider of integrated local and long distance
telecommunications services to small and medium-sized businesses primarily in
Iowa and Illinois. The Company derives its telecommunications revenue from (i)
the sale of "bundled" local and long distance telecommunications services to end
users, (ii) telecommunications network maintenance services and (iii)
competitive access services, including special access and private line services.
The Company offers "one-stop" integrated telecommunications services tailored to
the customer's individual needs. This approach simplifies the customer's
telecommunications procurement and management tasks and provides for customized
services, such as "least-cost" long distance pricing and enhanced calling
features, to customers who might otherwise be unable to secure such services
directly on a cost-effective basis. The Company also operates a competitive
access provider that offers a variety of special access and private line
services to 73 large businesses, institutional customers and interexchange
carriers. In addition, the Company provides network maintenance services for the
State of Iowa's fiber optic network. As of March 31, 1996, the Company served
over 10,000 customers in 50 cities and towns. See "Business -- Current Products
and Services."
The Company believes it is the first telecommunications provider in its
markets to offer "bundled" local and long distance services. As a result, the
Company believes that it is well-positioned to take advantage of fundamental
changes occurring in the telecommunications industry resulting from the
Telecommunications Act of 1996 (the "Telecommunications Act") and to challenge
incumbent local exchange carriers. See "Business -- Market Potential" and
"Business -- Regulation." The Company provides local service using existing
telephone lines obtained from incumbent local exchange carriers, which allows
customers to switch to local service provided by the Company without changing
existing telephone numbers. The Company provides long distance services by
purchasing bulk capacity from a long distance carrier. Using the Company's
sophisticated proprietary software, each customer receives the lowest long
distance rate available each month from among the most popular pricing plans of
AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI") and Sprint
Corporation ("Sprint"). See "Business -- Current Products and Services."
BUSINESS STRATEGY
The Company's objective is to become a leading provider of
telecommunications services in Iowa, Illinois, Nebraska, Minnesota, Wisconsin
and South Dakota. The Company intends to increase its penetration of existing
markets and expand into new markets by: (i) aggressively capturing market share
and generating revenues using leased network capacity and (ii) concurrently
constructing additional network infrastructure enabling it to more
cost-effectively serve its customers. The Company estimates that as of March 31,
1996 it had a market share of approximately 16% of business local telephone
lines in its Iowa markets (based on 1994 market data) and a market
1
<PAGE> 7
share of approximately 10% of business local telephone lines in its Illinois
markets (based on 1994 Iowa market data, assuming that the Company's Illinois
markets are substantially similar to the Company's Iowa markets). An integrated
package of telecommunications services that includes local and long distance
service, voice mail and Internet access is expected to be available to
residential customers in the near future. In addition, the Company intends to
expand beyond its existing services to provide wireless telecommunications and
other value-added services, such as conference calling and operator services.
The principal elements of the Company's business strategy include:
EMPHASIS ON MARKETING AND CUSTOMER SERVICE. The Company believes that the
key to revenue growth in its target markets is capturing and retaining customers
through an emphasis on marketing, sales and customer service. The Company has
been successful in obtaining long-term commitments from its customers and
responding rapidly and creatively to customer needs. The Company's
customer-focused software and network architecture allow immediate access to the
Company's customer data by Company personnel, enabling a quick and effective
response to customer requests and needs at any time. This software permits the
Company to present its customers with one fully integrated monthly billing
statement for local, long distance, 800, international and travel card services.
The Company believes that its customer-focused software platform is an important
element in the marketing of its telecommunications services and gives it a
competitive advantage in the marketplace. See "Business -- Current Products and
Services" and "Business -- Sales and Marketing."
LEVERAGE PROVEN MANAGEMENT TEAM. The Company has recruited a team of
veteran competitive telecommunications managers, led by entrepreneur Clark
McLeod, who have together in the past successfully implemented a similar
customer-focused telecommunications strategy in the same region. Six of the nine
executive officers of the Company served as officers of Teleconnect Company
("Teleconnect") or of Teleconnect's successor, Telecom*USA, Inc.
("Telecom*USA"). Teleconnect began providing long distance services in Iowa in
1982 and rapidly expanded into dozens of cities and towns in the Midwest.
Telecom*USA was the fourth-largest U.S. long distance provider when MCI
purchased it in 1990 for $1.25 billion. See "Management."
FOCUS ON SMALL AND MID-SIZED MARKETS IN THE MIDWEST. The Company
principally targets small and mid-sized markets (cities and towns with a
population between 15,000 and 350,000) in Iowa, Illinois, Nebraska, Minnesota,
Wisconsin and South Dakota. The Company estimates that its current target
markets have a combined population of approximately 5.6 million. The Company
strives to be the first to market integrated telecommunications services in its
principal markets and expects that intense competition in bundled local and long
distance services will be slower to develop in these markets than in larger
markets.
TRANSITION INTO LOCAL SWITCHED SERVICES BUSINESS. When regulatory
authorities complete certain proceedings, and assuming the economics are
favorable to the Company, the Company intends to begin offering local
facilities-based switched services by using its existing high-capacity digital
AT&T switch and installing additional switches. These regulatory proceedings are
currently ongoing before the Federal Communications Commission (the "FCC") and
many state public utilities commissions, including that of Iowa, for the purpose
of establishing most of the economic and technical terms of interconnection. The
Company believes that these proceedings should be substantially completed and
that the Company could begin offering local facilities-based switched services
over the next six to 20 months. In March 1995 and April 1996, respectively, the
Company received state regulatory approval in Iowa and Illinois to offer local
switched services in Cedar Rapids, Iowa and in Illinois cities other than
Chicago. The Company intends to seek regulatory approval to provide such
services in other cities and towns in Iowa and other states targeted by the
Company in the Midwest when the economic terms of interconnection with the
incumbent local exchange carrier make the provision of local switched services
cost-effective. See "Business -- Expansion of Certain Facilities-based Services"
and "Business -- Regulation."
EXPANSION OF ITS FIBER OPTIC NETWORK. The Company is constructing a
state-of-the-art digital fiber optic telecommunications network designed to
serve markets in Iowa. The Company currently owns approximately 430 route miles
of fiber network and expects to construct approximately 6,000 route miles of
fiber network during the next five years. Through its strategic relationships
with its
2
<PAGE> 8
electric utility stockholders and its contracts to build and lease the final
links of the Iowa Communications Network to the State of Iowa, the Company
believes that it will be able to achieve capital efficiencies in constructing
its fiber optic network in a rapid and cost-effective manner. The Iowa
Communications Network is a fiber optic network that links certain of the
state's schools, libraries and other public buildings. The Company also believes
that its fiber optic network in combination with its proprietary software will
create an attractive customer-focused platform for the provision of local, long
distance, wireless and enhanced services. See "Business -- Network Facilities."
The Company was incorporated as an Iowa corporation on June 6, 1991 and was
reincorporated in the State of Delaware on August 1, 1993. The Company's
principal executive offices are located at 221 Third Avenue SE, Suite 500, Cedar
Rapids, Iowa 52401, and its phone number is (319) 364-0000.
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered hereby.......... 10,000,000 shares
Common Stock outstanding after the
Offering(1)................................ 26,410,519 shares of Class A Common Stock
15,625,929 shares of Class B Common Stock
Use of Proceeds.............................. The net proceeds of the Offering will be used
to fund certain development and construction
costs of the Company's fiber optic network,
to repay all borrowings outstanding under the
Credit Facility (as defined herein), to fund
market expansion activities of the Company's
telecommunications business, to fund
operating deficits and net losses and for
additional working capital and general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market Symbol................ MCLD
Dividend Policy.............................. The Company has never declared or paid any
cash dividends on its capital stock and does
not anticipate paying cash dividends in the
foreseeable future. The Company's ability to
pay dividends is limited by the terms of its
revolving lines of credit with The First
National Bank of Chicago (collectively, the
"Credit Facility") and by the terms of the
Company's related agreements with IES
Diversified Inc. in connection with IES
Diversified Inc.'s guarantee and/or support
of certain portions of the Credit Facility.
See "Dividend Policy" and "Management's
Discussion and Analysis of Financial
Condition and Results of Operations --
Liquidity and Capital Resources."
</TABLE>
RISK FACTORS
POTENTIAL INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN FACTORS RELATING TO
AN INVESTMENT IN THE CLASS A COMMON STOCK. SEE "RISK FACTORS."
- ---------------
(1) Based on the number of shares of Class A Common Stock and Class B Common
Stock outstanding as of March 31, 1996, and the consummation of the
Offering. Excludes (a) 6,403,304 shares of Class A Common Stock issuable
upon exercise of stock options granted to directors, officers and employees
of the Company and (b) 3,787,500 shares of Class B Common Stock issuable
upon exercise of stock options granted to a principal stockholder of the
Company in connection with the guarantee and/or support by such stockholder
of certain portions of the Credit Facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Management -- Stock Option Plans."
3
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table summarizes certain selected financial and operating
data of the Company and should be read in conjunction with and is qualified by
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Consolidated Financial Statements of the Company,
the Notes thereto and the other financial data contained elsewhere in this
Prospectus. The unaudited pro forma information reflects the April 28, 1995
acquisition by the Company of MWR Telecom, Inc. ("MWR") using the purchase
method of accounting, assuming, for purposes of the pro forma statement of
operations data, that the acquisition of MWR was consummated on January 1, 1995.
The unaudited pro forma information should be read in conjunction with the
Financial Statements of MWR and the Notes thereto included elsewhere in this
Prospectus. The financial and operating data presented below are derived from
the records of the Company and MWR.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1991 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------------------------
1991(1) 1992 1993 1994 1995(2)(3)(4)
--------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Telecommunications revenue..... $ -- $ 250,000 $ 1,550,098 $ 8,014,093 $ 28,997,880
-------- --------- ----------- ------------ ------------
OPERATING EXPENSES:
Cost of service.............. -- 261,800 1,527,658 6,211,783 19,667,138
Selling, general and
administrative............. 55,736 218,756 2,389,890 12,373,411 18,053,431
Depreciation and
amortization............... 2,101 6,441 235,013 771,879 1,835,127
-------- --------- ----------- ------------ ------------
Total operating
expenses................ 57,837 486,997 4,152,561 19,357,073 39,555,696
-------- --------- ----------- ------------ ------------
Operating loss................. $ (57,837) $ (236,997) $ (2,602,463) $ (11,342,980) $(10,557,816)
Interest income (expense),
net.......................... -- -- 162,846 (72,982) (771,123)
Income taxes................... -- -- -- -- --
-------- --------- ----------- ------------ ------------
Net loss....................... $ (57,837) $ (236,997) $ (2,439,617) $ (11,415,962) $(11,328,939)
======== ========= =========== ============ ============
Loss per common and common
equivalent share............. $ -- $ (.02) $ (.08) $ (.31) $ (.31)
======== ========= =========== ============ ============
OTHER FINANCIAL DATA:
Capital expenditures, including
acquisition of business...... -- 137,618 2,052,475 3,392,663 14,697,402
EBITDA (6)..................... $ (55,736) $ (230,556) $ (2,367,450) $ (10,571,101) $ (8,722,689)
<CAPTION>
THREE MONTHS ENDED MARCH 31,
PRO FORMA -------------------------------
1995(2)(5) 1995 1996(4)
------------ -------------- --------------
<S> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Telecommunications revenue..... $ 29,870,689 $ 4,761,307 $ 12,487,519
------------ ----------- -----------
OPERATING EXPENSES:
Cost of service.............. 20,042,618 3,266,666 9,249,981
Selling, general and
administrative............. 18,151,759 3,978,740 6,344,907
Depreciation and
amortization............... 2,043,252 317,653 968,614
------------ ----------- -----------
Total operating
expenses................ 40,237,629 7,563,059 16,563,502
------------ ----------- -----------
Operating loss................. $(10,366,940) $ (2,801,752) $ (4,075,983)
Interest income (expense),
net.......................... (825,850) (154,968) (264,321)
Income taxes................... -- -- --
------------ ----------- -----------
Net loss....................... $(11,192,790) $ (2,956,720) $ (4,340,304)
============ =========== ===========
Loss per common and common
equivalent share............. $ (.31) $ (.08) $ (.12)
============ =========== ===========
OTHER FINANCIAL DATA:
Capital expenditures, including
acquisition of business...... 15,063,941 188,360 4,389,638
EBITDA (6)..................... $ (8,323,688) $ (2,484,099) $ (3,107,369)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- MARCH 31,
1994 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
OTHER OPERATING DATA:
Local lines.................... 17,112 35,795 41,268
Number of customers............ 5,137 8,776 10,009
Markets........................ 26 50 50
Route miles.................... 8 218 434
Employees...................... 302 419 462
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------
1991 1992 1993 1994 1995(2)(7)
--------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)...... $ (71,751) $ (439,924) $ 5,962,445 $ 1,658,982 $ (91,750)
Property and equipment, net.... -- 135,380 1,957,534 4,716,215 15,078,234
Total assets................... 20,516 693,607 9,050,710 10,686,696 28,986,452
Long-term debt................. -- -- -- 3,500,000 3,600,000
Stockholders' equity
(deficit).................... (52,837) (289,834) 7,935,874 3,291,182 14,957,942
<CAPTION>
MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED(8)
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)...... $ 1,595,590 $149,895,590
Property and equipment, net.... 18,955,980 18,955,980
Total assets................... 38,275,289 186,575,289
Long-term debt................. 11,300,000 --
Stockholders' equity
(deficit).................... 11,142,763 170,742,763
</TABLE>
(Footnotes on following page)
4
<PAGE> 10
- ---------------
(1) The Company was organized on June 6, 1991.
(2) The acquisition of MWR in April 1995 affects the comparability of the data
presented for 1995 to the data for prior periods shown.
(3) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(4) On a pro forma basis, as adjusted to give effect to the sale of the number
of shares of Class A Common Stock offered hereby necessary to retire as of
the beginning of the period or at the date of issuance of the Company's
interest-bearing debt, the Company's net loss, loss per common and common
equivalent share and weighted average common and common equivalent shares
outstanding would have been $(10,419,125), $(.29) and 35,408,420,
respectively, for 1995 and $(4,074,934), $(.11) and 35,586,906,
respectively, for the three months ended March 31, 1996.
(5) Includes operations of MWR from January 1, 1995 to December 31, 1995 and
certain adjustments attributable to the acquisition of MWR.
(6) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. The Company has included EBITDA data because it is a measure
commonly used in the industry. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income as a measure of performance or to
cash flows as a measure of liquidity.
(7) Includes MWR, which was acquired by the Company on April 28, 1995.
(8) Adjusted to reflect the application of the estimated net proceeds to the
Company from the sale of the Class A Common Stock offered hereby. If the
Investors do not purchase any of the Investor Shares and such shares are
instead purchased by the Underwriters, the Company's working capital, total
assets and stockholders' equity at March 31, 1996, as adjusted, would be
$147,395,590, $184,075,289 and $168,242,763, respectively.
5
<PAGE> 11
RISK FACTORS
An investment in the Class A Common Stock involves a significant degree of
risk. In determining whether to make an investment in the Class A Common Stock,
potential investors should consider carefully all of the information set forth
in this Prospectus and, in particular, the following factors.
LIMITED OPERATING HISTORY; OPERATING LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS
The Company began operations in 1992 and has only a limited operating
history upon which investors may base an evaluation of its performance. As a
result of operating expenses and development expenditures, the Company has
incurred significant operating and net losses to date. Net losses for 1993,
1994, 1995 and the three months ended March 31, 1996 were approximately $2.4
million, $11.4 million, $11.3 million and $4.3 million, respectively. Although
its revenue has increased substantially in each of the last three years, the
Company also has experienced significant increases in expenses associated with
the development and expansion of its fiber optic network and its customer base.
The Company expects to incur significant operating losses and to generate
negative cash flows from operating and construction activities during the next
several years, while it develops its businesses and installs and expands its
fiber optic network. There can be no assurance that the Company will achieve or
sustain profitability or positive cash flows from operating activities in the
future. If the Company cannot achieve operating profitability or positive cash
flows from operating activities, it may not be able to meet its debt service or
working capital requirements, which could have a material adverse effect on the
Company. See "-- Significant Capital Requirements," "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
SIGNIFICANT CAPITAL REQUIREMENTS
Expansion of the Company's operations and facilities, network and services
will require significant capital expenditures. The Company estimates that its
capital requirements for 1996 and 1997 will be, in the aggregate, approximately
$106 million. The Company expects that it will require additional capital in the
future for funding operating losses and working capital as well as continuing
expansion into new markets and further network development and construction. In
addition, the Company expects to explore alternatives to permit it to provide
personal communications services ("PCS") and other wireless services and may
decide to pursue the acquisition of PCS licenses or other strategic
acquisitions, which could require substantial additional capital. The Company
expects to meet its additional capital needs with the proceeds from additional
credit facilities and other borrowings, additional debt and equity financings
and possible joint ventures. There can be no assurance, however, that the
Company will be successful in producing sufficient cash flows or raising
sufficient debt or equity capital to meet its strategic objectives or that such
funds, if available at all, will be available on a timely basis or on terms that
are acceptable to the Company. Failure to generate or raise sufficient funds may
require the Company to delay or abandon some of its future expansion plans or
expenditures, which could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
WIRELINE COMPETITION
The telecommunications industry is highly competitive. The Company faces
intense competition from local exchange carriers, including the Regional Bell
Operating Companies (primarily U S WEST Communications, Inc. ("U S WEST") and
Ameritech Corporation ("Ameritech")) and the General Telephone Operating
Companies, which currently dominate their local telecommunications markets. The
Company also competes with long distance carriers in the provision of long
distance services. The long distance market is dominated by three major
competitors, AT&T, MCI and Sprint. Hundreds of other companies also compete in
the long distance marketplace. Other competitors of the Company may include
cable television companies, competitive access providers, microwave and
6
<PAGE> 12
satellite carriers and private networks owned by large end users. In addition,
the Company competes with equipment vendors and installers and
telecommunications management companies with respect to certain portions of its
business. Many of the Company's existing and potential competitors have
financial and other resources far greater than those of the Company.
The local and access telephone services offered by the Company compete
principally with the services offered by the incumbent local exchange carrier
serving each of the Company's markets. Incumbent local exchange carriers have
long-standing relationships with their customers and have the potential to
subsidize competitive services from less competitive service revenues.
In addition, a continuing trend toward business combinations and strategic
alliances in the telecommunications industry may create significant new
competitors. The Company may, in the future, face competition in the markets in
which it operates from one or more competitive access providers operating fiber
optic networks, in many cases in conjunction with the local cable television
operator. Each of AT&T, MCI and Sprint has indicated its intention to offer
local telecommunications services, either directly or in conjunction with other
competitive access providers or cable television operators. There can be no
assurance that these firms, and others, will not enter the small and mid-sized
markets where the Company focuses its sales efforts. Like the Company, MCI
currently holds a certificate of public convenience and necessity to offer local
and long distance service in Iowa through partitioning of U S WEST's central
office switch. Two other small telecommunications companies also hold such
certificates in Iowa. On February 29, 1996, AT&T filed an application before the
Iowa Utilities Board to offer local service on both a resale and
facilities-based basis.
The Company believes that the Telecommunications Act and state legislative
initiatives in Illinois, Iowa and other states within the Company's target
markets, as well as a recent series of transactions and proposed transactions
between telephone companies, long distance carriers and cable companies,
increase the likelihood that barriers to local exchange competition will be
substantially reduced or removed. These initiatives include requirements that
the Regional Bell Operating Companies permit entities such as the Company to
interconnect to the existing telephone network, to purchase, at cost-based
rates, access to unbundled network elements, to enjoy dialing parity, to access
rights-of-way and to resell services offered by the incumbent local exchange
carriers. See "Business -- Regulation." However, incumbent local exchange
carriers also have new competitive opportunities. The Telecommunications Act
removes previous restrictions concerning the provision of long distance service
by the Regional Bell Operating Companies and also provides them with increased
pricing flexibility. Under the Telecommunications Act, the Regional Bell
Operating Companies will, upon the satisfaction of certain conditions, be able
to offer long distance services that would enable them to duplicate the
"one-stop" integrated telecommunications approach used by the Company. The
Company believes that it has certain advantages over these companies in
providing its telecommunications services, including management's prior
experience in the competitive telecommunications industry and the Company's
emphasis on marketing (primarily using a direct sales force) and on responsive
customer service. However, there can be no assurance that the anticipated
increased competition will not have a material adverse effect on the Company. In
addition, if the incumbent local exchange carriers, particularly the Regional
Bell Operating Companies, are allowed by regulators to lower their rates for
access and private line services, to engage in unreasonable volume and term
discount pricing practices for their customers or to charge alternative
providers such as the Company excessive fees for interconnection to the local
exchange carriers' networks, the Company could be at a significant competitive
disadvantage. See "-- Regulation" and "Business -- Regulation."
DEPENDENCE ON REGIONAL BELL OPERATING COMPANIES; U S WEST CENTREX ACTION
The Company is dependent on the Regional Bell Operating Companies for
provision of its local and certain of its long distance services. U S WEST and
Ameritech are currently the Company's sole suppliers of access to local central
office switches. The Company uses such access to partition the local switch and
provide local service to its customers.
7
<PAGE> 13
The Company purchases such access in the form of a product generally known
as "Centrex." Without such access, the Company could not currently provide
bundled local and long distance services, although it could provide stand-alone
long distance service. Since the Company believes its ability to offer bundled
local and long distance services is critical to its current sales efforts, any
successful effort by U S WEST or Ameritech to deny or substantially limit the
Company's access to partitioned switches would have a material adverse effect on
the Company.
On February 5, 1996, U S WEST filed tariffs and other notices announcing
its intention to limit future Centrex access to its switches by Centrex
customers (including the Company) throughout U S WEST's fourteen-state service
region, effective February 5, 1996 (the "U S WEST Centrex Action"). Although U S
WEST stated that it would "grandfather" existing Centrex agreements with the
Company and permit the Company to continue to use U S WEST's central office
switches through April 29, 2005, it also indicated that it would not permit the
Company to expand to new cities and would severely limit the number of new lines
it would permit the Company to partition onto U S WEST's portion of the switches
in cities currently served by the Company. Because of U S WEST's commitment to
"grandfather" service to the Company, the Company does not believe its current
customers are at risk that service will be interrupted. The Company has
challenged, or is challenging, the U S WEST Centrex Action before the public
utilities commissions in each of the states served by U S WEST where the Company
is doing business or currently plans to do business. The Company based such
challenges on its belief that the U S WEST Centrex Action is unlawful under
various federal and state laws, regulations and policies precluding unreasonable
restrictions on the resale of telecommunications services and discrimination
against entities such as the Company with respect to access to local
telecommunications services.
In Iowa, the Company filed a complaint with the Iowa Utilities Board
against U S WEST's actions and was granted interim relief on an ex parte basis
that allowed the Company to continue to expand to new cities and expand the
number of new lines partitioned onto U S WEST's switches. Subsequent to the
grant of interim relief, the Company on March 18, 1996 agreed to a settlement
agreement with U S WEST that permits the Company to continue to expand, without
restrictions, the number of new lines it serves in Iowa through March 18, 2001.
In addition, the settlement agreement provides that the Company may expand to
seven new markets (central offices) in Iowa per year through March 18, 2001. As
a result of the settlement agreement, the Company has withdrawn its complaint
before the Iowa Utilities Board. The Iowa Utilities Board may seek to review the
settlement agreement (although it has not indicated that it will do so), but the
Company expects that the settlement agreement will be approved if such review is
undertaken by the Iowa Utilities Board. In the event that the Iowa Utilities
Board refused to approve the settlement agreement, the Company would retain the
right to challenge the U S WEST Centrex Action on its merits; however, any such
refusal could materially adversely affect the Company's expansion plans and
prospects in Iowa pending a final decision by the Iowa Utilities Board.
Additionally, because MCI, AT&T and others have also challenged U S WEST's
action, the Iowa Utilities Board is continuing to review the U S WEST Centrex
Action.
Other telecommunication firms also have challenged the U S WEST Centrex
Action in each of the other states where U S WEST engages in local telephone
service. Oregon and Minnesota have rejected outright the tariffs filed by U S
WEST. Such a rejection may preclude U S WEST from withdrawing the Centrex
capability in such states, because the Telecommunications Act (which was enacted
into law three days after the original U S WEST tariff filings purporting to
withdraw/restrict the service were filed in Iowa and the other thirteen states)
requires U S WEST to permit resale of its services, including its Centrex
service, without unreasonable restrictions or conditions. Nevertheless, on May
2, 1996, U S WEST refiled its proposed limitations on Centrex service in
Minnesota, proposing to "grandfather" the service to existing customers as of
July 9, 1996.
No settlements or other resolutions have yet been effected with respect to
the Company's challenge to the U S WEST Centrex Action in states other than Iowa
or Minnesota. There can be no assurance that the Company will succeed in its
legal challenges to U S WEST's action, or that this
8
<PAGE> 14
action by U S WEST, or similar actions by other Regional Bell Operating
Companies, will not have a material adverse effect on the Company. See
"Business -- Legal Proceedings."
FAILURE OF U S WEST TO FURNISH CALL DETAIL RECORDS
The Company depends on certain call detail records provided by U S WEST
with respect to long distance services, and Ameritech with respect to both local
and long distance services, in order to verify its customers' bills for both
local and long distance service. The Company has in the past experienced certain
omissions in the call detail records it receives from U S WEST on a monthly
basis. For example, during the period from January 1995 through January 1996,
U S WEST failed to furnish, on average, monthly call detail records for 2.5% of
the long distance calls placed by the Company's customers in Iowa. Thus, the
Company was unable to verify with certainty that a given long distance call
placed by a customer and known by the Company to have been terminated by the
Company's wholesale long distance supplier was, in fact, placed by the customer.
Absent such verification, the Company does not bill its customer for the
call. The Company does not believe this impediment to billing certain customers
for a small percentage of calls in a given month materially adversely affects
its relationships with or contractual obligations to its customers. The failure
to bill the customer does have a negative effect on the Company's gross margins,
because the Company incurs expenses for calls it does not bill. In January 1996,
for example, the Company estimates that it was unable to bill approximately
$22,000 in long distance calls due to this situation.
The Company believes that U S WEST is contractually obligated to provide
the Company with such call detail records. Accordingly, in an effort to offset
the expenses associated with this problem, during the period from September 1994
through March 31, 1996, the Company has withheld $451,000 from payments of
amounts invoiced by U S WEST due to the failure by U S WEST to furnish 100% of
the call detail records. U S WEST disputes the Company's right to make these
withholdings, and the Company and U S WEST have agreed to undertake non-binding
mediation in an effort to resolve the financial aspects of the dispute. No date
for such mediation has been set. The Company has expensed the amounts withheld
from U S WEST on its financial statements. As a result, in the event U S WEST
prevails in its dispute with the Company, there will be no effect on the
Company's earnings.
In January 1996, U S WEST advised the Company that it had instituted
certain new procedures, primarily involving data entry protocols, in an effort
to "capture" 100% of the call detail records. Such efforts appear to have had a
salutary effect, as U S WEST furnished the Company with 99.2% of the requisite
call detail records for February and March 1996.
There can be no assurance, however, that U S WEST will not continue to
experience difficulties in furnishing complete call detail records to the
Company, that the percentage of call detail records not provided to the Company
will not increase, or that the resulting negative effect on gross margins will
not have a material adverse effect on the Company.
WIRELESS COMPETITION
The Company does not currently offer PCS or cellular services, and the
Company has no specific plans to obtain PCS or other wireless licenses at this
time, although the Company is considering participating in future FCC auctions
of PCS licenses. The Company believes that the market for wireless
telecommunications services is likely to expand significantly as equipment costs
and service rates continue to decline, equipment becomes more convenient and
functional and wireless services become more diverse. The Company also believes
that providers of wireless services increasingly will offer, in addition to
products that supplement a customer's landline communications (similar to
cellular telephone services in use today), wireline replacement products that
may result in wireless services becoming the customer's primary mode of
communication. The Company anticipates that in the future there could
potentially be eight wireless competitors in its
9
<PAGE> 15
current and/or target markets: two existing cellular providers and, in view of
the ongoing PCS auctions for spectrum in these markets, as many as six
additional PCS providers.
As the wireline and wireless markets converge, the Company believes that it
can identify opportunities to generate revenues from the wireless industry on a
wholesale basis, by leveraging its network to, for example, lease tower sites to
wireless providers or switch wireless traffic through the Company's switching
platform and on a retail basis, by entering into "bundling/branding"
arrangements with both cellular and PCS companies on favorable economic terms or
acquiring wireless licenses in its targeted markets if such opportunities become
available on economically attractive terms. However, the Company has no current
or pending negotiations, arrangements or agreements to acquire the ability to
provide wireless services. There can be no assurance that the Company will
identify any such opportunities, or that competition from PCS and other
providers of wireless telecommunications services will not have a material
adverse effect on the Company. See "Business -- Wireless Services."
DEPENDENCE ON KEY PERSONNEL
The Company's business is dependent upon a small number of key executive
officers, particularly Clark E. McLeod, the Company's Chairman and Chief
Executive Officer, and Stephen C. Gray, the Company's President and Chief
Operating Officer. The Company does not currently have any term employment
agreements with these or any other employees. However, prior to completion of
the Offering, the Company intends to enter into employment, confidentiality and
non-competition agreements with Messrs. McLeod and Gray and certain other key
employees of the Company providing for employment by the Company for an
indefinite period, subject to termination by either party (with or without
cause) on 30 days' prior written notice, and an agreement not to compete with
the Company for a period of one or two years, depending on the employee,
following termination for cause or voluntary termination of employment. The
Company maintains "key man" insurance on Mr. McLeod, in the amount of
$2,000,000, and on Mr. Gray, in the amount of $1,000,000. Proceeds from both
policies are pledged as collateral to The First National Bank of Chicago as
security for the Credit Facility.
There can be no assurance that the proposed employment agreements will
improve the Company's ability to retain its key managers or employees or that
the Company can attract or retain other skilled management personnel in the
future. The loss of the services of key personnel, or the inability to attract
additional qualified personnel, could have a material adverse effect on the
Company. See "Management -- Management Agreements."
REGULATION
The Company is subject to varying degrees of federal, state and local
regulation relating to its local, long distance and access telecommunications
services. McLeod Telemanagement, Inc., a wholly owned subsidiary of the Company
("McLeod Telemanagement"), is required by federal and state regulation to file
tariffs listing the rates, terms and conditions of certain services provided.
McLeod Telemanagement also is required to obtain certification from the relevant
state public utilities commission prior to the initiation of intrastate service.
Any failure to maintain proper federal and state tariffing or state
certification, or noncompliance with federal or state laws or regulations, could
have a material adverse effect on the Company. The Company has never experienced
difficulties in maintaining such tariffing. McLeod Telemanagement also has
obtained authority from the FCC to provide international services. The FCC's
rules applicable to the provision of international services may, under certain
conditions, limit the size of investments in the Company by foreign
telecommunications carriers. The Company does not currently hold any common
carrier radio licenses issued by the FCC, although it may obtain or acquire
radio licenses in the future in connection with the provision of wireless
services. The Telecommunications Act limits the ownership of non-U.S. citizens,
foreign governments, and corporations organized under the laws of a foreign
country in radio licensees. The Company, through its wholly owned subsidiary
MWR,
10
<PAGE> 16
provides certain competitive access services as a private carrier on a
non-regulated basis. The Company believes that MWR's private carrier status is
consistent with applicable federal and state laws, as well as regulatory
decisions interpreting and implementing those laws as of the date of this
Prospectus. Should such laws and/or regulatory interpretations change in the
future to reclassify MWR's regulatory status, the Company believes that
compliance with such reclassification will not have a material adverse effect on
the Company. In addition, the recently enacted Telecommunications Act has
significantly altered regulation of the telecommunications industry by
preempting state and local laws to the extent that they prevent competition and
by imposing a variety of new duties on incumbent local exchange carriers in
order to promote competition in local exchange and access services. The
Telecommunications Act also eliminates previous prohibitions on the provision of
long distance services by the Regional Bell Operating Companies and the General
Telephone Operating Companies. Although the Company believes that the enactment
of the Telecommunications Act and other trends in federal and state legislation
and regulation that favor increased competition are to the advantage of the
Company, there can be no assurance that the resulting increased competitive
opportunities or other changes in current regulations or future regulations at
the federal or state level will not have a material adverse effect on the
Company. See "-- Wireline Competition" and "Business -- Regulation."
CONTRACT WITH THE STATE OF IOWA
The Company's telecommunications network maintenance services revenue is
derived almost exclusively from the State of Iowa under a fiber optic
maintenance contract (the "Iowa Communications Network Maintenance Contract")
expiring in 2004. Revenues from the Company's services performed for the State
of Iowa under the Iowa Communications Network Maintenance Contract and related
contracts totaled $1.6 million, $3.4 million and $4.9 million in 1993, 1994 and
1995, respectively, or 100%, 42% and 17%, of the Company's total revenues in
1993, 1994 and 1995, respectively. Revenues from these contracts totaled $1.1
million and $1.4 million, respectively, or 21% and 11% of the Company's total
revenues during the three months ended March 31, 1995 and 1996, respectively.
The State of Iowa has the right to terminate the Iowa Communications
Network Maintenance Contract in the event of a lack of funding as well as for
material breach by the Company. The Company does not believe that there are
currently grounds for terminating the Iowa Communications Network Maintenance
Contract or that the State of Iowa currently intends to do so. However,
termination of the Iowa Communications Network Maintenance Contract by the State
of Iowa could have a material adverse effect on the Company.
RISKS OF EXPANSION
The Company is engaged in the expansion and development of its network and
services. The expansion and development of its network and services will depend
on, among other things, its ability to partition the incumbent local exchange
company's central office switch, enter markets, design fiber optic network
routes, install facilities and obtain rights-of-way, building access and any
required government authorizations and/or permits, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions. There can be no
assurances that the Company will be able to expand its existing network.
Furthermore, the Company's ability to manage its expansion effectively also will
require it to continue to implement and improve its operating, financial and
accounting systems and to expand, train and manage its employee base. The
inability to manage its planned expansion effectively could have a material
adverse effect on the Company. Finally, if the Company's challenges to the U S
WEST Centrex Action fail and no favorable settlement agreement is reached, there
could be a material adverse effect on the Company's planned expansions and
business prospects in Iowa and elsewhere. See "-- Dependence on Regional Bell
Operating Companies; U S WEST Centrex Action," and "Business -- Legal
Proceedings."
11
<PAGE> 17
NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY
In order to develop and construct its network, the Company must obtain
local franchises and other licenses and permits, as well as rights to utilize
underground conduit and aerial pole space and other rights-of-way and easements
from entities such as local exchange carriers and other utilities, railroads,
interexchange carriers, state highway authorities, local governments and transit
authorities. The Company has entered into long-term agreements with its two
principal electric utility stockholders, IES Industries Inc. (collectively with
its subsidiaries, "IES"), and MidAmerican Energy Company (collectively with its
predecessors and subsidiaries, "MidAmerican"), pursuant to which the Company
generally has access to the electric utilities' rights-of-way, poles and towers,
primarily located in Iowa, for so long as the utilities maintain their
franchises to provide electrical services in a given locality. There can be no
assurance that the Company will be able to maintain its existing franchises,
permits and rights-of-way or to obtain and maintain the other franchises,
permits and rights-of-way needed to implement its business plan on acceptable
terms. Although the Company believes that its existing arrangements will not be
canceled and will be renewed as needed in the near future, if any of the
existing franchises, license agreements or rights-of-way were terminated or not
renewed and the Company were forced to remove its facilities or abandon its
network in place, such cancellation or non-renewal of certain of such
arrangements could have a material adverse effect on the Company. See
"Business -- Network Facilities" and "Business -- Regulation."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. While the Company believes that for the foreseeable future these
changes will neither materially affect the continued use of fiber optic
telecommunications network nor materially hinder the Company's ability to
acquire necessary technologies, the effect of technological changes on the
business of the Company cannot be predicted. There can be no assurance that
technological developments in telecommunications will not have a material
adverse effect on the Company.
DIVIDEND POLICY; RESTRICTION ON PAYMENT OF DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future.
See "Dividend Policy." The Company's ability to pay dividends is limited by the
terms of the Credit Facility and by the terms of the Company's agreements with
IES, in connection with IES's guarantee and/or support of certain portions of
the Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
CONTROL OF THE COMPANY
Upon completion of the Offering, IES, MidAmerican, and Clark and Mary
McLeod will own, directly or indirectly, in the aggregate approximately 41% of
the outstanding Class A Common Stock and all of the Class B Common Stock, which
will represent approximately 52% of the combined voting power of the Common
Stock. The Class B Common Stock is convertible into Class A Common Stock at any
time at the option of the holders of Class B Common Stock. If all of the Class B
Common Stock were converted into Class A Common Stock, upon completion of the
Offering, IES, MidAmerican and Mr. and Mrs. McLeod would hold approximately 63%
of the Class A Common Stock and voting power of the Company. IES, MidAmerican
and Mr. and Mrs. McLeod also have entered into a voting agreement with respect
to the election of directors. Accordingly, upon completion of the Offering, such
stockholders will collectively be able to control the management policy of the
Company and all fundamental corporate actions, including mergers, substantial
acquisitions and dispositions, and election of the Board of Directors of the
Company (the "Board"). In addition, in the event of default by the Company under
the Credit Facility and payment by IES under its guarantee and/or support of
portions of the Credit Facility, IES would receive shares of Class A Preferred
Stock and would be entitled to elect two directors to the Board. See "-- Obliga-
12
<PAGE> 18
tions and Security Under Credit Facility." The Company intends to use a part of
the proceeds from the Offering to repay all borrowings outstanding under the
Credit Facility and will terminate those portions of the Credit Facility that
are guaranteed and/or supported by IES (the "IES-backed Facilities"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company's Amended and
Restated Certificate of Incorporation (the "Restated Certificate") contains
provisions that may make it more difficult to effect a hostile takeover of the
Company or to remove members of the Board. See "Management -- Stockholders'
Agreements," "Principal Stockholders" and "Description of Capital Stock."
OBLIGATIONS AND SECURITY UNDER CREDIT FACILITY
All of the Company's accounts receivable and inventory are pledged to The
First National Bank of Chicago as security for certain amounts loaned to the
Company under the Credit Facility. In the event of default by the Company under
the Credit Facility, these assets could be subject to foreclosure. Certain
portions of the Credit Facility are guaranteed and/or supported by IES. In the
event of default by the Company under the Credit Facility and payment on the
guarantee by IES, the Company must issue to IES a number of shares of Class A
Preferred Stock equal to the payment made by IES divided by $5.50. These shares
must be redeemed on a semi-annual basis from the Company's available cash and
entitle IES to elect two directors to the Board. The Company intends to use a
portion of the proceeds from the Offering to repay all amounts outstanding under
the Credit Facility and will terminate the IES-backed Facilities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Capital
Stock."
DILUTION
The public offering price is substantially higher than the tangible book
value of the outstanding Class A Common Stock. Purchasers of shares of Class A
Common Stock in the Offering will therefore experience immediate and substantial
dilution in tangible book value per share, and existing stockholders will
receive a material increase in the tangible book value per share of their shares
of Class A Common Stock. Assuming an initial public offering price of $17.00 per
share (the midpoint of the estimated range of the initial public offering
price), the dilution to new investors would be $13.00 per share. In addition,
investors purchasing shares of Class A Common Stock in the Offering will incur
additional dilution to the extent outstanding stock options are exercised. See
"Dilution."
VARIABILITY OF OPERATING RESULTS
As a result of the significant expenses associated with the construction
and expansion of its network and services, the Company anticipates that its
operating results could vary significantly from period to period. Such
variability could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there was no public market for the Class A Common
Stock. There can be no assurance that an active trading market will develop or
be sustained. The offering price has been determined by negotiations between the
Company and the Underwriters and there can be no assurance that the prices at
which the Class A Common Stock will sell in the public market after the Offering
will not be lower than the price at which they are sold in the Offering. See
"Underwriting." Furthermore, the trading price of the Class A Common Stock could
be subject to significant fluctuations in response to variations in general
conditions in the telecommunications industry and other factors not within the
control of the Company.
13
<PAGE> 19
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have approximately
42,036,448 shares of Common Stock outstanding, including 10,000,000 shares of
Class A Common Stock offered hereby and 32,036,448 "restricted" shares of Common
Stock. The shares of Class A Common Stock offered hereby will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), by persons other than "affiliates"
of the Company within the meaning of Rule 144 promulgated under the Securities
Act. The holders of restricted shares generally will be entitled to sell these
shares in the public securities market without registration under the Securities
Act to the extent permitted by Rule 144 (or Rule 145, as applicable) promulgated
under the Securities Act or any exemption under the Securities Act. Of the
32,036,448 restricted shares, 22,126,437 shares of Common Stock generally are
currently eligible for sale under Rule 144 as currently in effect, and 9,910,011
shares of Common Stock generally will be eligible for sale under Rule 144 as
currently in effect beginning in January 1997 through February 1998.
The Company, its directors and executive officers and certain other
stockholders have entered into "lock-up" agreements with the Underwriters,
providing that, subject to certain exceptions, they will not, for a period from
180 days to one year after the date of this Prospectus, without the prior
written consent of the Representatives, sell or contract to sell, or otherwise
dispose of, directly or indirectly, or announce the offering of, any shares of
Common Stock or any securities convertible into, or exchangeable for, shares of
Common Stock. See "Underwriting."
The Company has reserved 12,112,679 shares of Class A Common Stock for
issuance under the Company's employee stock purchase plan and upon exercise of
options outstanding or to be granted pursuant to the Company's stock option
plans. As of March 31, 1996, options to purchase 6,403,304 shares of Class A
Common Stock were outstanding and unexercised under the Company's stock option
plans. See "Management -- Stock Option Plans" and "Management -- The Employee
Stock Purchase Plan." In addition, options to purchase 3,787,500 shares of Class
B Common Stock, which were granted to IES in connection with a guarantee and/or
support of certain portions of the Credit Facility, were outstanding as of March
31, 1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." The Company currently
intends to register the shares of Class A Common Stock reserved for issuance
under the Company's stock option plans and stock purchase plan following the
date of this Prospectus.
Sales of a substantial amount of Class A Common Stock in the public market,
or the perception that such sales may occur, could adversely affect the market
price of the Class A Common Stock prevailing from time to time in the public
market and could impair the Company's ability to raise additional capital
through the sale of its equity securities. See "Shares Eligible for Future
Sale."
14
<PAGE> 20
USE OF PROCEEDS
The net proceeds of the Offering (assuming an initial public offering price
of $17.00 per share, the midpoint of the estimated range of the initial public
offering price) are estimated to be approximately $159.6 million (approximately
$157.1 million if the Investors do not purchase any of the Investor Shares and
such shares are instead purchased by the Underwriters), after deducting the
estimated underwriting discount and other expenses payable by the Company. The
Company intends to use the net proceeds of the Offering as follows: (i)
approximately $86.4 million to fund certain development and construction costs
of the Company's fiber optic network, (ii) approximately $15 million to repay
all borrowings outstanding under the Credit Facility (which consists of two
revolving lines of credit expiring in September 1996 and May 1998, respectively,
and bears interest at variable rates (based on LIBOR, the prime rate or the
federal funds rate)), and (iii) approximately $58.2 million (approximately $55.7
million if the Investors do not purchase any of the Investor Shares and such
shares are instead purchased by the Underwriters) to fund market expansion
activities of the Company's telecommunications business, to fund operating
deficits and net losses, and for additional working capital and general
corporate purposes. The Company has used funds borrowed under the Credit
Facility for working capital and general corporate purposes. The Company may
allocate different amounts of the proceeds among the uses described above, if
future developments and circumstances make such reallocation (in the Company's
discretion) more advantageous. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Prior to the application of the net proceeds of the Offering as described
above, such funds will be invested in short-term, investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying dividends in the foreseeable future. The
Credit Facility prohibits the payment of dividends by the Company without the
consent of The First National Bank of Chicago. The Company has also entered into
agreements with IES, in connection with IES's guarantee and/or support of
certain portions of the Credit Facility, which prohibit the payment of
dividends. Future dividends, if any, will be at the discretion of the Board and
will depend upon, among other things, the Company's operations, capital
requirements and surplus, general financial condition, contractual restrictions
and such other factors as the Board may deem relevant. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
15
<PAGE> 21
DILUTION
The pro forma net tangible book value of the Company on March 31, 1996 was
approximately $8.7 million or approximately $.27 per share of Class A Common
Stock. See "Description of Capital Stock." Pro forma net tangible book value per
share represents the amount of total tangible assets of the Company less the
amount of total liabilities divided by the total number of shares of Common
Stock outstanding. After giving effect to the sale by the Company of the
10,000,000 shares of Class A Common Stock offered hereby, the application of the
estimated net proceeds therefrom as set forth under "Use of Proceeds" and the
consummation of the Recapitalization, the pro forma net tangible book value of
the Company at March 31, 1996 would have been approximately $168.3 million, or
$4.00 per share of Class A Common Stock. See Note 11 to the Consolidated
Financial Statements of the Company included elsewhere in this Prospectus for
additional information regarding the Recapitalization. This represents an
increase in pro forma net tangible book value of $3.73 per share to the existing
stockholders and dilution of $13.00 per share to new investors purchasing shares
of Class A Common Stock in the Offering. The following table illustrates
dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $ 17.00
Pro forma net tangible book value per share before
the Offering................................................. $ .27
Increase per share attributable to new investors(1)............. 3.73
-----
Pro forma net tangible book value per share after the Offering.... 4.00
-----
Dilution per share to new investors(2)(3)(4)...................... $ 13.00
=====
</TABLE>
- ---------------
(1) After deducting the estimated underwriting discount and offering expenses
payable by the Company.
(2) Dilution is determined by subtracting the pro forma net tangible book value
per share after the Offering from the initial public offering price paid by
a new investor for a share of Class A Common Stock.
(3) If the Underwriters' over-allotment option is exercised in full, pro forma
net tangible book value of the Company after the Offering would be $4.41 per
share, representing an increase in pro forma net tangible book value of
$4.14 per share and dilution to new investors of $12.86 per share.
(4) If the Investors do not purchase any of the Investor Shares and such shares
are instead purchased by the Underwriters, pro forma net tangible book value
of the Company after the Offering would be $3.94 per share, representing an
increase in pro forma net tangible book value of $3.67 per share and
dilution to new investors of $13.06 per share.
The foregoing computations assume no exercise of stock options prior to
completion of the Offering. It is anticipated that options to purchase an
aggregate of 6,403,304 shares of Class A Common Stock at exercise prices ranging
from $.27 to $2.93, with a weighted average exercise price of approximately
$1.68 per share, and options to purchase 3,787,500 shares of Class B Common
Stock at exercise prices ranging from $1.47 to $2.27, will be outstanding
immediately prior to completion of the Offering. If all of such stock options
had been exercised at March 31, 1996, the pro forma net tangible book value per
share after completion of the Offering would be $3.55, representing an increase
in pro forma net tangible book value of $3.28 per share attributable to the
Offering and dilution to new investors of $13.45 per share.
16
<PAGE> 22
The following table summarizes the difference between existing stockholders
and new investors with respect to the number of shares of Common Stock purchased
from the Company, the total consideration paid to the Company and the average
price paid per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
New Investors.................... 10,000,000 23.8% $170,000,000 81.1% $ 17.00
Existing Stockholders(1)......... 32,036,448 76.2 39,704,079 18.9 1.24
---------- ----- ----------- -----
Total.................. 42,036,448 100.0% $209,704,079 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Based on the number of shares of Class A Common Stock and Class B Common
Stock outstanding as of March 31, 1996. Excludes (a) 6,403,304 shares of
Class A Common Stock issuable upon exercise of stock options granted to
directors, officers and employees of the Company and (b) 3,787,500 shares of
Class B Common Stock issuable upon exercise of stock options granted to IES
in connection with its guarantee and/or support of certain portions of the
Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Management -- Stock Option Plans."
17
<PAGE> 23
CAPITALIZATION
The following table sets forth, as of March 31, 1996, the actual
capitalization of the Company and the capitalization of the Company as adjusted
for the Offering, including application of a portion of the net proceeds
therefrom as set forth under "Use of Proceeds" and consummation of the
Recapitalization. This table should be read in conjunction with the Selected
Consolidated Financial Data, the Consolidated Financial Statements of the
Company, the Notes thereto and the other financial data included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------
ACTUAL AS ADJUSTED(1)
------------ --------------
<S> <C> <C>
Short-term debt.............................................. $ -- $ --
------------ ------------
Long-term debt............................................... 11,300,000 --
------------ ------------
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized; none outstanding............................ -- --
Preferred Stock, Class A, $5.50 par value, 1,150,000 shares
authorized; none outstanding............................ -- --
Class A Common Stock, $.01 par value, 75,000,000 shares
authorized; 16,410,519 shares issued and outstanding and
26,410,519 shares, as adjusted for the Offering......... 164,105 264,105
Class B Common Stock, convertible, $.01 par value,
22,000,000 shares authorized; 15,625,929 shares
issued and outstanding.................................. 156,259 156,259
Additional paid-in capital................................. 40,642,055 200,142,055
Accumulated deficit........................................ (29,819,656) (29,819,656)
------------ ------------
Total stockholders' equity......................... 11,142,763 170,742,763
------------ ------------
Total capitalization............................... $ 22,442,763 $ 170,742,763
============ ============
</TABLE>
- ---------------
(1) If the Investors do not purchase any of the Investor Shares and such shares
are instead purchased by the Underwriters, the Company's additional paid-in
capital, total stockholders' equity and total capitalization at March 31,
1996, as adjusted, would be $197,642,055, $168,242,763 and $168,242,763,
respectively.
18
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and
should be read in conjunction with and is qualified by "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements of the Company, the Notes thereto and the other financial
data included elsewhere in this Prospectus. All of the financial data as of and
for each of the five periods ended December 31, 1991, 1992, 1993, 1994 and 1995
have been derived from Consolidated Financial Statements of the Company that
have been audited by McGladrey & Pullen, LLP, independent auditors. The
information as of and for the three month periods ended March 31, 1995 and 1996
is unaudited, but in the opinion of the Company reflects all adjustments
necessary for the fair presentation of the Company's financial position and
results of operations for such periods, and may not be indicative of the results
of operations for a full year.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1991
TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------------------------------
1991(1) 1992 1993 1994 1995(2)(3)(4)
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Telecommunications revenue........ $ -- $ 250,000 $ 1,550,098 $ 8,014,093 $ 28,997,880
----------- ----------- ----------- ------------ ------------
Operating expenses:
Cost of service................. -- 261,800 1,527,658 6,211,783 19,667,138
Selling, general and
administrative................ 55,736 218,756 2,389,890 12,373,411 18,053,431
Depreciation and amortization... 2,101 6,441 235,013 771,879 1,835,127
----------- ----------- ----------- ------------ ------------
Total operating expenses.... 57,837 486,997 4,152,561 19,357,073 39,555,696
----------- ----------- ----------- ------------ ------------
Operating loss.................... (57,837) (236,997) (2,602,463) (11,342,980) (10,557,816)
Interest income (expense), net.... -- -- 162,846 (72,982) (771,123)
Income taxes...................... -- -- -- -- --
----------- ----------- ----------- ------------ ------------
Net loss.......................... $ (57,837) $ (236,997) $ (2,439,617) $ (11,415,962) $(11,328,939)
=========== =========== =========== ============ ============
Loss per common and common
equivalent share................ $ -- $ (.02) $ (.08) $ (.31) $ (.31)
=========== =========== =========== ============ ============
Weighted average common and common
equivalent shares outstanding... 14,924,865 14,924,865 29,655,063 36,369,916 37,054,744
=========== =========== =========== ============ ============
OTHER FINANCIAL DATA:
Capital expenditures, including
acquisition of business......... -- 137,618 2,052,475 3,392,663 14,697,402
EBITDA(5)......................... $ (55,736) $ (230,556) $ (2,367,450) $ (10,571,101) $ (8,722,689)
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1995 1996(4)
------------- -------------
<S> <C> <C>
OPERATIONS STATEMENT DATA:
Telecommunications revenue........ $ 4,761,307 $ 12,487,519
------------- -------------
Operating expenses:
Cost of service................. 3,266,666 9,249,981
Selling, general and
administrative................ 3,978,740 6,344,907
Depreciation and amortization... 317,653 968,614
Total operating expenses.... 7,563,059 16,563,502
------------- -------------
Operating loss.................... (2,801,752) (4,075,983)
Interest income (expense), net.... (154,968) (264,321)
Income taxes...................... -- --
------------- -------------
Net loss.......................... $ (2,956,720) $ (4,340,304)
============= =============
Loss per common and common
equivalent share................ $ (.08) $ (.12)
============= =============
Weighted average common and common
equivalent shares outstanding... 37,053,802 37,055,053
============= =============
OTHER FINANCIAL DATA:
Capital expenditures, including
acquisition of business......... 188,360 4,389,638
EBITDA(5)......................... $ (2,484,099) $ (3,107,369)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------------
1991 1992 1993 1994 1995(2)(6)
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit)......... $ (71,751) $ (439,924) $ 5,962,445 $ 1,658,982 $ (91,750)
Property and equipment, net....... -- 135,380 1,957,534 4,716,215 15,078,234
Total assets...................... 20,516 693,607 9,050,710 10,686,696 28,986,452
Long-term debt.................... -- -- -- 3,500,000 3,600,000
Stockholders' equity (deficit).... (52,837) (289,834) 7,935,874 3,291,182 14,957,942
<CAPTION>
MARCH 31,
1996
-------------
<S> <C>
BALANCE SHEET DATA
Working capital (deficit)......... $ 1,595,590
Property and equipment, net....... 18,955,980
Total assets...................... 38,275,289
Long-term debt.................... 11,300,000
Stockholders' equity (deficit).... 11,142,763
</TABLE>
- ---------------
(1) The Company was organized on June 6, 1991.
(2) The acquisition of MWR in April 1995 affects the comparability of the data
presented for 1995 to the data for prior periods shown.
(3) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(4) On a pro forma basis, as adjusted to give effect to the sale of the number
of shares of Class A Common Stock offered hereby necessary to retire as of
the beginning of the period or at the date of issuance of the Company's
interest-bearing debt, the Company's net loss, loss per common and common
equivalent share and weighted average common and common equivalent shares
outstanding would have been $(10,419,125), $(.29) and 35,408,420,
respectively, for 1995 and $(4,074,934), $(.11) and 35,586,906,
respectively, for the three months ended March 31, 1996.
(5) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. The Company has included EBITDA data because it is a measure
commonly used in the industry. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income as a measure of performance or to
cash flows as a measure of liquidity.
(6) Includes MWR, which was acquired by the Company on April 28, 1995.
19
<PAGE> 25
PRO FORMA STATEMENT OF OPERATIONS
The following unaudited Pro Forma Statement of Operations is derived from
the Consolidated Statement of Operations of the Company for the year ended
December 31, 1995 and the Statement of Income of MWR for the period from January
1, 1995 to April 28, 1995, both of which are included elsewhere in this
Prospectus. The unaudited Pro Forma Statement of Operations reflects the
Company's acquisition of MWR using the purchase method of accounting and assumes
that such acquisition was consummated as of January 1, 1995. The unaudited Pro
Forma Statement of Operations should be read in conjunction with the
Consolidated Financial Statements of the Company, the Financial Statements of
MWR and the Notes thereto included elsewhere in this Prospectus. The Pro Forma
Statement of Operations does not purport to represent what the Company's results
of operations would actually have been if the acquisition of MWR had occurred on
the date indicated or to project the Company's results of operations for any
future period or date. The pro forma adjustments, as described in the
accompanying data, are based on available information and the assumptions set
forth in the footnotes below, which management believes are reasonable.
<TABLE>
<CAPTION>
MWR ADJUSTMENTS
MCLEOD, INC. TELECOM, INC. FOR ACQUISITION AS ADJUSTED
------------ ------------- --------------- ------------
<S> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Telecommunications revenue.................... $ 28,997,880 $ 872,809 $ -- $ 29,870,689
------------ -------- -------- ------------
Operating expenses:
Cost of service............................. 19,667,138 375,480 -- 20,042,618
Selling, general and administrative......... 18,053,431 98,328 -- 18,151,759
Depreciation and amortization............... 1,835,127 220,125 (12,000)(1) 2,043,252
------------ -------- -------- ------------
Total operating expenses................ 39,555,696 693,933 (12,000) 40,237,629
------------ -------- -------- ------------
Operating income (loss)....................... (10,557,816) 178,876 12,000 (10,366,940)
Interest income (expense), net................ (771,123) (54,727) -- (825,850)
Income taxes.................................. -- (51,239) 51,239(2) --
------------ -------- -------- ------------
Net income (loss)............................. $(11,328,939) $ 72,910 $ 63,239 $(11,192,790)
============ ======== ======== ============
Loss per common and common equivalent
share....................................... $ (.31) $ (.30)
============ ============
Weighted average common and common equivalent
shares outstanding(3)....................... 37,054,744 37,054,744
============ ============
OTHER FINANCIAL DATA:
EBITDA(4)..................................... $ (8,722,689) $ 399,001 $ -- $ (8,323,688)
</TABLE>
- ---------------
(1) Depreciation and amortization has been adjusted to include amortization of
goodwill and to reflect the estimated depreciation of the purchase price
allocated to MWR's property and equipment from January 1, 1995 to April 28,
1995, the date of the Company's acquisition of MWR.
(2) Net income (loss) does not include a pro forma adjustment for income taxes
due to the availability of net operating loss carryforwards and a valuation
allowance.
(3) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83 (SAB 83), the Company was required to include the shares issued for the
MWR acquisition in the Company's calculation of loss per common and common
equivalent share as though such shares were outstanding for the whole year.
As a result, no adjustments are required for the pro forma calculation.
(4) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. The Company has included EBITDA data because it is a measure
commonly used in the industry. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income as a measure of performance or to
cash flows as a measure of liquidity.
20
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto appearing
elsewhere in this Prospectus.
OVERVIEW
The Company currently derives its telecommunications revenue from (i) the
sale of local and long distance telecommunications services to end users, (ii)
telecommunications network maintenance services and (iii) special access and
private line services. The table set forth below summarizes the Company's
percentage revenue from these sources:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED MARCH
31, 31,
---------------------- -------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Local and long distance telecommunications
services..................................... --% 58% 74% 78% 67%
Telecommunications network maintenance
services..................................... 100 42 17 21 11
Special access and private line services....... -- -- 9 1 22
---- ---- ---- ---- ----
100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
The Company began offering "bundled" local and long distance services to
business customers in January 1994. At the end of 1995, the Company began
marketing and providing long distance services to residential customers. The
Company currently plans to continue its efforts to market and provide services
to business customers and plans to accelerate its efforts to market to
residential users by employing additional field and telemarketing sales
personnel. Because its revenue from network maintenance is derived almost
exclusively from the Iowa Communications Network Maintenance Contract and such
revenue is expected to increase more slowly than the Company's other types of
revenue, the Company expects that revenue derived from network maintenance
services will continue to constitute a decreasing percentage of the Company's
revenue in the future. Special access and private line services as a percent of
the Company's total revenue increased in 1995 due to the revenue generated by
MWR, which was acquired in April 1995. The percentage increase in revenue from
this source for the three months ended March 31, 1996 was primarily due to the
revenue from a one-time construction and sale of a fiber optic network.
Excluding the revenue from this project, the percentage of total revenue from
the three sources would have been 77%, 13% and 10%, respectively.
The Company's principal operating expenses consist of cost of service;
selling, general and administrative expenses ("SG&A"); and depreciation and
amortization. Cost of service includes local services purchased from two
Regional Bell Operating Companies, costs to terminate the long distance calls of
the Company's customers through an interexchange carrier, costs associated with
maintaining the Iowa Communications Network and costs associated with operating
the Company's network. SG&A consists of selling and marketing, customer service
and corporate administrative expenses. Depreciation and amortization include
depreciation of the Company's telecommunications network and equipment, one-time
installation costs associated with transferring customers' local line service
from the Regional Bell Operating Companies to the Company's telemanagement
services and the amortization of goodwill related to the Company's acquisition
of MWR. The installation costs are amortized over the average life of customer
contracts with the Company, which currently is approximately 50 months.
As the Company expands into new markets, both cost of service and SG&A will
increase. The Company expects to incur SG&A expenses prior to achieving
significant revenues in new markets. Significant levels of marketing activity
may be necessary in new markets in order for the Company to
21
<PAGE> 27
build a customer base large enough to generate sufficient revenue to offset such
marketing expenses. In addition, SG&A may increase as a percentage of revenue in
the short term after the Company enters a new market, because many of the fixed
costs of providing service in new markets are incurred before significant
revenue can be expected from those markets.
In connection with IES's guarantee and/or support of certain portions of
the Credit Facility, the Company issued options to purchase 3,787,500 shares of
Class B Common Stock. The Company used the Black-Scholes model to value the
options at the date of grant, which resulted in an aggregate value of
approximately $3,400,000 to be amortized over the vesting period of the options.
Since the options only vest while the IES-backed Facilities are outstanding, and
since the Company intends to use a portion of the proceeds from the Offering to
repay all outstanding borrowings under the Credit Facility and will terminate
the IES-backed Facilities, this amortization will only affect the Company's
financial statements through the date of termination of the IES-backed
Facilities. See "-- Liquidity and Capital Resources."
In January and February 1996, the Company granted to certain officers,
other employees and directors, options to purchase an aggregate of 965,166 and
688,502 shares of Class A Common Stock, respectively, at an exercise price of
$2.67 per share. The estimated fair market value of these options, in the
aggregate, at the date of grant was later determined to exceed the aggregate
exercise price by approximately $9.2 million. This amount will be amortized on a
monthly basis over the four-year vesting period of the options.
The Company has experienced operating losses since its inception as a
result of efforts to build its customer base, develop and construct its network
infrastructure, build its internal staffing, develop its systems and expand into
new markets. The Company expects to continue to focus on increasing its customer
base and geographic coverage. Expansion of the Company's operations and
facilities, network and services will require significant capital expenditures.
Accordingly, the Company expects that its cost of service, SG&A and capital
expenditures will continue to increase significantly, all of which may have a
negative impact on operating results. Therefore, the Company expects to continue
to incur significant losses for the foreseeable future. In addition, the Company
may be forced to change its pricing policies to respond to a changing
competitive environment, and there can be no assurance that the Company will be
able to maintain its operating margin. See "Risk Factors -- Wireline
Competition" and "Risk Factors -- Regulation." There can be no assurance that
growth in the Company's revenue or customer base will continue or that the
Company will be able to achieve or sustain profitability or positive cash flows.
The Company has generated net operating losses since its inception and,
accordingly, has incurred no income tax expense. The Company has reduced the net
deferred tax assets generated by these losses by a valuation allowance which
offsets the net deferred tax asset due to the uncertainty of realizing the
benefit of the tax loss carryforwards. The Company will reduce the valuation
allowance when, based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred tax assets will be realized.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1995
Telecommunications revenue increased from $4.8 million for the three months
ended March 31, 1995 to $12.5 million for the three months ended March 31, 1996,
representing an increase of $7.7 million or 162%. Revenue from the sale of local
and long distance telecommunications services accounted for $4.7 million of this
increase. There also was an increase of $2.7 million related to special access
and private line services, of which $1.6 million was a one-time construction and
sale of a fiber optic network. Average monthly revenue per line increased from
$72.36 to $76.99. Average lines per customer increased from 3.58 to 4.50. Total
local and long distance customers served increased 60%, from 6,206 at March 31,
1995 to 9,928 at March 31, 1996.
Revenue from telecommunications network maintenance services for the three
months ended March 31, 1996 was $1.4 million, compared to $1.1 million for the
first quarter of 1995. This increase was primarily attributable to additional
services provided to the State of Iowa. The Company acquired MWR, a competitive
access provider that offers most of the Company's special access and
22
<PAGE> 28
private line services, in April 1995 in an acquisition accounted for as a
purchase. MWR represented $800,000 of the Company's revenue for the three months
ended March 31, 1996.
Cost of service increased from $3.3 million for the three months ended
March 31, 1995, to $9.2 million for the three months ended March 31, 1996,
representing an increase of $5.9 million or 183%. This increase in cost of
service resulted primarily from costs for providing local and long distance
services and costs of $1.6 million related to the one-time construction and sale
of a fiber optic network discussed above. Cost of service as a percentage of
telecommunication revenue increased from 69% to 74%. While the cost of providing
local and long distance services decreased as a percentage of the local and long
distance telecommunications revenue by 1%, the overall 5% increase was
principally due to the low margin realized on this one-time construction and
sale of a fiber optic network.
SG&A increased from $4 million for the three months ended March 31, 1995 to
$6.3 million for the three months ended March 31, 1996, an increase of $2.3
million or 60%. This increase was due to the increased compensation resulting
from selling and customer support activities of $1.1 million, additional
administrative personnel of $445,000 and associated costs of $755,000 required
to handle the growth experienced primarily in local and long distance services.
Depreciation and amortization expenses increased from $318,000 for the
three months ended March 31, 1995 to $969,000 for the three months ended March
31, 1996, representing an increase of $651,000 or 205%. The increase consisted
of $315,000 of amortization expense related to stock options granted to certain
officers, other employees and directors as discussed above; depreciation of
$175,000 related to the additional fiber optic network purchased and built
during 1995 and the first three months of 1996; $59,000 resulting from the
amortization of one-time installation costs primarily associated with
transferring customers' local line service from the Regional Bell Operating
Companies to the Company's telemanagement service; $57,000 of depreciation
related to capital costs associated with the growth of the Company; and
amortization of goodwill of $45,000 related to the Company's acquisition of MWR
in April 1995.
Interest expense increased from $155,000 for the first quarter of 1995 to
$326,000 for the first quarter of 1996 as a result of the need for additional
secured debt to fund the Company's growth and operating losses. During 1996, the
Company capitalized interest costs of $61,000 on construction projects resulting
in net interest expense of $264,000. Interest income for both periods was
insignificant.
The Company's net loss increased from $3.0 million for the three months
ended March 31, 1995 to $4.3 million for the three months ended March 31, 1996,
an increase of $1.3 million. This increase in the loss resulted primarily from
the expansion of the local and long distance businesses and amortization expense
related to stock options granted to certain officers, other employees and
directors. The development of the Company's business and the construction and
expansion of its network require significant expenditures, a substantial portion
of which is incurred before the realization of revenues.
Earnings before interest, income taxes, depreciation and amortization
("EBITDA") decreased from a negative $2.5 million for the first quarter of 1995
to a negative $3.1 million for the first quarter of 1996, a decrease of
$600,000. The change reflected the increased losses incurred in 1996 due
primarily to the expansion of the local and long distance businesses and the
factors described above.
YEAR ENDED 1995 COMPARED WITH YEAR ENDED 1994
Telecommunications revenue increased from $8 million in 1994 to $29 million
in 1995, representing an increase of $21 million or 262%. Revenue from the
increase in the sale of local and long
23
<PAGE> 29
distance telecommunications services accounted for $16.9 million of this
increase. Average monthly revenue per line increased from $58.30 to $62.68.
Average lines per customer increased from 3.33 to 4.31. Total local and long
distance customers served increased 69% from 5,137 at the end of 1994 to 8,700
at the end of 1995. Local lines under the Company's management increased 109%
from 17,112 at the end of 1994 to 35,795 at the end of 1995.
Revenue from telecommunications network maintenance services was $4.9
million in 1995. The Company acquired MWR, a competitive access provider that
offers most of the Company's special access and private line services, in April
1995 in an acquisition accounted for as a purchase. MWR represented $1.6 million
of the Company's revenue in 1995.
Cost of service increased from $6.2 million in 1994 to $19.7 million in
1995, an increase of $13.5 million or 217%. This increase in cost of service
resulted primarily from costs for providing local and long distance services.
Cost of service as a percentage of telecommunications revenue decreased from 78%
in 1994 to 68% in 1995, principally as a result of certain economies of scale.
SG&A increased from $12.4 million in 1994 to $18.1 million in 1995, an
increase of $5.7 million or 46%. This increase was due to increased compensation
resulting from selling and customer support activities of $2.8 million,
additional administrative personnel of $1.6 million and associated costs of $1.3
million required to handle the growth experienced primarily in local and long
distance revenues.
Depreciation and amortization expenses increased from $772,000 in 1994 to
$1.8 million in 1995, an increase of $1 million or 138%. This increase consisted
of depreciation of $362,000 related to the additional fiber optic network
purchased and built during 1995; $304,000 of depreciation related to capital
costs associated with the growth of the Company; $266,000 resulting from the
amortization of one-time installation costs primarily associated with
transferring customers' local line service from the Regional Bell Operating
Companies to the Company's telemanagement service; and amortization of goodwill
of $117,000 related to the Company's acquisition of MWR in 1995.
Net interest expense increased from $73,000 in 1994 to $771,000 in 1995.
This net increase resulted from an increase in interest expense of $692,000 due
to the need for additional secured debt in 1995 to fund the Company's growth and
operating losses and a decrease in interest income of $6,000 resulting from
reduced investment of funds due to the use of funds needed to satisfy working
capital needs.
The Company's net loss decreased from $11.4 million in 1994 to $11.3
million in 1995, a decrease of $87,000. This decrease resulted from the ability
of the Company to generate additional service income while reducing customer
acquisition and support costs as a percentage of service income.
EBITDA improved from a negative $10.6 million in 1994 to a negative $8.7
million in 1995, an improvement of $1.9 million. The improvement reflected the
decrease in the net loss and the increase in depreciation and amortization in
1995 resulting from the capital expenditures necessary to support the Company's
revenue growth.
YEAR ENDED 1994 COMPARED WITH YEAR ENDED 1993
Telecommunications revenue increased from $1.6 million in 1993 to $8
million in 1994, representing an increase of $6.4 million or 417%. The increase
reflected an increase in revenue from the Iowa Communications Network
Maintenance Contract of $1.9 million as well as the Company's commencement of
local and long distance service. The increased revenue from the Iowa
Communications Network Maintenance Contract resulted from the ability to charge
full maintenance costs in 1994 versus reduced charges in 1993 because of a
warranty period on the network.
24
<PAGE> 30
Cost of service increased from $1.5 million in 1993 to $6.2 million in
1994, an increase of $4.7 million or 307%. This increase in cost of service
resulted primarily from costs for providing local and long distance services.
SG&A increased from $2.4 million in 1993 to $12.4 million in 1994, an
increase of $10 million or 418%. This increase was due to increased compensation
resulting from selling and customer support activities of $5.5 million,
additional administrative personnel of $1.8 million and associated costs of $2.7
million resulting from the start-up of local and long distance services.
Depreciation and amortization expenses increased from $235,000 in 1993 to
$772,000 in 1994, an increase of $537,000 or 228%. This increase was primarily
due to depreciation on the increased capital expenditures required to enter the
local and long distance businesses and the amortization of one time installation
costs associated with transferring customers' local line service from the
Regional Bell Operating Companies to the Company's telemanagement service.
Interest income in 1993 was $163,000 compared to net interest expense of
$73,000 in 1994. The decrease resulted from an increase in interest expense of
$218,000 due to the need for additional secured debt in 1994 to fund the
Company's growth and operating losses and a decrease in interest income of
$18,000 resulting from reduced investment of funds due to the use of funds
needed to satisfy the Company's working capital needs.
The Company's net loss increased from $2.4 million in 1993 to $11.4 million
in 1994, an increase of $9 million. This increase was primarily due to the
Company's entry into the local and long distance businesses.
EBITDA decreased from a negative $2.4 million in 1993 to a negative $10.6
million in 1994, a decrease of $8.2 million. The decrease reflected the
increased losses incurred in 1994 related to the Company's entry into the local
and long distance businesses.
YEAR ENDED 1993 COMPARED WITH YEAR ENDED 1992
Because the Company's revenue-producing operations began in November 1992,
the Company does not believe a comparison of financial results between 1992 and
1993 would be meaningful.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had total assets of $38.3 million,
representing an increase of $9.3 million from December 31, 1995. Included in
this increase was an increase in trade receivables, net of allowance for
doubtful accounts and discounts, of $4.9 million and an increase in property and
equipment, net of depreciation, of $3.9 million. The Company's current assets
were $14.9 million and exceeded its current liabilities by $1.6 million. During
the three months ended March 31, 1996, the Company required $3.9 million for
operating activities and $3.9 million primarily for the purchase of property and
equipment. The Company funded these cash requirements with funds obtained under
the Credit Facility.
At December 31, 1995, the Company had total assets of $29 million. The
Company's current liabilities of $9.7 million exceeded current assets of $9.6
million, resulting in a working capital deficit of $92,000. This working capital
deficit resulted from the growth experienced by the Company, the increase in
working capital components and the substantial investment in property and
equipment. The Company does not believe that this deficit will materially impair
the future operating activities of the Company. Trade receivables, net of
allowance for doubtful accounts and discounts, comprised $6.7 million of total
assets and reflected the Company's entry into the telemanagement services
market. Property and equipment, net of depreciation, comprised $15.1 million of
total assets. Intangibles of $4.3 million were comprised primarily of deferred
line installation costs of $1.4 million and goodwill of $2.5 million related to
the acquisition of MWR in 1995. During 1995, the Company required $9.5 million
for operating activities and $5.5 million for investing activities. In addition,
the Company issued Class B Common Stock valued at $8.3 million to acquire MWR, a
competitive
25
<PAGE> 31
access provider in Des Moines, Iowa. The Company funded its cash requirements
primarily through the issuance of Common Stock, with minimal funds obtained
under the Credit Facility.
During 1994, the Company started building its telemanagement business by
offering local and long distance services to business customers by purchasing
Centrex services from two Regional Bell Operating Companies and interexchange
carrier services for termination of long distance calls. The Company's cash
requirements were approximately $11.4 million for operating activities and
approximately $3.4 million for property and equipment. The Company funded its
requirements with proceeds from issuances of Common Stock of $6.6 million and
from funds obtained under the Credit Facility of $3.5 million.
The Credit Facility consists of two revolving lines of credit with The
First National Bank of Chicago. The Credit Facility has an aggregate $32 million
limit, of which $24 million expires in May 1998 and $8 million expires in
September 1996. As of March 31, 1996, the Company had $11.3 million outstanding
under the Credit Facility. Borrowings under the Credit Facility bear interest at
various rates equal to LIBOR, the prime rate or the federal funds rate, in each
case plus an applicable margin, and certain of the borrowings are secured by the
Company's trade receivables and inventory. Available borrowings of $14 million
are also guaranteed and/or supported by IES (collectively, the "IES Guarantee"),
which receives from the Company annual fees based upon the amounts outstanding
under the IES-backed Facilities. The Credit Facility contains various covenants
restricting the Company's ability, among other things, to (i) declare or pay any
dividends, (ii) incur additional indebtedness, (iii) repurchase shares of
capital stock, (iv) enter into a merger, consolidation or similar transaction or
(v) convey its assets. The Company intends to use a portion of the proceeds from
the Offering to repay all outstanding borrowings under the Credit Facility and
will terminate the IES-backed Facilities upon completion of the Offering. The
Company expects a portion of the proceeds from the Offering to provide the
liquidity previously available under the IES-backed Facilities. The Company also
intends to maintain the portion of the Credit Facility that is not guaranteed
and/or supported by IES, which would require the agreement of The First National
Bank of Chicago. While the Company believes that The First National Bank of
Chicago will agree to permit the Company to maintain such portion of the Credit
Facility, there can be no assurances that such an agreement will be reached on
terms acceptable to the Company or at all. The Company also plans to put other
lines of credit in place, although no such lines have yet been negotiated. Based
on current plans, the Company believes that the proceeds from the Offering will
provide it with sufficient funding through the end of 1997.
In the event of default by the Company under the Credit Facility and
payment on the IES Guarantee, the Company must issue to IES a number of shares
of Class A Preferred Stock equal to the amount of the payment made by IES
divided by $5.50. These shares must be redeemed by the Company from available
cash and entitle the holder thereof to elect two directors to the Board. Also in
connection with the IES Guarantee, the Company granted to IES options to
purchase 3,787,500 shares of Class B Common Stock at prices ranging from $1.47
to $2.27 per share. While the IES Guarantee is in place, the options vest
quarterly based on IES' exposure under the IES Guarantee. As of March 31 1996,
993,750 options had vested. See "Description of Capital Stock -- Class A
Preferred Stock."
At December 31, 1995, the Company had actual remaining contractual capital
commitments of $8.7 million for costs associated with the construction of fiber
optic networks. The Company estimates its capital requirements for 1996 and 1997
to be approximately $106 million. These capital commitments and requirements are
expected to be funded, in large part, by the net proceeds of the Offering and by
lease payments to the Company for portions of the Company's network.
The Company expects that it will require additional capital in the future
for funding operating losses and working capital as well as continuing expansion
into new markets and further network development and construction. In addition,
the Company expects to explore alternatives to permit it to provide PCS and
other wireless services and may decide to pursue the acquisition of PCS
26
<PAGE> 32
licenses or other strategic acquisitions, which could require substantial
additional capital. The Company expects to meet its additional capital needs
with the proceeds from additional credit facilities and other borrowings, public
and private debt and equity financings, and possible joint ventures. There can
be no assurance that the Company will be successful in producing sufficient cash
flows or raising sufficient debt or equity capital to enable it to meet its
strategic objectives or that such funds, if available at all, will be available
on a timely basis or on terms that are acceptable to the Company. See "Risk
Factors -- Significant Capital Requirements."
EFFECTS OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of, which will require the Company to review for the
impairment of long-lived assets and certain identifiable intangibles to be held
and used by the Company whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable. Adoption of SFAS
No. 121 is required in fiscal 1996.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value based method for financial
accounting and reporting stock-based employee compensation plans. However, the
new standard allows compensation to continue to be measured by using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires
expanded disclosures. SFAS No. 123 is effective in fiscal year 1996. The Company
has elected to continue to apply the intrinsic value-based method of accounting
for stock options.
While the Company does not know precisely the impact of adopting SFAS No.
121 and SFAS No. 123, the Company does not expect that the adoption of SFAS No.
121 or SFAS No. 123 will have a material effect on the Company's consolidated
financial statements.
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
27
<PAGE> 33
BUSINESS
OVERVIEW
The Company is a provider of integrated local and long distance
telecommunications services to small and medium-sized businesses primarily in
Iowa and Illinois. The Company derives its telecommunications revenue from (i)
the sale of "bundled" local and long distance telecommunications services to end
users, (ii) telecommunications network maintenance services and (iii)
competitive access services, including special access and private line services.
The Company offers "one-stop" integrated telecommunications services tailored to
the customer's individual needs. This approach simplifies the customer's
telecommunications procurement and management tasks and provides for customized
services, such as "least-cost" long distance pricing and enhanced calling
features, to customers who might otherwise be unable to secure such services
directly on a cost-effective basis. The Company also operates a competitive
access provider that offers a variety of special access and private line
services to 73 large businesses, institutional customers and interexchange
carriers. In addition, the Company provides network maintenance services for the
State of Iowa's fiber optic network. As of March 31, 1996, the Company served
over 10,000 customers in 50 cities and towns.
The Company was formed on June 6, 1991 as McLeod Telecommunications, Inc.
It began operations in November of 1992, providing fiber optic maintenance
services for the Iowa Communications Network. On August 1, 1993, the Company was
reincorporated in the State of Delaware. McLeod Telemanagement received
regulatory approvals in Iowa and Illinois to offer local and long distance
services in December 1993 and began providing such services in January 1994. In
April 1995, the Company acquired all of the outstanding stock of MWR, a
competitive access provider in Des Moines, Iowa.
The Company is organized as a holding company and operates through four
wholly owned subsidiaries: (i) McLeod Telemanagement, which is the Company's
retail marketing and sales entity, providing "telemanagement" services for small
and medium-sized business customers; (ii) MWR, which provides competitive access
services to interexchange carriers and other high-volume users of
telecommunications services, primarily in Des Moines, Iowa; (iii) McLeod Network
Services, Inc., which is engaged in network construction; and (iv) McLeod
Telecommunications, Inc., which is engaged in the Company's network maintenance
activities.
The Company believes it is the first telecommunications provider in its
markets to offer "bundled" local and long distance services. As a result, the
Company believes that it is well-positioned to take advantage of fundamental
changes occurring in the telecommunications industry resulting from the
Telecommunications Act and to challenge incumbent local carriers. The Company
provides local service using existing telephone lines obtained from incumbent
local exchange carriers, which allows customers to switch to local service
provided by the Company without changing existing telephone numbers. The Company
provides long distance services by purchasing bulk capacity from a long distance
carrier. Using the Company's sophisticated proprietary software, each customer
receives the lowest long distance rate available each month from among the most
popular pricing plans of AT&T, MCI and Sprint.
ACQUISITION OF MWR
On April 28, 1995, the Company purchased all of the outstanding stock of
MWR from Midwest Capital Group, Inc., a non-regulated subsidiary of MidAmerican.
As consideration for the acquisition, the Company issued 3,676,058 shares of the
Company's Class B Common Stock valued at $8.3 million to Midwest Capital Group,
Inc.
As part of the transaction, Midwest Capital Group, Inc. received the right
to appoint one director to the Board and one "observer Board member." See
"Management -- Stockholders' Agreements." It was also granted an option to
purchase an additional 3,529,414 shares of Class B
28
<PAGE> 34
Common Stock at a purchase price of $2.27 per share, which option Midwest
Capital Group, Inc. exercised in June 1995.
MWR is a competitive access provider which owns and operates approximately
145 miles of fiber optic network in Des Moines, Iowa and which offers special
access and private line services to 73 large businesses, institutional customers
and interexchange carriers.
BUSINESS STRATEGY
The Company's objective is to become a leading provider of
telecommunications services in Iowa, Illinois, Nebraska, Minnesota, Wisconsin
and South Dakota. The Company intends to increase its penetration of existing
markets and expand into new markets by: (i) aggressively capturing market share
and generating revenues using leased network capacity and (ii) concurrently
constructing additional network infrastructure to more cost-effectively serve
its customers. The Company estimates that as of March 31, 1996 it had a market
share of approximately 16% of business local telephone lines in its Iowa markets
(based on 1994 market data) and a market share of approximately 10% of business
local telephone lines in its Illinois markets (based on 1994 Iowa market data,
assuming that the Company's Illinois markets are substantially similar to the
Company's Iowa markets). An integrated package of telecommunications services
that includes local and long distance service, voice mail and Internet access is
expected to be available to residential customers in the near future. In
addition, the Company intends to expand beyond its existing services to provide
wireless telecommunications and other value-added services, such as conference
calling and operator services.
The principal elements of the Company's business strategy include:
- EMPHASIS ON MARKETING AND CUSTOMER SERVICE. The Company believes that
the key to revenue growth in its target markets is capturing and
retaining customers through an emphasis on marketing, sales and customer
service. The Company has been successful in obtaining long-term
commitments from its customers and responding rapidly and creatively to
customer needs. The Company's customer-focused software and network
architecture allow immediate access to the Company's customer data by
Company personnel, enabling a quick and effective response to customer
requests and needs at any time. This software permits the Company to
present its customers with one fully integrated monthly billing statement
for local, long distance, 800, international and travel card service. The
Company believes that its customer-focused software platform is an
important element in the marketing of its telecommunications services and
gives it a competitive advantage in the marketplace.
- LEVERAGE PROVEN MANAGEMENT TEAM. The Company has recruited a team of
veteran competitive telecommunications managers, led by entrepreneur
Clark McLeod, who have together in the past successfully implemented a
similar customer-focused telecommunications strategy in the same industry
and region. Six of the nine executive officers of the Company served as
officers of Teleconnect or its successor, Telecom*USA. Teleconnect began
providing long distance services in Iowa in 1982 and rapidly expanded
into dozens of cities and towns in the Midwest. Telecom*USA was the
fourth-largest U.S. long distance provider when MCI purchased it in 1990
for $1.25 billion.
- FOCUS ON SMALL AND MID-SIZED MARKETS IN THE MIDWEST. The Company
principally targets small and mid-sized markets (cities and towns with a
population between 15,000 and 350,000) in Iowa, Illinois, Nebraska,
Minnesota, Wisconsin and South Dakota. The Company estimates that its
current target markets have a combined population of approximately 5.6
million. The Company strives to be the first to market integrated
telecommunications services in its principal markets and expects that
intense competition in bundled local and long distance services will be
slower to develop in these markets than in larger markets.
29
<PAGE> 35
- TRANSITION INTO LOCAL SWITCHED SERVICES BUSINESS. When regulatory
authorities complete certain proceedings, and assuming the economics are
favorable to the Company, the Company intends to begin offering local
facilities-based switched services by using its existing high-capacity
digital AT&T switch and installing additional switches. These regulatory
proceedings are currently ongoing before the FCC and many state public
utilities commissions, including that of Iowa, for the purpose of
establishing most of the economic and technical terms of interconnection.
The Company believes that these proceedings should be substantially
completed and that the Company could begin offering local
facilities-based switched services over the next six to 20 months. In
March 1995 and April 1996, respectively, the Company received state
regulatory approval in Iowa and Illinois to offer local switched services
in Cedar Rapids, Iowa and in Illinois cities other than Chicago. The
Company intends to seek regulatory approval to provide such services in
other cities and towns in Iowa and other states targeted by the Company
in the Midwest when the economic terms of interconnection with the
incumbent local exchange carrier make the provision of local switched
services cost-effective.
- EXPANSION OF ITS FIBER OPTIC NETWORK. The Company is constructing a
state-of-the-art digital fiber optic telecommunications network designed
to serve markets in Iowa. The Company currently owns approximately 430
route miles of fiber network and expects to construct approximately 6,000
route miles of fiber network during the next five years. Through its
strategic relationships with its electric utility stockholders and its
contracts to build and lease the final links of the Iowa Communications
Network to the State of Iowa, the Company believes that it will be able
to achieve capital efficiencies in constructing its fiber optic network
in a rapid and cost-effective manner. The Iowa Communications Network is
a fiber optic network that links certain of the state's schools,
libraries and other public buildings. The Company also believes that its
fiber optic network in combination with its proprietary software will
create an attractive customer-focused platform for the provision of
local, long distance, wireless and enhanced services.
MARKET POTENTIAL
The telecommunications industry is currently undergoing substantial changes
due to statutory, regulatory and technological developments. The Company
believes that it is well-positioned to take advantage of these fundamental
changes.
The market for local exchange services consists of a number of distinct
service components. These service components are defined by specific regulatory
tariff classifications including: (i) local network services, which generally
include basic dial tone, local area charges, enhanced calling features and
private line services (dedicated point-to-point intraLATA service); (ii) network
access services, which consist of access provided by local exchange carriers to
long distance network carriers; (iii) long distance network services, which
include intraLATA long distance calls; and (iv) other varied services. Industry
sources have estimated that the 1994 aggregate revenues of all local exchange
carriers approximated $97 billion. Until recently, there was virtually no
competition in the local exchange markets.
Until 1984, AT&T largely monopolized local and long distance telephone
services in the United States. Technological developments gradually enabled
others to compete with AT&T in the long distance market. In 1984, largely as the
result of a court decree, AT&T was required to divest its local telephone
systems (the "Divestiture"), which created the present structure of the
telecommunications industry. The Divestiture and subsequent related proceedings
divided the country into 201 Local Access and Transport Areas ("LATAs"). As part
of the Divestiture, AT&T's former local telephone systems were organized into
seven independent Regional Bell Operating Companies. The Regional Bell Operating
Companies were given the right to provide local telephone service, local access
service and intraLATA long distance service, but were prohibited from providing
interLATA service. AT&T retained its long distance services operations. The
separation of the Regional Bell
30
<PAGE> 36
Operating Companies from AT&T's long distance business created two distinct
telecommunications market segments: local exchange and long distance. The
Divestiture decreed direct, open competition in the long distance segment, but
continued the regulated monopoly environment in local exchange services.
In 1984, a separate court decree (the "GTE Decree") required the local
exchange operations of the General Telephone Operating Companies to be
structurally separated from the competitive operations of GTE Corp., their
parent company. As a result, the GTE Decree also prohibited the General
Telephone Operating Companies from providing interLATA services.
On February 8, 1996, the Telecommunications Act was enacted. The
Telecommunications Act removed the restrictions in the Divestiture and the GTE
Decree concerning the provision of interLATA service by the Regional Bell
Operating Companies and the General Telephone Operating Companies. These decree
restrictions have been replaced, with respect to the Regional Bell Operating
Companies, by provisions of the Telecommunications Act setting forth the
conditions under which the Regional Bell Operating Companies may enter formerly
prohibited markets. The Telecommunications Act requires all local exchange
carriers to "unbundle" their local network offerings and allow other providers
of telecommunications services to interconnect with their facilities and
equipment. Most significantly, the incumbent local exchange carriers will be
required to complete local calls originated by the Company's customers and
switched by the Company and to deliver inbound local calls to the Company for
termination to its customers, assuring customers of unimpaired local calling
ability. The Company should also be able to obtain access to incumbent carrier
"loop" facilities (the transmission lines connecting customers' premises to the
public telephone network) on an unbundled basis at reasonable and
non-discriminatory rates. In addition, local exchange carriers are obligated to
provide local number portability and dialing parity upon request and make their
local services available for resale by competitors. Local exchange carriers also
are required to allow competitors nondiscriminatory access to local exchange
carrier pole attachments, conduit space and other rights-of-way. Moreover,
states are forbidden from disallowing local competition, although they are
allowed to regulate such competition.
The Company believes that each of these requirements is likely, when fully
implemented, to increase competition among providers of local telecommunications
services and simplify the process of switching from local exchange carrier
services to those offered by competitive access provider/competitive local
exchange carriers. However, the Telecommunications Act also offers important
benefits to the incumbent local exchange carriers. The incumbent local exchange
carriers have been granted substantial new pricing flexibility. Regional Bell
Operating Companies and General Telephone Operating Companies have regained the
ability to provide long distance services under specified conditions and have
new rights to provide certain cable TV services. The Telecommunications Act,
however, also provides for certain safeguards to attempt to protect against
anticompetitive abuses by the Regional Bell Operating Companies. Among other
protections, the ability of the Regional Bell Operating Companies to market
jointly interLATA and local services is limited under certain circumstances.
Prior to the enactment of the Telecommunications Act, several factors
served to promote competition in the local exchange market, including: (i)
rapidly growing customer demand for an alternative to the local exchange carrier
monopoly, spurred partly by the development of competitive activities in the
long distance market; (ii) advances in the technology for transmission of data
and video, which require greater capacity and reliability levels than many local
exchange carrier networks (which principally are copper-based) can accommodate;
(iii) the development of fiber optics and digital electronic technology, which
reduced network construction costs while increasing transmission speeds,
capacity and reliability as compared to the local exchange carriers' copper-
based network; (iv) the significant access charges interexchange carriers are
required to pay to local exchange carriers to access the local exchange
carriers' networks; and (v) a willingness on the part of legislators to enact
and regulators to enforce legislation and regulations permitting and promoting
competition in the local exchange market.
31
<PAGE> 37
Competitors in the local exchange market, designated as competitive access
providers by the FCC, were first established in the mid-1980s. Initially,
competitive access providers were allowed to compete for only the non-switched
special access/private line service of the local exchange market. In New York
City, Chicago and Washington, D.C., newly formed companies provided dedicated
non-switched services by installing fiber optic facilities capable of connecting
points of presence of interexchange carriers within a metropolitan area,
connecting two or more customer locations with private line service and, in some
cases, connecting business and government users with interexchange carriers.
Competitive access providers used the substantial capacity and economies of
scale inherent in fiber optic cable to offer customers service that was
generally less expensive and of higher quality than could be obtained from the
local exchange carriers due, in part, to copper-based facilities used in many
local exchange carrier networks. In addition, competitive access providers
offered shorter installation and repair intervals and improved reliability in
comparison to the local exchange carriers.
Most of the early competitive access providers were entrepreneurial
enterprises that operated limited networks in the central business districts of
major cities in the United States where the highest concentration of voice and
data traffic, including interexchange carrier to interexchange carrier traffic,
were located. The provision of competitive access services, however, need not be
confined to large metropolitan areas. The Company believes that, through proper
design and installation of its network in its targeted markets, it can
effectively provide integrated local and long distance services not only to
interexchange carriers and large users, but also to residential and small to
medium-sized business customers.
As a result of regulatory changes and competitive trends, competitive local
telecommunications companies and access providers appear to be positioned for
dramatic growth. Effective in early 1994, FCC decisions announced in September
1992 and August 1993, as modified by subsequent FCC and court decisions (the
"Interconnection Decisions"), opened additional segments of the market by
permitting competitive access providers expanded authority to interconnect with
and use facilities owned by local exchange companies for interstate traffic. The
Interconnection Decisions, together with other statutory and regulatory
initiatives in the telecommunications industry (including the Telecommunications
Act), recently introduced to foster competition in the local exchange markets,
have stimulated demand for competitive local services.
As of March 31, 1996, a number of states, including Iowa, Illinois,
Minnesota and Wisconsin, have taken regulatory and legislative action to open
local telecommunications markets to various degrees of competition. The
Telecommunications Act preempts any remaining state prohibitions of local
competition and also forbids unreasonable restrictions on resale of local
services. The Company expects that continuing pro-competitive regulatory
changes, together with increasing customer demand, will create more
opportunities for competitive service providers to introduce additional
services, expand their networks and address a larger customer base.
CURRENT PRODUCTS AND SERVICES
The Company currently derives revenue from: (i) the sale of telemanagement
services, (ii) special access and private line services and (iii)
telecommunications network maintenance services. For the three months ended
March 31, 1996, these services represented 67%, 22% and 11%, respectively, of
the Company's total revenues. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
TELEMANAGEMENT SERVICES. End-user business customers in each of the 50
cities and towns currently served by the Company can obtain local, long distance
and ancillary (such as three-way calling and call transfer) services directly
from the Company. In order to provide these services, the Company, pursuant to
agreements with U S WEST for its Iowa customers and Ameritech for its Illinois
customers, partitions part of the central office switches serving the
communities in which the Company provides such services ("Centrex" services).
The Company's customers' telephone lines
32
<PAGE> 38
and numbers are assigned to the Company's portion of the switch. U S WEST or
Ameritech, as the case may be, bills the Company for all the lines that the
Company has assigned to the Company's customers and provides the Company with
call detail reports, which enable the Company to verify its customers' bills for
both local and long distance service.
The Company believes that these services are superior to a standard
business telephone line, since the Company can offer features, such as three-way
calling, consultation hold and call transfer, at no extra charge to the end
user. Certain other custom calling features are also available at additional
cost to the end user. Because the Company has also purchased the "Centrex
Management System" and the "Centrex Mate Service" from U S WEST and Ameritech,
respectively, Company personnel have on-line access to U S WEST and Ameritech
facilities and may make changes to the customers' services electronically and
quickly. By using Centrex service instead of a private branch exchange ("PBX")
to direct their telecommunications traffic, customers can also avoid the large
investment in equipment required and the fixed costs associated with maintaining
a PBX network infrastructure. The Company's telemanagement services allow small
to mid-sized business customers, which may lack the resources to support their
own PBX, to benefit from a sophisticated telecommunications system managed by
industry experts.
The Company recently entered into a settlement agreement with U S WEST in
connection with a complaint brought against U S WEST by the Company before the
Iowa Utilities Board. The settlement agreement permits the Company to obtain
access to the partitioned portion of U S WEST central office switches in Iowa
until March 18, 2001 and contains rates that may not be increased by U S WEST
unless the rates are renegotiated by the parties based on U S WEST's rates for
access to unbundled elements of its network. See "-- Legal Proceedings." In
Illinois, the Company's seven-year agreements with Ameritech extend through 2001
or 2002 and provide for stabilized rates that may not be unilaterally increased
by Ameritech.
The Company provides long distance service by purchasing capacity, in bulk,
from WorldCom Network Services, Inc., d/b/a Wiltel ("WilTel") and a wholly owned
subsidiary of WorldCom, Inc., and routing its customers' long distance traffic
over this capacity. The Company is subject to certain minimum monthly purchase
and minutes-of-usage requirements under its agreement with WilTel. If the
Company fails to meet the minimum purchase requirement in any month, it is
obligated to pay WilTel the difference between its actual purchases and the
minimum commitment. If the Company fails to meet the minimum minutes-of-usage
requirement in any month, it is obligated to pay WilTel an amount equal to the
difference between its actual usage and the minimum usage requirement multiplied
by a flat rate per minute. The Company has consistently met the minimum purchase
requirements and generally has met the minimum usage requirements under its
agreement with WilTel. The Company did, however, fail to meet the minimum usage
requirements from December 1994 through February 1995, which obligated the
Company to pay WilTel an aggregate of approximately $67,000. The Company
believes that it will be able to continue to meet such requirements in the
future. Because of the many potential suppliers of wholesale long distance
services in the marketplace, the Company currently expects that it will be able
to continue to obtain favorable wholesale long distance pricing.
The Company generally offers its customers local service at prices that are
substantially similar to the published retail local exchange carrier rates for
basic business service provided by the incumbent local exchange carrier. Long
distance rates generally are calculated by totaling each customer's monthly
calls and comparing the total charges that would be applicable to that
customer's calls under each of the pricing plans of the major long distance
carriers that currently are most popular with the Company's customers. The
Company then bills the customer the lowest long distance charges identified in
this comparison. Specifically, the Company's billing software enables the
Company to calculate the monthly charges that each customer would be billed
based on the customer's actual calls under each of several long distance plans
offered by AT&T, MCI and Sprint and, in certain instances, other rates agreed to
by the Company. The customer is then billed an amount equal to such "lowest
cost" monthly charges calculated using this software, minus any
33
<PAGE> 39
discount to which the customer may be entitled as a result of having made a
long-term commitment to use the Company's services. Currently, the Company
compares its customers' monthly calls to the following plans offered by other
long distance carriers:
Outbound Products. AT&T Commercial Long Distance; AT&T CustomNet; AT&T
ProWATS/Plan Q; AT&T Megacom; AT&T Uniplan; MCI Commercial Dial 1; MCI
Prism Plus; MCI Preferred; MCI Vision (Switched Access); MCI Vision
(Dedicated Access); MCI Prism I; Sprint Business Sense; Sprint Business
Sense ($200 minimum usage required); Sprint Clarity "Most for Business";
Sprint Clarity (Dedicated Access); and Sprint UltraWATS.
800 Service Products. AT&T Readyline; AT&T Starterline (Plan K); AT&T
Megacom 800; AT&T Uniplan 800; MCI Business Line 800; MCI Preferred 800;
MCI Vision 800; MCI 800; Sprint FONline 800; Sprint Business Sense ($0
commitment); Sprint Business Sense ($200 minimum usage required); Sprint
Clarity 800; and Sprint Ultra 800.
The Company's average telemanagement service contract has a 50-month term.
The Company also offers other long distance rates to certain customers, based on
the customers' particular needs. The Company believes that its method of
computing long distance service rates is an important factor in attracting and
retaining customers.
The Company has developed the software that performs its long distance
rating analysis. Like other Company software, it is designed around the customer
rather than around a given product. The Company has also developed and installed
state-of-the-art, "customer-focused" software for providing integrated
telecommunications services. This software permits the Company to present its
customers with one fully integrated monthly billing statement for local, long
distance, 800, international and travel card services. The Company believes that
its customer-focused software platform is an important element in the marketing
of its telecommunications services and gives it a competitive advantage in the
marketplace.
The Company estimates that as of March 31, 1996, after 27 months of
operations, it had a market share of approximately 16% of business local
telephone lines in its Iowa markets (based on 1994 market data) and a market
share of approximately 10% of business local telephone lines in its Illinois
markets (based on 1994 Iowa market data, assuming that the Company's Illinois
markets are substantially similar to the Company's Iowa markets). As of March
31, 1996, the Company was providing, on a retail basis, approximately 41,000
lines in those markets, primarily to small and mid-sized business customers.
Since beginning sales activities in January 1994, the Company has increased its
revenue 367% from the sale of bundled local and long distance products from $4.6
million for the year ended December 31, 1994 to $21.5 million for the year ended
December 31, 1995.
SPECIAL ACCESS AND PRIVATE LINE SERVICES. The Company currently provides,
on a private carrier basis, a wide range of special access and private line
services to its interexchange carrier and end-user (including two cable
television company) customers. These services include POP-to-POP special access,
end user/interexchange carrier special access and private line services. POP-
to-POP special access services provide telecommunications lines that link the
points of presence ("POPs") of one interexchange carrier, or the POPs of
different interexchange carriers, in a market, allowing these POPs to exchange
telecommunications traffic for transport to final destinations. End
user/interexchange carrier special access services provide telecommunications
lines that connect an end user (such as a large business) to the local POP of
its selected interexchange carrier. Private line services provide
telecommunications lines that connect various locations of a customer's
operation to transmit internal voice, video and/or data traffic.
34
<PAGE> 40
To provide these services, the Company offers various types of highly
reliable fiber optic lines that operate at different speeds and handle varying
amounts of traffic to provide tailor-made solutions to meet its customers'
needs. These lines include:
DS-0. A dedicated line that meets the requirements of everyday
business communications, with transmission capacity of up to 64 kilobits of
bandwidth per second (one voice-grade equivalent circuit). This service
offers a basic low-capacity dedicated digital channel for connecting
telephones, fax machines, personal computers and other telecommunications
equipment.
DS-1. A high-speed channel typically linking high volume customer
locations to interexchange carriers or other customer locations. Used for
voice transmissions as well as the interconnection of local area networks,
DS-1 service accommodates transmission speeds of up to 1.544 megabits per
second, the equivalent of 24 voice-grade equivalent circuits. The Company
offers this high-capacity service for customers who need a larger
communications pipeline.
DS-3. A very high-capacity digital channel with transmission capacity
of 45 megabits per second, which is equivalent to 28 DS-1 circuits or 672
voice-grade circuits. This is a digital service used by interexchange
carriers for central office connections and by some large commercial users
to link multiple sites.
The Company's networks are designed to support this wide range of
communications services, provide increased network reliability and reduce costs
for its customers. The Company's network consists of fiber optic cables, which
typically contain between 24 and 144 fiber strands, each of which is capable of
providing many telecommunications circuits. A single pair of fibers on the
Company's network can currently transmit 32,256 simultaneous voice
conversations, whereas a typical pair of copper wires can currently carry a
maximum of 24 digitized simultaneous voice conversations. The Company expects
that continuing developments in compression technology and multiplexing
equipment will increase the capacity of each fiber, thereby providing more
capacity at relatively low incremental cost.
NETWORK MAINTENANCE SERVICES. In 1990, the State of Iowa authorized
construction of Parts I and II of the Iowa Communications Network. Parts I and
II, which were completed in 1993 and are owned by the State of Iowa, provide
fiber optic connections to over 100 classrooms or other meeting facilities in
Iowa, and are used primarily for interactive distance learning, telemedicine and
the State's own long distance telephone traffic. The Company maintains Parts I
and II of the 2,900 miles of the Iowa Communications Network pursuant to the
Iowa Communications Network Maintenance Contract. The Company's maintenance
activities under the Iowa Communications Network Maintenance Contract are
available on a 24-hour-per-day, 365-days-per-year basis, and consist of alarm
monitoring, repair services (include splicing, digital circuit card replacement,
cable relocation and circuit installation testing) and cable location services.
The Iowa Communications Network Maintenance Contract expires in 2004.
For its services under the Iowa Communications Network Maintenance
Contract, the Company receives approximately $2.9 million per year, plus an
additional amount based on an hourly rate for certain overtime, equipment and
repair supervision activities. The Company's network maintenance activities are
provided by a 42-member team headquartered on-site at the Iowa Communications
Network network operations center, which is located at the STARC National Guard
Armory in Des Moines, Iowa. The Company believes that the expertise in fiber
optic maintenance developed through the maintenance of the Iowa Communications
Network will provide significant advantages in maintenance of the Company's own
network facilities. Because commercial telecommunications use of the Part I and
II segments is forbidden, however, neither the Company nor any other
telecommunications carrier may use the Part I and II capacity to provide
telecommunications services to customers.
35
<PAGE> 41
EXPANSION OF CERTAIN FACILITIES-BASED SERVICES
The Company currently is constructing network that will enable it, upon
receipt of all necessary regulatory approvals, to serve its end-user customers
on a local switched basis as well as to serve other wireline and wireless
carriers on a wholesale basis.
The Company has leased and is currently testing a state-of-the-art
high-capacity digital AT&T switch and plans to acquire additional switches in
the future. Although the Company is not currently engaged in negotiations to
acquire additional switches, such products are readily available from several
suppliers, and the Company does not believe it will experience any difficulties
or delays when it determines to acquire additional switches. It is anticipated
that these switches will provide the switching platform for the local exchange
switched telephone and long distance services to be offered by the Company.
Given the size and regional concentration of the Company's markets, available
technology and current cost structures, the Company plans ultimately to deploy a
hubbed switching strategy, whereby one or more central switches would serve
multiple markets via remote switching modules.
In March 1995, the Iowa Utilities Board approved the Company's application
for authorization to provide competitive switched local telephone service to
business and residential customers in Cedar Rapids, Iowa. In April 1996, the
Company received similar approval from the Illinois Commerce Commission to offer
such service in Illinois cities other than in Chicago (which was not included in
the Company's application). The Company intends to seek authorizations from the
appropriate public utility commissions to provide similar services in other
markets served by the Company.
Although the Company has made no final determinations as to its target
markets for facilities-based switched services, the Company intends initially to
provide facilities-based switched services in Cedar Rapids, Des Moines,
Waterloo, Cedar Falls, Dubuque, Sioux City, Council Bluffs, and Iowa City, Iowa
and the Quad Cities of Iowa/Illinois (Davenport, Bettendorf, Rock Island and
Moline), among other places. The Company plans to expand its facilities-based
services to other cities as its network develops and its market penetration
increases.
For a detailed description of the expansion of the Company's fiber optic
network, see "-- Network Facilities."
WIRELESS SERVICES
The Company does not currently offer PCS or cellular services, and the
Company has no specific plans to obtain PCS or other wireless licenses at this
time, although the Company is considering participating in future FCC auctions
of PCS licenses. The Company believes that the market for wireless
telecommunications services is likely to expand significantly as equipment costs
and service rates continue to decline, equipment becomes more convenient and
functional and wireless services become more diverse. The Company also believes
that wireline and wireless markets are converging, and that providers of
wireless services increasingly will offer, in addition to products that
supplement a customer's landline communications (similar to cellular telephone
services in use today), wireline replacement products that may result in
wireless services becoming the customer's primary mode of communication. The
Company anticipates that in the future there could potentially be eight wireless
competitors in its current and/or target markets: two existing cellular
providers and, in view of the ongoing PCS auctions for spectrum in these
markets, as many as six additional PCS providers.
As the wireline and wireless markets converge, the Company believes that it
can identify opportunities to generate revenues from the wireless industry on
both a wholesale and a retail basis. On a wholesale basis, these opportunities
may include (i) leasing tower sites to wireless providers, (ii) switching
wireless traffic through the Company's switching platform and (iii) transporting
wireless traffic using the Company's fiber optic network to interconnect
wireless providers' cell sites or to connect such sites to either the Company's
switches or to switches of
36
<PAGE> 42
other providers of wireline services. In May 1996, the Company entered into an
agreement with a paging company to provide access to the towers controlled by
the Company. On a retail basis, the Company believes that it will be able to
enter into "bundling/branding" arrangements with both cellular and PCS companies
on favorable economic terms, and would also consider acquiring wireless licenses
in its targeted markets if such opportunities become available on terms that the
Company finds economically attractive. However, the Company has no current or
pending negotiations, arrangements or agreements to acquire the ability to
provide wireless services. See "Risk Factors -- Wireless Competition."
NETWORK FACILITIES
As the incumbent local exchange carriers are compelled, by regulatory
changes and competitive forces, to "unbundle" their network components and to
permit resale of their products, the Company expects to be able to provide its
customers with a full range of telecommunications services using a combination
of its own network, the networks of the incumbent local exchange carriers and
the networks of other competitive carriers.
In April 1995, as part of its overall business strategy, the Company
acquired from MidAmerican approximately 120 miles of fiber optic network through
its acquisition of MWR. MWR is a competitive access provider which currently
owns and operates approximately 145 miles of fiber optic network and offers
special access and private line services to 73 large businesses, institutional
customers and interexchange carriers, primarily in Des Moines, Iowa. This
strategic acquisition positioned the Company as the only competitive access
provider in the Des Moines market. The Company believes the already-installed
MWR network is an important aspect of its efforts to become the first state wide
integrated telecommunications provider.
In 1995, the Iowa General Assembly passed legislation to extend the Iowa
Communications Network to 543 more "endpoints" (which are usually located in
schools or public libraries) throughout the state (the "Part III segments"). The
majority of these fiber optics links, unlike Parts I and II of the Iowa
Communications Network, are not to be owned by the State of Iowa, but are to be
leased from a private entity, such as the Company. As a result of public
bidding, the Company has the right to build and then lease capacity to the State
of Iowa on 265 of such segments. Under its lease agreements with the State, the
Company is currently constructing a "fiber-rich" broadband network, on which the
State of Iowa has agreed to lease one DS-3 circuit for a period of seven years
for a total aggregate lease cost of approximately $30.5 million. Upon completion
of installation of each segment, the leases provide that the State of Iowa will
make a one-time up-front lease payment to the Company for the capacity, with
nominal monthly lease payments thereafter. At the end of a seven-year period,
the leases may be extended, upon terms to be mutually agreed upon. During the
term of the leases, the State may order additional DS-3 circuits at a mutually
agreed upon price.
The Company has reached agreements with its electric utility stockholders
(MidAmerican and IES) that allow the Company to make use of those utilities'
underground conduits, distribution poles, transmission towers and building
entrances in exchange for rights by such stockholders to use certain capacity on
the Company's network. These agreements give the Company access to rights-of-way
in Iowa and in certain portions of Illinois for installation of the Company's
networks. The Company's access to these rights-of-way are expected to have a
significant positive impact on the Company's capital costs for network
construction and the speed with which the Company can construct its network. The
Company believes that its strategic relationships with its electric utility
stockholders give it a significant competitive advantage.
Concurrently with construction of the Part III segments, the Company is
also installing low-cost network facilities that are expected to form a series
of fiber optic "self-healing rings" intended to enable the Company to provide
facilities-based local and long distance service to most significant cities and
towns in Iowa. Thus, the Company believes it is well positioned to become the
first
37
<PAGE> 43
facilities-based state-wide integrated provider of competitive
telecommunications services in the Midwest.
The Company expects to build a total of 6,000 route miles of fiber in the
next five years. Approximately two-thirds of this fiber capacity will be in the
State of Iowa, with the balance built throughout the Company's other target
markets. The Company will decide to begin construction of fiber in a market
based on various economic factors, including: (i) the number of its customers in
a market, (ii) the anticipated operating cost savings associated with such
construction and (iii) any strategic relationships with owners of existing
infrastructure (e.g., utilities and cable operators).
SALES AND MARKETING
Marketing of the Company's telemanagement services is handled by a sales
and marketing group which, as of March 31, 1996, included 108 direct sales
personnel located both at the Company's headquarters in Cedar Rapids and in 27
branch sales offices. The Company's sales force is trained to emphasize the
Company's customer-focused sales and customer service efforts. The sales
employees make personal calls to prospective and existing customers, conduct
analyses of customers' call usage histories, and demonstrate that the Company's
software systems will rate the customers' calls by comparison to the lowest cost
plan of the most popular business calling plans offered by AT&T, MCI and Sprint.
The Company estimates that as of March 31, 1996, after 27 months of
operations, it had a market share of approximately 16% of business local
telephone lines in its Iowa markets (based on 1994 market data) and a market
share of approximately 10% of business local telephone lines in its Illinois
markets (based on 1994 Iowa market data, assuming that the Company's Illinois
markets are substantially similar to the Company's Iowa markets). As of March
31, 1996, the Company was providing, on a retail basis, approximately 41,000
lines in those markets, primarily to small and medium-sized business customers.
Since beginning sales activities in January 1994, the Company has increased its
revenues 367% from the sale of bundled local and long distance products from
$4.6 million for the year ended December 31, 1994 to $21.5 million for the year
ended December 31, 1995.
The Company also emphasizes its 24-hours-per-day, 365-days-per-year
customer service center, which a customer may call with any question or problem
regarding the Company's services. The Company's employees answer customer
service calls directly rather than requiring customers to use an automated
queried message system. The Company believes that its emphasis on a "single
point of contact" for meeting the customer's telecommunications needs, as well
as its ability to provide one bill for both local and long distance service, is
very appealing to its prospective customers.
To date, the Company has directed its telemanagement sales efforts
primarily toward small and medium-sized businesses. The Company has recently
begun marketing its telemanagement services to residential users through the use
of telemarketers. As of March 31, 1996, each of the Company's end-user customers
had, on average, slightly more than four telecommunications lines and expended
approximately $300 per month, in aggregate, on local and long distance services.
Sales and marketing of the Company's competitive access services are
handled by a six-member sales staff located in Des Moines and Cedar Rapids.
These sales people work closely with the Company's network engineers to design
and market special access and private line services.
In 1996 and 1997, the Company expects to expand its local and long distance
sales and marketing efforts into Minnesota, Wisconsin and South Dakota and
continue its expansion in Iowa and Illinois. However, the Telecommunications Act
also provides local exchange carriers, particularly the Regional Bell Operating
Companies, with new competitive opportunities and with increased pricing
flexibility.
38
<PAGE> 44
COMPETITION
The telecommunications industry is highly competitive. The Company faces
intense competition from local exchange carriers, including the Regional Bell
Operating Companies (primarily U S WEST and Ameritech) and the General Telephone
Operating Companies, which currently dominate their local telecommunications
markets. The Company also competes with long distance carriers in the provision
of long distance services. The long distance market is dominated by three major
competitors, AT&T, MCI and Sprint. Hundreds of other companies also compete in
the long distance marketplace. Other competitors of the Company may include
cable television companies, competitive access providers, microwave and
satellite carriers, wireless telecommunications providers, teleports and private
networks owned by large end-users. In addition, the Company competes with
equipment vendors and installers and telecommunications management companies
with respect to certain portions of its business. Many of the Company's existing
and potential competitors have financial and other resources far greater than
those of the Company. See "Risk Factors -- Wireline Competition."
The Company believes that the Telecommunications Act and other state
legislative initiatives and developments in Illinois, Iowa and other states
within the Company's target markets, as well as a recent series of transactions
and proposed transactions between telephone companies, long distance carriers
and cable companies, increase the likelihood that barriers to local exchange
competition will be substantially reduced or removed. These initiatives include
requirements that the Regional Bell Operating Companies permit entities such as
the Company to interconnect to the existing telephone network, to purchase, at
cost-based rates, access to unbundled network elements, to enjoy dialing parity,
to access rights-of-way and to resell services offered by the incumbent local
exchange carriers. See "-- Regulation." However, incumbent local exchange
carriers also have new competitive opportunities. The Telecommunications Act
removes previous restrictions concerning the provision of long distance service
by the Regional Bell Operating Companies and also provides them with increased
pricing flexibility. Under the Telecommunications Act, the Regional Bell
Operating Companies will, upon the satisfaction of certain conditions, be able
to offer long distance services that would enable them to duplicate the
"one-stop" integrated telecommunications approach used by the Company. The
Company believes that it has certain advantages over these companies in
providing its telecommunications services, including management's prior
experience in the competitive telecommunications industry and the Company's
emphasis on marketing (primarily using a direct sales force) and on responsive
customer service. However, there can be no assurance that the anticipated
increased competition will not have a material adverse effect on the Company. In
addition, if regulators allow incumbent local exchange carriers, particularly
the Regional Bell Operating Companies, to lower their rates for access and
private line services, to engage in unreasonable volume and term discount
pricing practices for their customers or to charge alternative providers such as
the Company excessive fees for interconnection to the local exchange carriers'
networks, the Company could be at a competitive disadvantage. See "Risk
Factors -- Regulation" and "-- Regulation."
The Company believes that there are currently no other competitive access
providers operating or building networks in any of the Company's current
markets. Based on management's experience, the initial market entrant with an
operational fiber optic competitive access provider network generally enjoys a
competitive advantage over other competitive access providers that later attempt
to enter the market, because it has the first opportunity to contact customers
who are willing to switch from the local exchange carrier serving the market.
Competition for local and access telecommunications services is based
principally on price, quality, network reliability, customer service and service
features. The Company believes that its management expertise allows it to
compete effectively with the incumbent local exchange carriers. The Company
generally offers its customers local exchange services at prices that are
substantially similar to the established retail local exchange carrier rates for
basic business service, while generally providing enhanced calling features and
a higher level of customer service. Long distance
39
<PAGE> 45
rates ensure that each customer receives the lowest rate charged under the most
popular pricing plans of the major long distance carriers. The Company's fiber
optic networks will provide both diverse access routing and redundant
electronics, design features not widely deployed by the local exchange carriers'
networks.
REGULATION
OVERVIEW. The Company's services are subject to federal, state and local
regulation. The FCC exercises jurisdiction over all facilities of, and services
offered by, telecommunications common carriers to the extent those facilities
are used to provide, originate or terminate interstate or international
communications. State regulatory commissions retain some jurisdiction over the
same facilities and services to the extent they are used to originate or
terminate intrastate common carrier communications. Local governments may
require the Company to obtain licenses, permits or franchises regulating use of
public rights-of-way necessary to install and operate its networks.
The Company, through its wholly owned subsidiary McLeod Telemanagement,
holds various federal and state regulatory authorizations and often joins other
industry members in seeking regulatory reform at the federal and state levels to
open additional telecommunications markets to competition.
The Company, through its wholly owned subsidiary MWR, provides certain
competitive access services as a private carrier on a non-regulated basis. In
general, a private carrier is one that provides service to customers on an
individually negotiated contractual basis, as opposed to a common carrier that
provides service to the public on the basis of generally available rates, terms,
and conditions. The Company believes that MWR's private carrier status is
consistent with applicable federal and state laws, as well as regulatory
decisions interpreting and implementing those laws as of the date of this
Prospectus. Should such laws and/or regulatory interpretations change in the
future to reclassify MWR's regulatory status, whether as a result of passage of
the Telecommunications Act or other regulatory developments, the Company
believes that compliance with such reclassification will not have a material
adverse effect on the Company.
FEDERAL REGULATION. The Telecommunications Act became effective February
8, 1996. The Telecommunications Act preempts state and local laws to the extent
that they prevent competitive entry into the provision of any telecommunications
service. Subject to this limitation, however, the state and local governments
retain most of their existing regulatory authority. The Telecommunications Act
imposes a variety of new duties on incumbent local exchange carriers in order to
promote competition in local exchange and access services. Some smaller
telephone companies may seek suspension or modification of these duties, and
some companies serving rural areas are exempt from these duties. Some duties are
also imposed on non-incumbent local exchange carriers, such as the Company. The
duties created by the Telecommunications Act include the following:
Reciprocal
Compensation Requires all local exchange carriers to complete
calls originated by competing carriers under
reciprocal arrangements at prices based on a
reasonable approximation of incremental cost or
through mutual exchange of traffic without explicit
payment.
Resale Requires all local exchange carriers to permit
resale of their telecommunications services without
unreasonable restrictions or conditions. In
addition, incumbent local exchange carriers are
required to offer wholesale versions of all retail
services to other telecommunications carriers for
resale at discounted rates, based on the costs
avoided by the incumbent local carrier in the
wholesale offering.
Interconnection Requires incumbent local exchange carriers to
permit their competitors to interconnect with their
facilities at any technically
40
<PAGE> 46
feasible point within their networks, on
nondiscriminatory terms, at prices based on cost
(which may include a reasonable profit). At the
option of the carrier seeking interconnection,
physical collocation of the requesting carrier's
equipment in the incumbent local exchange carrier's
premises must be offered, except where the
incumbent local exchange carrier can demonstrate
space limitations or other technical impediments to
collocation.
Unbundled Access Requires incumbent local exchange carriers to
provide nondiscriminatory access to unbundled
network elements (including network facilities,
equipment, features, functions, and capabilities)
at any technically feasible point within their
networks, on nondiscriminatory terms, at prices
based on cost (which may include a reasonable
profit).
Number Portability Requires all local exchange carriers to permit
users of telecommunications services to retain
existing telephone numbers without impairment of
quality, reliability or convenience when switching
from one telecommunications carrier to another.
Dialing Parity Requires all local exchange carriers to provide
"1+" equal access to competing providers of
telephone exchange service and toll service, and to
provide nondiscriminatory access to telephone
numbers, operator services, directory assistance,
and directory listing, with no unreasonable dialing
delays.
Access to
Rights-of-Way Requires all local exchange carriers to permit
competing carriers access to poles, ducts, conduits
and rights-of-way at regulated prices.
Incumbent local exchange carriers are required to negotiate in good faith
with carriers requesting any or all of the above arrangements. If the
negotiating carriers cannot reach agreement within a prescribed time, either
carrier may request binding arbitration of the disputed issues by the state
regulatory commission.
The Telecommunications Act also eliminates previous prohibitions on the
provision of interLATA long distance services by the Regional Bell Operating
Companies and the General Telephone Operating Companies. The Regional Bell
Operating Companies are now permitted to provide interLATA long distance service
outside those states in which they provide local exchange service
("out-of-region long distance service") upon receipt of any necessary state
and/or federal regulatory approvals that are otherwise applicable to the
provision of intrastate and/or interstate long distance service. Under the
Telecommunications Act, the Regional Bell Operating Companies will be allowed to
provide long distance service within the regions in which they also provide
local exchange service ("in-region service") upon specific approval of the FCC
and satisfaction of other conditions, including a checklist of interconnection
requirements. The General Telephone Operating Companies are permitted to enter
the long distance market without regard to limitations by region, although
regulatory approvals otherwise applicable to the provision of long distance
service will need to be obtained. The General Telephone Operating Companies are
also subject to the provisions of the Telecommunications Act that impose
interconnection and other requirements on local exchange carriers.
The Telecommunications Act imposes certain restrictions on the Regional
Bell Operating Companies in connection with the Regional Bell Operating
Companies' entry into long distance services. Among other things, the Regional
Bell Operating Companies must pursue such activities only through separate
subsidiaries with separate books and records, financing, management and
employees, and all affiliate transactions must be conducted on an arm's length
and nondiscrimina-
41
<PAGE> 47
tory basis. The Regional Bell Operating Companies are also prohibited from
jointly marketing local and long distance services, equipment and certain
information services unless competitors are permitted to offer similar packages
of local and long distance services in their market. Further, the Regional Bell
Operating Company must obtain in-region long distance authority before jointly
marketing local and long distance services in a particular state. Additionally,
AT&T and other major carriers serving more than 5% of the nation's presubscribed
long distance access lines are also restricted, under certain conditions, from
packaging their long distance services and local services provided over Regional
Bell Operating Company facilities. These restrictions do not, however, apply to
the Company because it does not serve more than 5% of the nation's presubscribed
access lines.
Prior to passage of the Telecommunications Act, the FCC had already
established different levels of regulations for dominant and non-dominant
carriers. For domestic common carrier telecommunications regulation, large local
exchange carriers and the Regional Bell Operating Companies are currently
considered dominant carriers for the provision of interstate access services,
while other interstate service providers, such as the Company, are considered
non-dominant carriers. The FCC has recently proposed that the Regional Bell
Operating Companies offering out-of-region interstate long distance services be
regulated as non-dominant carriers, as long as such services are offered by an
affiliate of the Regional Bell Operating Company that complies with certain
structural separation requirements. The FCC regulates many of the rates, charges
and services of dominant carriers to a greater degree than non-dominant
carriers.
As a non-dominant carrier, the Company may install and operate facilities
for the transmission of domestic interstate communications without prior FCC
authorization, although FCC authorization is required for the provision of
international telecommunications by non-dominant carriers. Services of
non-dominant carriers are subject to relatively limited regulation by the FCC.
Non-dominant carriers currently are required to file tariffs listing the rates,
terms and conditions of interstate and international services provided by the
carrier. Periodic reports concerning the carrier's interstate circuits and
deployment of network facilities also are required to be filed. The FCC
generally does not exercise direct oversight over cost justification and the
level of charges for services of non-dominant carriers, although it has the
power to do so. The Company must offer its interstate services on a
nondiscriminatory basis, at just and reasonable rates, and remains subject to
FCC complaint procedures. Pursuant to these FCC requirements, the Company's
subsidiary, McLeod Telemanagement, has filed and maintains with the FCC a tariff
for its interstate and international services. All of the interstate and
international retail "basic" services (as defined by the FCC) provided by the
Company (through such subsidiary) and the rates charged for those services are
described therein. McLeod Telemanagement also has obtained FCC authority to
provide international services.
On March 21, 1996, the FCC initiated a rulemaking proceeding in which it
proposed to eliminate the requirement that non-dominant interstate carriers such
as the Company maintain tariffs on file with the FCC for domestic interstate
services. The FCC's proposed rules are pursuant to authority granted to the FCC
in the Telecommunications Act to "forebear" from regulating any
telecommunications service provider if the FCC determines that the public
interest will be served. The FCC also requested public comment on whether any
other regulations currently imposed on non-dominant carriers also should be
eliminated pursuant to the FCC's "forebearance" authority. It is not known when
the FCC will take final action on this proposal.
The FCC also imposes prior approval requirements on transfers of control
and assignments of operating authorizations. The FCC has the authority to
generally condition, modify, cancel, terminate or revoke operating authority for
failure to comply with federal laws and/or the rules, regulations and policies
of the FCC. Fines or other penalties also may be imposed for such violations.
There can be no assurance that the FCC or third parties will not raise issues
with regard to the Company's compliance with applicable laws and regulations.
The Company does not currently hold any radio licenses issued by the FCC,
although FCC radio licenses may be acquired in the future in connection with the
provision of wireless services. In
42
<PAGE> 48
general, applications for FCC radio licenses may be denied, and in extreme cases
radio licenses may be revoked after grant, if the FCC finds that an entity lacks
the requisite "character" qualification to be a licensee. In making that
determination, the FCC considers whether an applicant or licensee has been the
subject of adverse findings in a judicial or administrative proceeding
involving, among other things, the possession or sale of unlawful drugs, fraud,
antitrust violations or unfair competition.
Under the Telecommunications Act, non-U.S. citizens or their
representatives, foreign governments or their representatives, or corporations
organized under the laws of a foreign country may not own, in the aggregate,
more than 20% of a common carrier radio licensee; or more than 25% of the parent
of a common carrier radio licensee if the FCC determines that the public
interest would be served by prohibiting such ownership. If the Company acquires
or is granted FCC radio licenses in the future, the Company will be required to
comply with these foreign ownership restrictions. In addition, the FCC has
imposed reporting requirements with respect to foreign affiliations between U.S.
international and foreign telecommunications carriers, as well as reports of
certain investments by other foreign entities. Depending on the particular
foreign affiliate and its "home" market, the FCC may limit the size of the
foreign affiliate's investment in the U.S. carrier or subject the U.S. carrier
to dominant carrier regulation on one or more international routes. The
Company's subsidiary, McLeod Telemanagement, holds FCC authority to provide
international services, and therefore is subject to the FCC's rules on foreign
affiliations.
Failure to comply with statutory requirements on foreign ownership of radio
licenses, or with the FCC's foreign affiliation reporting requirements, may
result in the FCC issuing an order to the entity requiring divestiture of alien
ownership to bring the entity into compliance with the Telecommunications Act
and the FCC's rules. In addition, fines, a denial of renewal or revocation of
radio licenses are possible. The Restated Certificate permits the Board to
redeem any of the Company's capital stock from stockholders to the extent
necessary to prevent the loss or secure the reinstatement of any license,
operating authority or franchise from any governmental authority. The Company
has no knowledge of any present alien ownership or affiliation with foreign
telecommunications carriers in violation of the Telecommunications Act or the
FCC's rules. See "Description of Capital Stock-- Certain Charter and Statutory
Provisions."
The FCC, through the Interconnection Decisions, has ordered the Regional
Bell Operating Companies and all but one of the other local exchange carriers
having in excess of $100 million in gross annual revenue for regulated services
to provide expanded interconnection to local exchange carrier central offices to
any competitive access provider, interexchange carrier or end user seeking such
interconnection for the provision of interstate access services. As a result,
the Company is able to reach most business customers in its metropolitan service
areas and can expand its potential customer base. The FCC has imposed mandatory
virtual collocation obligations on the local exchange carriers. Virtual
collocation is a service in which the local exchange carrier leases or purchases
equipment designated by the interconnector and exerts complete physical control
over this equipment, including central office installation, maintenance and
repair. Certain local exchange carriers have pending requests for judicial
review of the FCC's mandatory virtual collocation requirement. In addition, some
local exchange carriers have voluntarily filed tariffs making "physical
collocation" available, enabling the interconnector to place its equipment in
the local exchange carriers central office space. As noted above, the
Telecommunications Act now requires most incumbent local exchange companies to
offer physical collocation. Subsequent to the enactment of the
Telecommunications Act, the FCC has begun a series of expedited rulemaking
proceedings to implement the requirements of the Telecommunications Act
concerning interconnection with local exchange carrier facilities and other
essential terms of the relationships between competing local carriers.
When ordering interconnection, the FCC granted local exchange carriers
additional flexibility in pricing their interstate special and switched access
services on a central office specific basis. Under this pricing scheme, local
exchange carriers may establish pricing zones based on access traffic
43
<PAGE> 49
density and charge different prices for central offices in each zone. The
Company anticipates that the FCC will grant local exchange carriers increasing
pricing flexibility as the number of interconnections and competitors increases.
In a concurrent proceeding, the FCC enacted interim pricing rules that
restructure local exchange carrier switched transport rates in order to
facilitate competition for switched access.
STATE REGULATION. McLeod Telemanagement, the Company's subsidiary that
provides intrastate common carrier services, is also subject to various state
laws and regulations. Most public utilities commissions subject providers such
as the Company to some form of certification requirement, which requires
providers to obtain authority from the state public utilities commission prior
to the initiation of service. In most states, including Iowa and Illinois, the
Company also is required to file tariffs setting forth the terms, conditions and
prices for services that are classified as intrastate. The Company also is
required to update or amend its tariffs when it adjusts its rates or adds new
products, and is subject to various reporting and record-keeping requirements.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state law and/or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state utilities commissions or third parties will
not raise issues with regard to the Company's compliance with applicable laws or
regulations.
The Company, through McLeod Telemanagement, currently holds certificates to
offer local services through partitioning U S WEST switches in Iowa and
Ameritech switches in Illinois, has long distance authority in Iowa and Illinois
and has tariffs on file in these states, as necessary, governing the provision
of local and intrastate long distance services. In March 1995 and April 1996,
respectively, the Company received state regulatory approval in Iowa and in
Illinois to offer local switched services in Cedar Rapids, Iowa and in Illinois
cities other than Chicago. The Company intends to seek regulatory approval to
provide such services in other cities and towns in Iowa and other states
targeted by the Company in the Midwest when the economic terms of
interconnection with the incumbent local exchange carrier make the provision of
local switched services cost-effective. See "-- Expansion of Certain
Facilities-based Services." In addition, the Company holds a certificate to
provide local exchange and long distance services in North Dakota, although the
Company does not currently plan to begin service in North Dakota in the near
future. The Company also holds a certificate to offer long distance service in
Nebraska and has an application to provide long distance service pending before
the Missouri Public Service Commission. The Company also has applications
pending before the Minnesota, Wisconsin and South Dakota Public Utilities
Commissions for local and long distance operating authority. In addition, on
April 24, 1996, the Iowa Utilities Board issued an order indicating it would
approve the Company's application for authority to resell all U S WEST services
within the geographic area served by U S WEST in Iowa, subject to a requirement
that the Company file certain additional documentation regarding the Company's
intended service territory. The Company has filed additional material with the
Iowa Utilities Board in response to this order. The Company may also apply for
authority to provide services in other states in the future. While the Company
expects and intends to obtain necessary operating authority in each jurisdiction
where it intends to operate, there can be no assurance that each jurisdiction
will grant the Company's request for authority.
Although the Telecommunications Act preempts the ability of states to
forbid local service competition, it is so recently enacted that certain public
utilities commissions, such as Nebraska and Missouri, where the legality of such
competition was previously uncertain, have not yet taken regulatory or statutory
actions to comply with the Telecommunications Act. Furthermore, the
Telecommunications Act preserves the ability of states to impose reasonable
terms and conditions of service and other regulatory requirements. In the last
several years, Iowa, Illinois, Minnesota and
44
<PAGE> 50
Wisconsin have enacted broad changes in those states' telecommunications laws
that authorize the entry of competitive local exchange carriers and provide for
new regulations to promote competition in local and other intrastate
telecommunications services.
The Company believes that, as the degree of intrastate competition
increases, the states will offer the local exchange carriers increasing pricing
flexibility. This flexibility may present the local exchange carriers with an
opportunity to subsidize services that compete with the Company's services with
revenues generated from non-competitive services, thereby allowing incumbent
local exchange carriers to offer competitive services at prices below the cost
of providing the service. The Company cannot predict the extent to which this
may occur or its impact on the Company's business.
LOCAL GOVERNMENT AUTHORIZATIONS. The Company is required to obtain street
use and construction permits and licenses and/or franchises to install and
expand its fiber optic networks using municipal rights-of-way. In some
municipalities where the Company has installed or anticipates constructing
networks, it will be required to pay license or franchise fees based on a
percentage of gross revenues or on a per linear foot basis. There can be no
assurance that, following the expiration of existing franchises, fees will
remain at their current levels. In many markets, the local exchange carriers do
not pay such franchise fees or pay fees that are substantially less than those
required to be paid by the Company. To the extent that competitors do not pay
the same level of fees as the Company, the Company could be at a competitive
disadvantage. Termination of the existing franchise or license agreements prior
to their expiration dates or a failure to renew the franchise or license
agreements and a requirement that the Company remove its facilities or abandon
its network in place could have a material adverse effect on the Company.
EMPLOYEES
As of March 31, 1996, the Company employed a total of 462 individuals full
time. The Company believes that its future success will depend on its continued
ability to attract and retain highly skilled and qualified employees. The
Company believes that its relations with its employees are good.
PROPERTY
The Company leases offices and space in a number of locations, primarily
for sales offices and network equipment installations. In addition, the Company
owns 88 acres of undeveloped farm and forest land in southern Cedar Rapids,
Iowa. The Company's headquarters is housed in 55,000 square feet of office space
in Cedar Rapids, Iowa, under a lease expiring in March 2001.
LEGAL PROCEEDINGS
The Company is not aware of any material litigation against the Company.
The Company is involved in numerous regulatory proceedings before various public
utilities commissions, particularly the Iowa Utilities Board, as well as before
the FCC. The Company and Clark E. McLeod are also plaintiffs in a civil action,
seeking an unspecified amount of damages, and alleging that the defendants, Iowa
Network Services, Inc. ("INS") and William P. Bagley, the general manager of
INS, in his personal capacity, engaged in libel and other tortious acts against
Clark E. McLeod, the Company and its wholly owned subsidiaries, through the
publication and wide circulation of a "letter to the editor" sent to a number of
newspapers and others in August 1994. The lawsuit has been set for trial in
February 1997. See "Management -- Compensation Committee Interlocks and Insider
Participation."
The Company is dependent on the Regional Bell Operating Companies for
provision of its local and certain of its long distance services. U S WEST and
Ameritech are currently the Company's sole suppliers of access to local central
office switches. The Company uses such access to partition the local switch and
provide local service to its customers.
The Company purchases access in the form of a product generally known as
"Centrex." Without such access, the Company could not currently provide bundled
local and long distance services, although it could provide stand-alone long
distance service. Since the Company believes
45
<PAGE> 51
its ability to offer bundled local and long distance services is critical to its
current sales efforts, any successful effort by U S WEST or Ameritech to deny or
substantially limit the Company's access to partitioned switches would have a
material adverse effect on the Company.
On February 5, 1996, U S WEST filed tariffs and other notices announcing
its intention to limit future Centrex access to its switches by Centrex
customers (including the Company) throughout U S WEST's fourteen-state service
region, effective February 5, 1996. Although U S WEST stated that it would
"grandfather" existing Centrex agreements with the Company and permit the
Company to continue to use U S WEST's central office switches through April 29,
2005, it also indicated that it would not permit the Company to expand to new
cities and would severely limit the number of new lines it would permit the
Company to partition onto U S WEST's portion of the switches in cities currently
served by the Company. Because of U S WEST's commitment to "grandfather" service
to the Company, the Company does not believe its current customers are at risk
that service will be interrupted. The Company has challenged, or is challenging,
the U S WEST Centrex Action before the public utilities commissions in each of
the states served by U S WEST where the Company is doing business or currently
plans to do business. The Company based such challenges on its belief that the
U S WEST Centrex Action is unlawful under various federal and state laws,
regulations and policies precluding unreasonable restrictions on the resale of
telecommunications services and discrimination against entities such as the
Company with respect to access to local telecommunications services.
In Iowa, the Company filed a complaint with the Iowa Utilities Board
against U S WEST's actions and was granted interim relief on an ex parte basis
that allowed the Company to continue to expand to new cities and expand the
number of new lines partitioned onto U S WEST's switches. Subsequent to the
grant of interim relief, the Company on March 18, 1996 agreed to a settlement
agreement with U S WEST that permits the Company to continue to expand, without
restrictions, the number of new lines it serves in Iowa through March 18, 2001.
In addition, the settlement agreement provides that the Company may expand to
seven new markets (central offices) in Iowa per year through March 18, 2001. As
a result of the settlement agreement, the Company has withdrawn its complaint
before the Iowa Utilities Board. The Iowa Utilities Board may seek to review the
settlement agreement (although it has not indicated that it will do so), but the
Company expects that the settlement agreement will be approved if such review is
undertaken by the Iowa Utilities Board. In the event that the Iowa Utilities
Board refused to approve the settlement agreement, the Company would retain the
right to challenge the U S WEST Centrex Action on its merits; however, any such
refusal could materially adversely affect the Company's expansion plans and
prospects in Iowa pending a final decision by the Iowa Utilities Board.
Additionally, because MCI, AT&T and others have also challenged U S WEST's
action, the Iowa Utilities Board is continuing to review the U S WEST Centrex
Action.
Other telecommunication firms also have challenged the U S WEST Centrex
Action in each of the other states where U S WEST engages in local telephone
service. Oregon and Minnesota have rejected outright the tariffs filed by U S
WEST. Such a rejection may preclude U S WEST from withdrawing the Centrex
capability in such states, because the Telecommunications Act (which was enacted
into law three days after the original U S WEST tariff filings purporting to
withdraw/restrict the service were filed in Iowa and the other thirteen states)
requires U S WEST to permit resale of its services, including its Centrex
service, without unreasonable restrictions or conditions. Nevertheless, on May
2, 1996, U S WEST refiled its proposed limitations on Centrex service in
Minnesota, proposing to "grandfather" the service to existing customers as of
July 9, 1996.
No settlements or other resolutions have yet been effected with respect to
the Company's challenge to the U S WEST Centrex Action in states other than
Minnesota. There can be no assurance that the Company will succeed in its legal
challenges to U S WEST's action, or that this action by U S WEST, or similar
actions by other Regional Bell Operating Companies, will not have a material
adverse effect on the Company. See "-- Competition" and "Risk
Factors -- Dependence on Regional Bell Operating Companies."
46
<PAGE> 52
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are listed below. The
Board currently consists of seven directors, divided into three classes of
directors serving staggered three-year terms. The Company intends to expand the
Board to nine directors pursuant to an Investors' Agreement with certain
principal stockholders. See "-- Stockholders' Agreements." Directors and
executive officers of the Company are elected to serve until they resign or are
removed, or are otherwise disqualified to serve, or until their successors are
elected and qualified. Directors of the Company are elected at the annual
meeting of stockholders. Executive officers of the Company generally are
appointed at the Board's first meeting after each annual meeting of
stockholders. The ages of the persons set forth below are as of March 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY TERM AS DIRECTOR EXPIRES
- ------------------------------ --- ------------------------------- ------------------------
<S> <C> <C> <C>
Clark E. McLeod............... 49 Chairman, Chief Executive 1997
Officer and Director
Stephen C. Gray............... 37 President, Chief Operating 1999
Officer and Director
James L. Cram................. 52 Chief Accounting Officer and 1998
Director
Blake O. Fisher, Jr........... 52 Chief Financial Officer and
Treasurer
Kirk E. Kaalberg.............. 36 Senior Vice President, Network
Design and Development
Casey D. Mahon................ 44 Senior Vice President, General
Counsel and Secretary
Stephen K. Brandenburg........ 43 Senior Vice President,
Intelligent Technologies and
Systems
Thomas M. Parvin.............. 57 Senior Vice President,
Operations
David M. Boatner.............. 47 Senior Vice President, Sales
and Marketing
Russell E. Christiansen(1).... 60 Director 1998
Thomas M. Collins(1).......... 68 Director 1998
Paul D. Rhines(2)............. 52 Director 1999
Lee Liu(2).................... 63 Director 1997
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Clark E. McLeod. Mr. McLeod founded the Company and has served as
Chairman, Chief Executive Officer and a director of the Company since its
inception in June 1991. His previous business venture, Teleconnect, an
Iowa-based long distance telecommunications company, was founded in January
1980. Mr. McLeod served as Chairman and Chief Executive Officer of Teleconnect
from January 1980 to December 1988, and from December 1988 to August 1990, he
served as President of Telecom*USA, the successor to Teleconnect following its
merger with SoutherNet, Inc. in December 1988. By 1990, Telecom*USA had become
America's fourth largest long distance telecommunications company with nearly
6,000 employees. MCI purchased Telecom*USA in August 1990 for $1.25 billion.
47
<PAGE> 53
Stephen C. Gray. Mr. Gray has been Chief Operating Officer of the Company
since September 1992, President since October 1994 and a director since April
1993. Prior to joining the Company, Mr. Gray served from August 1990 to
September 1992 as Vice President of Business Services at MCI, where he was
responsible for MCI's local access strategy and for marketing and sales support
of the Business Markets division. From February 1988 to August 1990, he served
as Senior Vice President of National Accounts and Carrier Services for
Telecom*USA, where his responsibilities included sales, marketing, key contract
negotiations and strategic acquisitions and combinations. Prior to joining
Telecom*USA, from September 1986 to February 1988, Mr. Gray held a variety of
management positions with Williams Telecommunications Company, a long distance
telephone company. From August 1983 to September 1986, Mr. Gray held a variety
of management positions with Clay Desta Communications, Inc., a long distance
company.
James L. Cram. Mr. Cram has served as Chief Accounting Officer of the
Company since February 1996 and as a director since April 1993. From June 1991
to February 1996, he served as Chief Financial Officer and Treasurer of the
Company. From August 1990 to May 1991, Mr. Cram acted as a private financial
consultant. From December 1987 to August 1990, he served as Executive Vice
President of Finance of Long Distance Operations, Central Division of
Telecom*USA. From 1982 to December 1987, he served as Vice President, Chief
Financial Officer and Treasurer of Teleconnect. Prior to joining Teleconnect,
Mr. Cram served from 1973 to 1982 in various management positions with HawkBilt
Company, a farm equipment manufacturer, including Controller, Treasurer and
General Manager.
Blake O. Fisher, Jr. Mr. Fisher joined the Company as Chief Financial
Officer and Treasurer in February 1996 and served on the Board from April 1993
to February 1996. He served as Executive Vice President and Chief Financial
Officer of IES, a diversified electric utility holding company, from January
1991 to February 1996, during which period he was one of IES' nominees to the
Board. Mr. Fisher also served as President of IES Utilities Inc. from February
1995 to February 1996. Prior to joining IES, Mr. Fisher held a variety of
management positions with Consumers Power Company, an electric utility,
including Vice President of Finance and Treasurer.
Kirk E. Kaalberg. Mr. Kaalberg has served since March 1994 as the
Company's Senior Vice President, Network Design and Development where he is
responsible for the maintenance of the Iowa Communications Network and the
design and development of the Company's network and switching platforms. From
January 1992 to February 1994, he served as Vice President of the Company. From
August 1990 to January 1992, Mr. Kaalberg served as a senior manager of MCI,
where he managed a 175-person conference calling, financial and operations
group. From August 1987 to August 1990, Mr. Kaalberg was an employee of
Teleconnect and its successor, Telecom*USA, where he was responsible for
business planning and management information systems project prioritization.
From 1983 to 1987, he held a variety of product management positions with Banks
of Iowa, Computer Services, Inc., a computer services company, and Source Data
Systems, a software company.
Casey D. Mahon. Ms. Mahon is responsible for the legal and regulatory
affairs of the Company, which she joined in June 1993 as General Counsel. Ms.
Mahon has served as Senior Vice President of the Company since February 1996 and
as the Company's Secretary since July 1993. Prior to joining the Company, she
was engaged in the private practice of law, with emphasis on telecommunications,
regulatory and corporate law. From August 1990 to December 1990, she served as
Vice President of Corporate Affairs at MCI, where she assisted in transitional
matters relating to MCI's purchase of Telecom*USA. From March 1986 to August
1990, Ms. Mahon served as Senior Vice President, General Counsel and Secretary
of Teleconnect and its successor, Telecom*USA. From 1977 to 1986, Ms. Mahon
served in various legal, financial and faculty positions at the University of
Iowa.
Stephen K. Brandenburg. Mr. Brandenburg has served since June 1995 as
Senior Vice President, Intelligent Technologies and Systems of the Company,
where he is responsible for the
48
<PAGE> 54
design and deployment of the Company's internal computing systems and
operations. Prior to joining the Company, Mr. Brandenburg served from August
1990 to June 1995 as Vice President, Revenue Management Systems at MCI, where he
was responsible for MCI's 1,400 person business markets traffic/call processing,
order/entry, billing and calling card operations. From 1987 to August 1990, he
served as Senior Vice President of Information Systems at Teleconnect and its
successor, Telecom*USA. Prior to joining Teleconnect, Mr. Brandenburg held a
variety of information systems positions with academic medical centers,
including the Mayo Medical Clinic and the University of Wisconsin.
Thomas M. Parvin. Mr. Parvin joined the Company as Senior Vice President,
Operations in February 1996. From July 1995 to February 1996, Mr. Parvin served
as Vice President, Service Operations of Brooks Fiber Properties, Inc., a
competitive access provider. From August 1990 to July 1995, he served as
Director of Operations of MCI, with responsibility for the installation,
maintenance and operations of MCI's network facilities within a nine-state
region of the Midwest. From July 1988 to August 1990, Mr. Parvin served as
Senior Vice President of Operations of Teleconnect and its successor,
Telecom*USA. Prior to joining Teleconnect, Mr. Parvin held a variety of
positions with various telecommunications companies, including LDX Net, AT&T and
Southwestern Bell.
David M. Boatner. Mr. Boatner has served as Senior Vice President, Sales
and Marketing of the Company since February 1996. Prior to joining the Company,
Mr. Boatner served from February 1995 to February 1996 as Regional Vice
President of Sales of WorldCom, Inc., a long distance telecommunications
company, where he was responsible for sales in the central and southwest regions
of the United States. From May 1989 to January 1995, Mr. Boatner served as Vice
President for Commercial Sales of WilTel, Inc., a long distance
telecommunications company which was acquired by WorldCom, Inc. in January 1995.
Prior to joining WilTel, Inc., Mr. Boatner held a variety of positions at AT&T
and its Bell operating subsidiaries.
Russell E. Christiansen. Mr. Christiansen has been a director of the
Company since June 1995, during which time he has been MidAmerican's nominee to
the Board. Since June 1995, he has also been Chairman and Chairman of the Office
of the Chief Executive Officer of MidAmerican. Mr. Christiansen has been a
director of MidAmerican and its predecessors since 1983. He served as Chairman
and Chief Executive Officer of Midwest Resources Inc., the predecessor to
MidAmerican, from October 1992 to June 1995, President from 1990 to 1995 and
Vice Chairman and Chief Operating Officer from November 1990 to 1992. Mr.
Christiansen is also a director of Norwest Bank Iowa N.A., a financial
institution.
Thomas M. Collins. Mr. Collins has been a director of the Company since
April 1993. Mr. Collins is Chairman of Shuttleworth & Ingersoll, P.C., a law
firm in Cedar Rapids, Iowa, where he has practiced law since 1952. Mr. Collins
was a director of Teleconnect and its successor, Telecom*USA, from December 1988
to August 1990. He is also a director of APAC TeleServices, Inc., a
telemarketing company.
Lee Liu. Mr. Liu has been a director of the Company since April 1993,
during which time he has been one of IES' nominees to the Board. Mr. Liu has
served since July 1993 as Chairman of IES. He has also served as President and
Chief Executive Officer of IES since July 1991. From May 1986 to July 1991, Mr.
Liu was Chairman, Chief Executive Officer and President of the predecessor to
IES. Mr. Liu has worked for IES since 1957. Mr. Liu is also a director of Hon
Industries, an office furniture manufacturing company, Eastman Chemical Company,
a chemical company and the Principal Financial Group, a financial services
company.
Paul D. Rhines. Mr. Rhines has been a director of the Company since April
1993, during which time he has been the nominee of Allsop Venture Partners III,
L.P. ("Allsop") to the Board. He is a founder and a general partner of R.W.
Allsop and Associates, L.P., R.W. Allsop and Associates II Limited Partnership
and Allsop, three venture capital limited partnerships established in Cedar
Rapids, Iowa, in 1981, 1983 and 1987, respectively. He has served since 1987 as
a general partner
49
<PAGE> 55
of Mark Venture Partners, L.P., a venture capital limited partnership. He has
also served since 1980 as Executive Vice President and a director of RWA, Inc.,
a venture capital management firm. Mr. Rhines was a director of Teleconnect and
its successor, Telecom*USA from 1982 to 1990. He is also a director of American
Safety Razor Company, a consumer product manufacturing company.
STOCKHOLDERS' AGREEMENTS
The Company and certain of its stockholders are parties to a Shareholders'
Agreement and an Investment Agreement (the "Prior Stockholders' Agreements"), in
each case dated April 1, 1993, as amended, pursuant to which such stockholders
have agreed to vote their Common Stock so as to elect one director selected by
Allsop, two directors selected by IES (four directors selected by IES if there
are any shares of Class A Preferred Stock outstanding, none of which is
currently outstanding), one director selected by Clark E. McLeod, one director
and one "observor Board member" selected by MidAmerican, and three directors
selected together by such stockholders. Of the current directors, Mr. Rhines was
selected by Allsop, Mr. Liu was selected by IES (and the other director position
to be selected by IES is vacant), Mr. McLeod is himself a director, Mr.
Christiansen is the director selected by MidAmerican (and the "observor Board
member" position is vacant), and Messrs. Collins, Cram and Gray were selected by
such stockholders together. The Prior Stockholders' Agreements also contain
other provisions, including (without limitation) certain transfer restrictions,
rights of first refusal, preemptive rights and registration rights.
The Company has entered into an agreement (the "Investor Agreement") with
IES, MidAmerican and Clark E. and Mary E. McLeod (collectively, the "Investor
Stockholders") and certain other stockholders, pursuant to which the Prior
Stockholders' Agreements will be terminated as of the effective date of the
Registration Statement relating to this Offering (provided that such
effectiveness occurs on or before December 31, 1996 and the aggregate offering
price with respect to such Offering is expected to be at least $50 million). In
addition, the Investor Agreement provides that each Investor Stockholder, for so
long as such Investor Stockholder owns at least 10% of the outstanding capital
stock of the Company, shall vote such Investor Stockholder's stock and take all
action within its power to (i) establish the size of the Board at nine
directors; (ii) cause to be elected to the Board one director designated by IES
(for so long as IES owns at least 10% of the outstanding capital stock of the
Company); (iii) cause to be elected to the Board one director designated by
MidAmerican (for so long as MidAmerican owns at least 10% of the outstanding
capital stock of the Company); (iv) cause to be elected to the Board three
directors who are executive officers of the Company designated by Clark E.
McLeod (for so long as Clark E. and Mary E. McLeod collectively own at least 10%
of the outstanding capital stock of the Company); and (v) cause to be elected to
the Board four independent directors nominated by the Board. The Investor
Agreement also provides that, for a period ending in March 1999 and subject to
certain exceptions, each of IES and MidAmerican will refrain from acquiring, or
agreeing or seeking to acquire, beneficial ownership of any securities issued by
the Company. In addition, the Investor Agreement provides that, for a two-year
period commencing on the effective date of this Prospectus, no Investor
Stockholder will sell or otherwise dispose of any equity securities of the
Company without the consent of the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board currently has two committees, the Audit Committee and the
Compensation Committee, each of which was appointed in March 1996. Prior to
March 1996, there were no Board committees. The Audit Committee, among other
things, recommends the firm to be appointed as independent accountants to audit
the Company's financial statements, discusses the scope and results of the audit
with the independent accountants, reviews with management and the independent
accountants the Company's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of the Company
and reviews the non-audit services to be performed by the independent
accountants. The current members of the Audit
50
<PAGE> 56
Committee are Messrs. Collins and Christiansen. The Compensation Committee
reviews and recommends the compensation arrangements for management of the
Company and administers the Company's stock option plans and stock purchase
plan. The current members of the Compensation Committee are Messrs. Rhines and
Liu.
DIRECTOR COMPENSATION
Directors of the Company who are also employees of the Company receive no
directors' fees. Non-employee directors receive directors fees of $1,000 for
each Board and committee meeting attended in person and $500 for each Board and
committee meeting attended by telephone. In addition, directors are reimbursed
for their reasonable out-of-pocket travel expenditures incurred. Directors of
the Company are also eligible to receive grants of stock options under the
Company's Director Stock Option Plan. See "-- Stock Option Plans -- Directors
Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Messrs. Rhines and
Liu. Prior to March 1996, there was no Compensation Committee and the entire
Board participated in deliberations regarding executive officer compensation.
During the fiscal year ended December 31, 1995, Messrs. McLeod, Gray and Cram
were executive officers of the Company. During such period, no member of the
Board served as a director or a member of the compensation committee of any
other company of which any executive officer served as a member of the Board.
During 1993, 1994 and 1995 the Company paid $91,191, $79,114 and $147,313,
respectively, to Shuttleworth & Ingersoll, P.C., a law firm in Cedar Rapids,
Iowa, for legal services rendered. The Company plans to retain the firm in 1996.
Thomas M. Collins, a director of the Company, is Chairman and a stockholder of
Shuttleworth & Ingersoll, P.C.
The Company paid $17,750, $50,932 and $38,000 during 1993, 1994 and 1995,
respectively, for use of an aircraft owned by ABCM Corporation ("ABCM"). McLeod
Transportation, Inc., an Iowa corporation whose stockholders include, among
others, the Company, Clark E. McLeod and McLeod Educational Group, Inc. (a
corporation controlled by Mr. McLeod) ("McLeod Educational Group"), owned 19% of
ABCM until March 1995. McLeod Transportation, Inc. was later liquidated. Mr.
McLeod is a director and executive officer of the Company.
The Company purchases advertising space in telephone directories published
by Telecom*USA Publishing, a corporation whose directors include, among others,
Clark E. McLeod, Paul D. Rhines and James L. Cram. Messrs. McLeod and Rhines and
Ms. Casey D. Mahon are stockholders of Telecom*USA Publishing. Telecom*USA
Publishing also purchases telecommunications service from the Company. The
Company paid Telecom*USA Publishing $1,397, $11,000 and $54,500 in 1993, 1994
and 1995, respectively, for advertising fees and charged Telecom*USA Publishing
$103,112 for telecommunications services in 1995. Messrs. McLeod, Rhines and
Cram are directors of the Company, and Messrs. McLeod and Cram and Ms. Mahon are
executive officers of the Company.
The Company rents facilities and equipment, purchases maintenance and
installation services and pays commission on local and long distance sales to
customers of Digital Communications, Inc. ("Digital"), a corporation that is
controlled by Mary E. and Clark E. McLeod. Mr. McLeod and Mr. James L. Cram
serve on the Board of Directors of Digital. The Company paid Digital $36,393,
$83,591 and $94,871 in 1993, 1994 and 1995, respectively. Messrs. McLeod and
Cram are directors and executive officers of the Company.
The Company provided accounting, payroll and administrative services to
McLeod Educational Group, a corporation that owns and operates an elementary
school in Cedar Rapids, Iowa. McLeod Educational Group paid the Company $6,297,
$51,664 and $38,411 for these services in 1993, 1994 and 1995, respectively.
Clark E. McLeod and Mary E. McLeod own over 99% of the stock of McLeod
51
<PAGE> 57
Educational Group. James L. Cram owns less than 1% of the stock of McLeod
Educational Group. Messrs. McLeod and Cram are directors and executive officers
of the Company.
The Company and Clark E. McLeod have entered into an agreement under which
they have agreed to share equally in the costs and damage awards, if any, of a
lawsuit brought by the Company and Mr. McLeod in Linn County, Iowa. The Company
has not to date incurred any material costs or received any damage awards in
connection with this lawsuit. See "Business -- Legal Proceedings."
The Company and McLeod Network Services, Inc. (a wholly owned subsidiary of
the Company) have entered into two agreements with IES pursuant to which IES has
agreed to grant the Company access to certain of IES' towers, rights-of-way,
conduits and poles in exchange for capacity on the Company's network. IES
purchased 5,625,000 shares of Class B Common Stock in April 1993 at an aggregate
price of $4.5 million. In February 1994, IES purchased 2,045,457 shares of Class
B Common Stock for an aggregate price of $3.0 million. IES also purchased
750,000 shares of Class B Common Stock for an aggregate price of $1.7 million on
June 15, 1995. IES also has entered into the IES Guarantee. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Lee Liu, a director of the
Company, is Chairman, Chief Executive Officer and President of IES. Blake O.
Fisher, Jr., an executive officer of the Company, was the Executive Vice
President and Chief Financial Officer of IES until February 1996. IES is also a
significant stockholder of the Company. See "Principal Stockholders."
In February 1996, the Company entered into two agreements with MidAmerican,
which incorporate prior agreements entered into between the parties or their
subsidiaries, pursuant to which MidAmerican has agreed to grant the Company
access to certain of MidAmerican's towers, rights-of-way, conduits and poles in
exchange for capacity on the Company's network. In April 1995, McLeod, Inc.
acquired MWR from MidAmerican in return for 3,676,058 shares of Class B Common
Stock issued to Midwest Capital Group Inc. MidAmerican purchased 3,529,414
shares of Class B Common Stock of the Company in June 1995 at an aggregate price
of $8.0 million. Russell E. Christiansen, a director of the Company, is Chairman
and Chairman of the Office of the Chief Executive Officer of MidAmerican.
MidAmerican is also a significant stockholder of the Company. See "Principal
Stockholders."
In 1995, the Company paid 2060 Partnership, L.P. $377,640 for the rental of
the Company's headquarters office and parking spaces in Cedar Rapids, Iowa. 2001
Development Corporation ("2001"), an Iowa corporation, is the general partner
and 80% owner of 2060 Partnership, L.P. IES and the Company own 54.55% and
3.03%, respectively, of the outstanding stock of 2001. The Company purchased its
stock in 2001 for $250,000 in July 1995. The directors and officers of 2001
included Lee Liu and Thomas M. Collins, directors of the Company, and Clark E.
McLeod, a director and executive officer of the Company.
In April 1993, the Company sold 2,500,002 shares of Class A Common Stock to
Allsop for an aggregate price of $2 million. In February 1994, the Company sold
1,022,727 shares of Class A Common Stock to Allsop for an aggregate price of
$1.5 million. In June 1995, the Company sold
171,188 shares of Class A Common Stock to Allsop for an aggregate price of
$388,025. Mr. Paul D. Rhines, an affiliate of Allsop, is a director of the
Company.
In July 1991, January 1993, April 1993, February 1994 and June 1995, the
Company sold 18,750, 2,462,334, 1,250,003, 511,365 and 64,163 shares,
respectively, of Class A Common Stock to Clark E. McLeod for $5,000, $656,622,
$1,000,002, $750,002 and $145,435, respectively. Mr. McLeod is a director and
executive officer of the Company.
In January 1993, April 1993, February 1994 and June 1995, the Company sold
2,481,080, 1,249,999, 511,362 and 64,159 shares, respectively, of Class A Common
Stock to Mary E. McLeod for $661,621, $999,999, $749,997 and $145,427,
respectively. Mary E. McLeod is Mr. McLeod's
52
<PAGE> 58
wife. In January 1993, the Company sold 34,459 shares of Class A Common Stock to
Holly A. McLeod, Mr. and Mrs. McLeod's daughter, for $9,189.
In January 1993 and in April 1993, the Company sold 153,548 and 18,750
shares, respectively, of Class A Common Stock to James L. Cram for $40,946 and
$15,000, respectively. In December 1995, the Company sold 11,250 shares of Class
A Common Stock to James L. Cram, upon exercise of stock options, for $3,000. Mr.
Cram is a director and executive officer of the Company. In January 1993 and in
April 1993, the Company sold 153,548 and 18,750 shares, respectively, of Class A
Common Stock to Virginia A. Cram for $40,946 and $15,000, respectively. Virginia
A. Cram is Mr. Cram's wife. In January 1993, Mr. Cram's children purchased an
aggregate of 37,500 shares of Class A Common Stock for $10,000.
In January 1993, April 1993 and in February 1994, the Company sold 86,149,
18,750 and 15,000 shares, respectively, of Class A Common Stock to Stephen C.
Gray and Sally W. Gray as tenants in common, for $22,973, $15,000 and $22,000,
respectively. In April 1993, the Company sold 3,750 shares of Class A Common
Stock to the Stephen Samuel Gray Irrevocable Trust for $3,000. In January 1995,
the Company sold 22,500 shares of Class A Common Stock to Mernat & Co. f/b/o
Stephen C. Gray for $39,000. In June 1995, the Company sold 26,352 shares of
Class A Common Stock to Stephen C. Gray for $59,730, and 3,750 shares of Class A
Common Stock to Mernat & Co. f/b/o Stephen C. Gray IRA for $8,500. In June 1995,
the Company also sold 88,238 shares of Class A Common Stock to a profit sharing
trust, the beneficiary of which is Fred L. Wham, III, for $200,005. Mr. Gray
serves as a director and executive officer of the Company. Sally W. Gray,
Stephen Samuel Gray and Mr. Wham are Mr. Gray's wife, son and father-in-law,
respectively.
In January 1993, the Company sold 17,232 shares of Class A Common Stock to
Kirk E. Kaalberg for $4,595. In February 1996, the Company sold 23,438 shares of
Class A Common Stock to Blake O. Fisher, upon exercise of stock options, for
$23,125. In February 1994, the Company sold 34,092 and 34,092 shares,
respectively, of Class A Common Stock to Casey D. Mahon and to Dain Bosworth &
Company as custodian for Ms. Mahon's IRA for $50,001 and $50,001, respectively.
Messrs. Kaalberg and Fisher and Ms. Mahon are executive officers of the Company.
In April 1993, the Company sold 45,000 shares of Class A Common Stock for
$36,000 to each of two trusts (an aggregate of 90,000 shares for $72,000),
beneficiaries of which are Thomas M. Collins and Joanne H. Collins,
respectively. In February 1994, the Company sold 102,274 shares of Class A
Common Stock to a trust, the beneficiary of which is Thomas M. Collins, for
$150,002. Mr. Collins is a director of the Company and Joanne Collins is Mr.
Collins' wife.
Except for the stock issued in connection with the Company's April 1995
acquisition of MWR, all of the stock issuances described above were for cash
consideration.
In March 1996, the Board adopted a policy requiring that any material
transactions between the Company and persons or entities affiliated with
officers, directors or principal stockholders of the Company be on terms no less
favorable to the Company than reasonably could have been obtained in arms'
length transactions with independent third parties or be approved by a majority
of disinterested directors.
Of the 10,000,000 shares of Class A Common Stock offered hereby, Clark E.
and Mary E. McLeod, MidAmerican and IES have indicated an interest in purchasing
shares of Class A Common Stock with a value of $5 million, $20 million and $10
million, respectively, at the initial public offering price without any
underwriting discount. See "Principal Stockholders" and "Underwriting." No sales
agreement has been entered into with respect to these shares, and none will be
entered into (if at all) until the Registration Statement of which this
Prospectus is a part becomes effective. If the Investors purchase such shares,
they will be sold directly by the Company to the Investors and will not be
subject to the terms and conditions of the Underwriting Agreement. If any of
these shares are not purchased by the Investors, they will be sold to the
Underwriters pursuant to the terms of the Underwriting Agreement.
53
<PAGE> 59
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the cash and
non-cash compensation during fiscal year 1995 earned by or awarded to the Chief
Executive Officer and to the four other most highly compensated executive
officers of the Company whose combined salary and bonus exceeded $100,000 during
the fiscal year ended December 31, 1995 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION(1)
-------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
Clark E. McLeod...................... $142,803 $74,902 75,000 1,500
Chairman and Chief
Executive Officer
Stephen C. Gray...................... 142,807 74,902 131,250 1,500
President and Chief
Operating Officer
Kirk E. Kaalberg..................... 101,528 56,177 75,000 1,463
Senior Vice President, Network
Design and Development
James L. Cram........................ 102,884 56,177 84,375 1,500
Chief Accounting Officer
Stephen K. Brandenburg............... 106,692 33,842 187,500 --
Senior Vice President, Intelligent
Technology and Systems
</TABLE>
- ---------------
(1) All other compensation represents matching contributions made by the Company
to the McLeod, Inc. 401(k) plan on behalf of the Named Executive Officers.
54
<PAGE> 60
OPTION GRANTS
The following table sets forth information with respect to grants of stock
options to each of the Named Executive Officers during the year ended December
31, 1995.
OPTION GRANTS DURING 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZED
-------------------------------------------------------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE -------------------
NAME GRANTED FISCAL YEAR PRICE GRANT DATE EXPIRATION DATE 5% 10%
- ------------------------------- ---------- ------------ -------- ---------------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Clark E. McLeod................ 18,750(4) 1.0% $ 1.91 January 26, 1995 January 26, 2000 $ 9,877 $ 21,826
56,250(5) 3.1% 2.49 July 27, 1995 July 27, 2000 38,748 85,624
Stephen C. Gray................ 75,000(4) 4.1% 1.73 January 26, 1995 January 26, 2002 52,931 123,344
56,250(5) 3.1% 2.27 July 27, 1995 July 27, 2005 80,184 203,202
Kirk E. Kaalberg............... 18,750(4) 1.0% 1.73 January 26, 1995 January 26, 2002 13,239 30,844
56,250(5) 3.1% 2.27 July 27, 1995 July 27, 2005 80,184 203,202
James L. Cram.................. 28,125(4) 1.5% 1.73 January 26, 1995 January 26, 2002 19,854 46,260
56,250(3) 3.1% 2.27 July 27, 1995 July 27, 2002 51,916 120,975
Stephen K. Brandenburg......... 131,250(4) 7.2% 2.27 June 29, 1995 June 29, 2002 121,123 282,257
56,250(5) 3.1% 2.27 July 27, 1995 July 27, 2005 80,184 203,202
</TABLE>
- ---------------
(1) All options are exercisable for shares of Class A Common Stock. Options
granted pursuant to the 1992 and 1993 Incentive Stock Option Plans will
become exercisable as follows: (i) 25% of the options will become
exercisable on the first anniversary of the date of grant, (ii) an
additional 25% will become exercisable on the second anniversary of the date
of grant, (iii) an additional 25% will become exercisable on the third
anniversary of the date of grant, and (iv) the remaining 25% will become
exercisable on the fourth anniversary of the date of grant. Options granted
pursuant to the 1995 Incentive Stock Option Plan will become exercisable at
a rate of 25% per year, on a cumulative basis, beginning five years from the
date of grant, except for options issued to Clark E. McLeod, the Company's
Chairman and Chief Executive Officer. Options issued to Mr. McLeod under the
1995 Incentive Stock Option Plan vest at a rate of 20% per year, on a
cumulative basis.
(2) Based on exercise price.
(3) Granted pursuant to the 1992 Incentive Stock Option Plan.
(4) Granted pursuant to the 1993 Incentive Stock Option Plan.
(5) Granted pursuant to the 1995 Incentive Stock Option Plan.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth the information with respect to the Named
Executive Officers concerning the exercise of options during fiscal year 1995
and unexercised options held as of December 31, 1995.
OPTION EXERCISES DURING 1995
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Clark E. McLeod............... 0 $ 0 219,224 208,074 $ 467,492 $ 287,029
Stephen C. Gray............... 0 0 390,000 333,750 878,000 520,500
Kirk E. Kaalberg.............. 0 0 145,313 192,187 302,501 252,499
James L. Cram................. 11,250 27,000 207,974 228,699 451,138 347,128
Stephen K. Brandenburg........ 0 0 0 187,500 0 75,000
</TABLE>
- ---------------
(1) Represents the difference between the exercise price and a fair market value
of $2.67 as determined by the Board.
55
<PAGE> 61
MANAGEMENT AGREEMENTS
Employment, Confidentiality and Non-Competition Agreements. The Company
intends, prior to completion of the Offering, to enter into employment,
confidentiality and non-competition agreements with 35 members of senior
management, including the Named Executive Officers, pursuant to which the senior
managers would agree that during the term of employment and for a two-year
period following a termination for cause, resignation or voluntary termination
of employment, the executive employee will not compete with the Company. The
two-year period is reduced to a one-year period for senior management employees
who are not executive employees. The agreements also provide that employees
subject to the agreements may not disclose any Company confidential information
while employed by the Company or thereafter. The agreements have an indefinite
term but may be terminated on 30 days' written notice by either party, provided,
however, that the confidentiality and non-competition obligations will survive
any such termination.
Change-of-Control Agreements. The Company also intends, prior to
completion of the Offering, to enter into change-of-control agreements with ten
executive employees, including the Named Executive Officers, which provide for
certain payments in connection with certain terminations of employment after a
change of control of the Company. The change of control agreements terminate on
December 31, 2006 unless a change of control has occurred during the six months
preceding December 31, 2006 in which case the agreements terminate on December
31, 2007. If an executive who is a party to a change of control agreement
terminates employment within six months after a "change of control" or, if
within 24 months after a "change of control," the executive's employment is
terminated by the Company "without cause" or by the executive for "good reason"
(as such terms are defined in the agreements), (i) the executive will be
entitled to a lump sum payment equal to 24 times the executive's "average
monthly compensation" (as defined) during the 12 months immediately preceding
the change of control or the date of termination, whichever is higher, (ii) all
of the executive's outstanding options to purchase stock of the Company will
become immediately exercisable in full and (iii) if the executive elects to
continue coverage under the Company's group health plan pursuant to Section
4980B of the Internal Revenue Code of 1986, as amended, the Company will
continue to pay the employer portion of the premiums for such coverage. An
executive who is entitled to payment(s) pursuant to a change of control
agreement is subject to a non-compete provision generally restricting the
executive from competing with the Company for a two-year period after the
termination of employment.
STOCK OPTION PLANS
1992 Incentive Stock Option Plan. Under the Company's 1992 Incentive Stock
Option Plan (the "1992 Plan"), the Company was authorized to grant options to
purchase up to 1,275,000 shares of Class A Common Stock to selected management
and other key employees of the Company. These options are intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). The Board selects optionees and determines the number
of shares covered by each option and the terms of the option agreement to be
executed by the Company and each optionee. As of March 31, 1996, options to
purchase 1,271,021 shares of Class A Common Stock had been granted under the
1992 Plan and options to purchase 11,250 shares of Class A Common Stock had been
exercised. The option agreements under the 1992 Plan typically include
provisions by which (i) options granted under the 1992 Plan may be exercised
with respect to 25 percent of the shares subject to such option one year after
the option is granted and with respect to an additional 25 percent of the shares
subject to such option in each of the three subsequent years and (ii) options
expire seven years after the date of grant. The 1992 Plan provides that
optionees may not dispose of shares of Class A Common Stock acquired pursuant to
the exercise of an option unless they have first complied with certain transfer
restrictions. The exercise price of the options granted under the 1992 Plan is
equal to the fair market value of the Class A Common Stock as determined by the
Board as of the date of grant. The Board terminated the 1992 Plan in March 1996
in connection with the adoption of the Company's 1996 Employee Stock Option Plan
(the "1996 Plan").
56
<PAGE> 62
1993 Incentive Stock Option Plan. Under the Company's 1993 Incentive Stock
Option Plan (the "1993 Plan"), the Company was authorized to grant options to
purchase up to 4,513,767 shares of Class A Common Stock to selected management
and key employees of the Company. These options are intended to qualify as
incentive stock options under Section 422 of the Code. The Board selects the
optionees and determines the number of shares of Class A Common Stock covered by
each option and the terms of the option agreement to be executed by the Company
and each optionee. As of March 31, 1996, options to purchase 4,440,690 shares of
Class A Common Stock had been granted under the 1993 Plan and options to
purchase 282 shares of Class A Common Stock had been exercised. The option
agreements under the 1993 Plan typically include provisions by which (i) options
granted under the 1993 Plan may be exercised with respect to 25 percent of the
shares subject to such option one year after the option is granted and with
respect to an additional 25 percent of the shares subject to such option in each
of the three subsequent years and (ii) options expire seven years after the date
of grant. The 1993 Plan provides that optionees may not sell shares of Class A
Common Stock acquired pursuant to the exercise of an option unless they have
first offered such shares of Class A Common Stock to the Company and all of the
other stockholders. The exercise price of options granted under the 1993 Plan is
equal to the fair market value of a share of Class A Common Stock as determined
by the Board on the date of grant. The Board terminated the 1993 Plan in March
1996 in connection with the adoption of the 1996 Plan.
1995 Incentive Stock Option Plan. Under the Company's 1995 Incentive Stock
Option Plan (the "1995 Plan"), the Company was authorized to grant options to
purchase up to 337,500 shares of Class A Common Stock to selected management and
key employees of the Company. These options are intended to qualify as incentive
stock options under Section 422 of the Code. The Board selects the optionees and
determines the number of shares of Class A Common Stock covered by each option
and the terms of the option agreement to be executed by the Company and each
optionee. As of March 31, 1996, options to purchase 337,500 shares of Class A
Common Stock had been granted under the 1995 Plan and no options had been
exercised. The option agreements under the 1995 Plan typically include
provisions by which (i) options granted under the 1995 Plan may be exercised
with respect to 25 percent of the shares subject to such option five years after
the option is granted and with respect to an additional 25 percent of the shares
subject to such option in each of the three subsequent years and (ii) options
expire ten years after the date of grant. Options issued to Clark E. McLeod,
Chairman and Chief Executive Officer of the Company, under the 1995 Plan vest at
a rate of 20% per year on a cumulative basis and expire five years after the
date of grant. The 1995 Plan provides that optionees may not sell shares of
Class A Common Stock acquired pursuant to the exercise of an option unless they
have first offered such shares of Class A Common Stock to the Company and all of
the other stockholders. The exercise price of options granted under the 1995
Plan is equal to the fair market value of a share of Class A Common Stock as
determined by the Board on the date of grant. The Board terminated the 1995 Plan
in March 1996 in connection with the adoption of the 1996 Plan.
The 1996 Employee Stock Option Plan. Under the 1996 Plan, which supersedes
the 1992 Plan, the 1993 Plan and the 1995 Plan, the Company may grant options to
purchase up to 4,525,000 shares of Class A Common Stock to employees of the
Company. In the event there is any increase or decrease in the number of shares
of Class A Common Stock without receipt of consideration by the Company (for
instance, by a recapitalization or stock split) after the effective date of the
1996 Plan, an appropriate and proportionate adjustment will be made in the
number and kinds of shares subject to the 1996 Plan, and in the number, kinds,
and per-share exercise price of shares subject to the unexercised portion of
options granted prior to any such change. The 1996 Plan provides for the grant
of options that are intended to qualify as "incentive stock options" under
Section 422 of the Code to employees of the Company as well as the grant of
non-qualifying options to officers, directors or key employees of the Company.
The Compensation Committee administers the 1996 Plan, selects the optionees and
determines the number of shares of Class A Common Stock covered by each option
and the terms of the option agreement to be executed by the Company and each
optionee. Although 4,525,000 shares of Class A Common Stock are reserved for
issuance upon exercise of options granted pursuant to the 1996 Plan, the Board
intends to limit at all times the aggregate number of shares subject to
outstanding stock options under all stock option
57
<PAGE> 63
plans of the Company to no more than 15% of the then-issued and outstanding
shares of the authorized Class A Common Stock and the then-granted and
outstanding options. The option exercise price for incentive stock options
granted under the 1996 Plan may not be less than 100% of the fair market value
of the Class A Common Stock on the date of grant of the option (or 110% in the
case of an incentive stock option granted to an optionee beneficially owning
more than 10% of the outstanding Class A Common Stock). The option exercise
price for non-incentive stock options granted under the 1996 Plan may not be
less than 50% of the fair market value of the Class A Common Stock on the date
of grant of the option. The maximum option term is ten years (or five years in
the case of an incentive stock option granted to an optionee beneficially owning
more than 10% of the outstanding Class A Common Stock). Options may be exercised
at any time after grant, except as otherwise determined by the Compensation
Committee and provided in the particular option agreement. Options covering no
more than 2,000,000 shares of Class A Common Stock may be granted to any officer
or other employee during the term of the 1996 Plan. There is also a $100,000
limit on the value of stock (determined at the time of grant) covered by
incentive stock options that first become exercisable by an optionee in any
calendar year. Options are non-transferable. The Board at any time may terminate
or suspend the 1996 Plan. Unless previously terminated, the 1996 Plan will
terminate automatically on March 28, 2006. No termination, suspension or
amendment of the 1996 Plan may, without the consent of the optionee to whom an
option has been granted, adversely affect the rights of the holder of the
option.
Directors Stock Option Plan. The Company's Directors Stock Option Plan
(the "Directors Plan") was adopted by the Board and approved by the stockholders
in 1993. On March 28, 1996, the Directors Plan was amended and restated to be a
"formula" plan providing for an automatic grant of stock options to eligible
non-employee directors. Under the Directors Plan, as amended, the number of
shares reserved for purchase pursuant to options was increased to an aggregate
of 550,000 shares of Class A Common Stock (subject to adjustment for certain
events, such as recapitalizations or stock splits, effected without
consideration) for grants to directors of the Company who are not officers or
employees of the Company (each an "Eligible Director"). Options for 389,063
shares of Class A Common Stock had been granted under the Directors Plan and
options to purchase 23,438 shares of Class A Common Stock had been exercised as
of March 31, 1996. The option agreements under the Directors Plan prior to its
amendment and restatement in 1996 typically included provisions by which (i)
options granted under the Directors Plan may be exercised with respect to 25
percent of the shares subject to such option one year after the option is
granted and with respect to an additional 25 percent of the shares subject to
such option in each of the three subsequent years, (ii) all options expire seven
years after the date of grant, (iii) optionees may not dispose of shares of
Class A Common Stock acquired pursuant to the exercise of an option unless the
Company has filed an effective Registration Statement under the Securities Act
covering the stock or the director has furnished an opinion of counsel
satisfactory to the Company or a Securities and Exchange Commission "no action"
letter stating that no such registration is required and (iv) in the event of an
attempt to transfer shares of Class A Common Stock issued pursuant to the
exercise of an option, except a transfer to a Company employee or director
approved by the Board, the Company has the right to repurchase the Class A
Common Stock for a price which is the greater of the book value of the Class A
Common Stock or the then fair market value of the Common Stock, as determined by
the Board. Under the Directors Plan, as amended, each Eligible Director who
commences service as a director after the 1996 amendment and restatement of the
Directors Plan is granted an initial option to purchase 10,000 shares of Class A
Common Stock. Each such Eligible Director is also granted an additional option
to purchase 5,000 shares of Class A Common Stock immediately after each of the
next two annual meetings of the Company's stockholders if the Eligible Director
continues to be an Eligible Director. Options granted under the Directors Plan,
as amended, may be exercised with respect to 25 percent of the shares subject to
such option one year after the option is granted and with respect to an
additional 25 percent of the shares subject to such option in each of the three
subsequent years; provided, however, that all unvested options become fully
exercisable upon a change in control of the Company (as defined in the Directors
Plan). All options expire ten years after the date of grant. The
58
<PAGE> 64
Directors Plan will terminate automatically on March 28, 2006, unless terminated
at an earlier date by the Board.
THE EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan (the "Employee Purchase
Plan"), 1,000,000 shares of Class A Common Stock are available for purchase by
eligible employees of the Company. The Employee Purchase Plan permits eligible
employees to elect to have a portion of their pay deducted to purchase shares of
Class A Common Stock of the Company. In the event there is any increase or
decrease in the number of shares of Class A Common Stock without receipt of
consideration by the Company (for instance, by a recapitalization or stock
split), there may be a proportionate adjustment to the number and kinds of
shares that may be purchased under the Employee Purchase Plan. Generally,
payroll deductions will be accumulated during the period to be specified by the
Compensation Committee (the "Payroll Deduction Period").
Any employee of the Company may participate in the Employee Purchase Plan,
except the following, who are ineligible to participate: (a) an employee who has
been employed by the Company for less than six months as of the beginning of a
Payroll Deduction Period; (b) an employee whose customary employment is for less
than five months in any calendar year; (c) an employee whose customary
employment is 20 hours or less per week; and (d) an employee who, after
exercising his or her rights to purchase stock under the Employee Purchase Plan,
would own stock (including stock that may be acquired under any outstanding
options) representing five percent or more of the total combined voting power of
all classes of stock of the Company. An employee must be employed on the last
day of the Payroll Deduction Period in order to acquire stock under the Employee
Purchase Plan unless the employee has retired, died or become disabled, or was
involuntarily terminated other than for cause.
Rights to purchase shares of Class A Common Stock will be deemed granted to
participating employees as of the first trading day of each Payroll Deduction
Period. The purchase price for each share will be established by the
Compensation Committee, but will not be less than 85% of the fair market value
of the Class A Common Stock on the first or last trading day of such Payroll
Deduction Period, whichever is lower. No employee may purchase Class A Common
Stock in any calendar year under the Employee Purchase Plan and all other
"employee stock purchase plans" of the Company having an aggregate fair market
value in excess of $25,000, determined as of the first trading date of the
Payroll Deduction Period. No participating employee may assign his or her rights
to purchase shares of Class A Common Stock under the Employee Purchase Plan,
whether voluntarily, by operation of law or otherwise.
The Board in its sole discretion may terminate the Employee Purchase Plan
at any time, provided, however, that such termination shall not impair any
rights of participants that have vested at the time of termination. In any
event, the Employee Purchase Plan shall, without further action of the Board,
terminate at the earlier of (i) March 28, 2006 and (ii) such time as all shares
of Class A Common Stock that may be made available for purchase under the
Employee Purchase Plan have been issued.
CERTAIN TRANSACTIONS
On July 18, 1995 and March 29, 1996, respectively, the Company loaned
$75,000 to each of Kirk E. Kaalberg and Stephen K. Brandenburg in exchange for
unsecured notes executed by Mr. Kaalberg and Mr. Brandenburg, respectively.
Interest accrues on both loan amounts at the applicable rate as determined in
accordance with Internal Revenue Service regulations. Pursuant to the terms of
the notes executed by Mr. Kaalberg and Mr. Brandenburg, respectively, annual
interest-only payments will be made through 1997 and 1998, respectively. They
will then make annual payments of $25,000 plus accrued interest in each of the
respective three years thereafter. Messrs. Kaalberg and Brandenburg are
executive officers of the Company.
For a description of certain other transactions, see "Business -- Legal
Proceedings" and "Management -- Compensation Committee Interlocks and Insider
Participation."
59
<PAGE> 65
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership, on a fully diluted basis, of the Company's outstanding capital stock
as of March 31, 1996 by (i) each stockholder who is known by the Company to
beneficially own 5% or more of any class of the Company's capital stock, (ii)
each director of the Company, (iii) each Named Executive Officer and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1)(2)
--------------------------------------------------------
NUMBER OF PERCENT OF SHARES PERCENT OF SHARES
SHARES OUTSTANDING OUTSTANDING
BENEFICIALLY PRIOR TO THE AFTER THE
NAME OF BENEFICIAL OWNER OWNED(3) OFFERING OFFERING
- ---------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
IES Investments Inc.(4)....................... 9,620,457 30.0% 25.7%
Clark E. McLeod(5)............................ 8,871,586 27.7 21.8
MWR Investments Inc.(6)....................... 7,205,472 22.5 18.5
Mary E. McLeod(7)............................. 4,287,850 13.4 10.6
Allsop Venture Partners III, L.P.(8).......... 3,693,917 11.5 8.8
Russell E. Christiansen....................... -- -- --
Thomas M. Collins............................. 225,087 * *
Paul D. Rhines(10)............................ 3,726,730 11.6 8.9
Lee Liu(11)................................... 32,813 * *
James L. Cram(12)............................. 608,354 1.9 1.4
Stephen C. Gray(13)........................... 585,001 1.8 1.4
Kirk E. Kaalberg(14).......................... 185,983 * *
Stephen K. Brandenburg........................ -- -- --
Directors and executive officers as a group
(13 persons)(15)............................ 14,423,270 45.0% 35.0%
</TABLE>
- ---------------
* Less than one percent.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days. More than one person may be
deemed to be a beneficial owner of the same securities.
(2) This table is based upon information supplied by directors, executive
officers and principal stockholders. Unless otherwise indicted in the
footnotes to this table, each of the stockholders named in this table has
sole voting and investment power with respect to the shares shown as
beneficially owned. Percent of Shares Outstanding After the Offering, and
numbers of Investor Shares have been calculated assuming an initial public
offering price of $17.00 per share, the midpoint of the estimated range.
(3) Amounts of shares of Common Stock beneficially owned assumes that all of
the Class B Common Stock has been converted into Class A Common Stock.
(4) Includes 8,420,457 shares of Class B Common Stock. IES Investments Inc. is
a wholly owned indirect subsidiary of IES. The address of IES is 200 1st
St., SE, Cedar Rapids, IA 52401. Includes 1,200,000 shares of Class B
Common Stock that IES has the right to purchase within 60 days from March
31, 1996 pursuant to options. IES has entered into a definitive agreement
of merger with WPL Holdings, Inc., the parent of Wisconsin Power Light
Company, and with Interstate Power Company, which merger is subject to
certain regulatory and other approvals. Assumes IES purchases 1,176,471
shares of Class A Common Stock in the Offering; if IES does not purchase
any of the Investor Shares, the number of shares beneficially owned by IES
as a Percent of Shares Outstanding After the Offering will be 22.9%.
(5) Includes 4,359,809 shares of Common Stock held of record by members of
Clark E. McLeod's family, including Mary E. McLeod, Mr. McLeod's wife. Mr.
McLeod's address is c/o McLeod, Inc., Suite 500, Town Centre, 221 3rd Ave.,
SE, Cedar Rapids, IA 52401. Includes 223,912 shares of Class A Common Stock
that Mr. McLeod has the right to purchase within 60 days from March 31,
1996 pursuant to options. Assumes Clark and Mary McLeod purchase, in the
aggregate, 294,118 shares of Class A Common Stock in the Offering; if Clark
and Mary McLeod do not purchase any of the Investor Shares, the number of
shares beneficially owned by Mr. McLeod as a Percent of Shares Outstanding
After the Offering will be 21.1%.
(Footnotes continued on following page)
60
<PAGE> 66
(6) Includes 7,205,472 shares of Class B Common Stock. MWR Investments Inc. is
a wholly owned indirect subsidiary of MidAmerican. The address of MWR
Investments, Inc. is c/o MidAmerican Energy Company, 500 E. Court Ave., Des
Moines, IA 50309. Assumes MidAmerican purchases 588,235 shares of Class A
Common Stock in the Offering; if MidAmerican does not purchase any of the
Investor Shares, the number of shares beneficially owned by MidAmerican as
a Percent of Shares Outstanding After the Offering will be 17.1%.
(7) Mrs. McLeod's address is c/o McLeod, Inc., Suite 500, Town Centre, 221 3rd
Ave., SE, Cedar Rapids, IA 52401. Assumes Mrs. McLeod purchases 147,059
shares of Class A Common Stock in the Offering; if Mrs. McLeod does not
purchase any of the Investor Shares, the number of shares beneficially
owned by Mrs. McLeod as a Percent of Shares Outstanding After the Offering
will be 10.2%.
(8) The address of Allsop is 2750 1st Ave., NE, Cedar Rapids, IA 52402.
(9) Includes 32,813 shares of Class A Common Stock that Mr. Collins has the
right to purchase within 60 days from March 31, 1996 pursuant to options.
(10) Mr. Rhines' address is c/o Allsop Venture Partners III, L.P., 2750 1st
Ave., NE, Cedar Rapids, IA 52402. Includes 3,693,917 shares of Class A
Common Stock held of record by Allsop. Includes 32,813 shares of Class A
Common Stock that Mr. Rhines has the right to purchase within 60 days from
March 31, 1996 pursuant to options.
(11) Includes 32,813 shares of Class A Common Stock that Mr. Liu has the right
to purchase within 60 days from March 31, 1996 pursuant to options.
(12) Includes 241,675 shares of Class A Common Stock held of record by members
of James L. Cram's family. Mr. Cram disclaims beneficial ownership as to
101,252 of such shares. Includes 215,006 shares of Class A Common Stock
that Mr. Cram has the right to purchase within 60 days from March 31, 1996
pursuant to options.
(13) Includes 119,899 shares of Class A Common Stock held as tenants in common
with Sally W. Gray, Mr. Gray's wife. Also includes 3,750 shares of Class A
Common Stock held of record by the Stephen Samuel Gray Irrevocable Trust,
and 3,750 shares of Class A Common Stock held of record by the Elizabeth
Mary Fletcher Gray Education Trust, of which Mr. Gray is the trustee.
Includes 26,250 shares of Class A Common Stock held of record by Mernat &
Co. for the benefit of Mr. Gray. Includes 408,750 shares of Class A Common
Stock that Mr. Gray has the right to purchase within 60 days from March 31,
1996 pursuant to options.
(14) Includes 168,751 shares of Class A Common Stock that Mr. Kaalberg has the
right to purchase within 60 days from March 31, 1996 pursuant to options.
(15) Includes 1,210,952 shares of Class A Common Stock that such persons have
the right to purchase within 60 days from March 31, 1996 pursuant to
options. Assumes the Investors purchase all of the Investor Shares; if the
Investors do not purchase any of the Investor Shares, the number of shares
beneficially owned by directors and executive officers as a group as a
Percent of Shares Outstanding After the Offering will be 34.3%.
61
<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is subject to the provisions of the Company's
Restated Certificate and Amended and Restated Bylaws (the "Bylaws"), which are
included as exhibits to the Registration Statement of which this Prospectus
forms a part and by the provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Pursuant to the Restated Certificate, the Company has authority to issue
100,150,000 shares of capital stock, consisting of 75,000,000 shares of Class A
Common Stock, par value $.01 per share, 22,000,000 shares of Class B Common
Stock, par value $.01 per share, 2,000,000 shares of Preferred Stock, par value
$.01 per share and 1,150,000 shares of Class A Preferred Stock, par value $5.50
per share (the "Class A Preferred Stock"). As of December 31, 1995, the Class A
Common Stock was held by 70 holders of record and the Class B Common Stock was
held by two holders of record.
As of December 31, 1995, 16,387,081 shares of Class A Common Stock,
15,625,929 shares of Class B Common Stock, no shares of Preferred Stock, par
value $.01 per share and no shares of Class A Preferred Stock were issued and
outstanding. In the event of a default by the Company under the Credit Facility
and payment on the IES Guarantee by IES, the Company must issue to IES a number
of shares of Class A Preferred Stock equal to the amount of the payment made by
IES divided by $5.50.
The rights of the holders of Common Stock discussed below are subject to
the rights of the holders of Class A Preferred Stock and to such rights as the
Board may hereafter confer on the holders of Preferred Stock; accordingly,
rights conferred on holders of Preferred Stock that may be issued in the future
under the Restated Certificate may adversely affect the rights of holders of
Common Stock.
CLASS A COMMON STOCK
Voting Rights. Each holder of the Class A Common Stock shall be entitled
to attend all special and annual meetings of the stockholders of the Company
and, together with the holders of shares of Class B Common Stock and the holders
of all other classes of stock entitled to attend and vote at such meetings, to
vote upon any matter or thing (including, without limitation, the election of
one or more directors) properly considered and acted upon by the stockholders.
Holders of the Class A Common Stock are entitled to one vote per share.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of the Company, whether voluntary or involuntary, the holders of the
Class A Common Stock, the holders of the Class B Common Stock and holders of any
class or series of stock entitled to participate therewith, shall become
entitled to participate in the distribution of any assets of the Company
remaining after the Company shall have paid, or provided for payment of, all
debts and liabilities of the Company and after the Company shall have paid, or
set aside for payment, to the holders of any class of stock having preference
over the Common Stock in the event of dissolution, liquidation or winding up the
full preferential amounts (if any) to which they are entitled.
Dividends. Dividends may be paid on the Class A Common Stock, the Class B
Common Stock and on any class or series of stock entitled to participate
therewith when and as declared by the Board.
CLASS B COMMON STOCK
Voting Rights. Each holder of the Class B Common Stock shall be entitled
to attend all special and annual meetings of stockholders of the Company and,
together with the holders of shares of Class A Common Stock and the holders of
all other classes of stock entitled to attend and vote at
62
<PAGE> 68
such meetings, to vote upon any matter or thing (including, without limitation,
the election of one or more directors) properly considered and acted upon by the
stockholders. Holders of the Class B Common Stock are entitled to .40 vote per
share.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of the Company, whether voluntary or involuntary, the holders of the
Class B Common Stock, the holders of the Class A Common Stock, and the holders
of any class or series of stock entitled to participate therewith, shall become
entitled to participate in the distribution of any assets of the Company
remaining after the Company shall have paid, or provided for payment of, all
debts and liabilities of the Company and after the Company shall have paid, or
set aside for payment, to the holders of any class of stock having preference
over the Common Stock in the event of dissolution, liquidation or winding up the
full preferential amounts (if any) to which they are entitled.
Dividends. Dividends may be paid on the Class B Common Stock, the Class A
Common Stock and any class or series of stock entitled to participate therewith
when and as declared by the Board.
Conversion Into Class A Common Stock. The shares of Class B Common Stock
may be converted at any time at the option of the holder into fully paid and
nonassessable shares of Class A Common Stock at the rate of one share of Class A
Common Stock for each share of Class B Common Stock (as adjusted for any stock
split).
CLASS A PREFERRED STOCK
Voting Rights. Except as otherwise required by law, the holders of shares
of Class A Preferred Stock are not entitled to vote on matters that are voted on
by stockholders generally, except that the holders of shares of Class A
Preferred Stock shall be entitled to vote as a class, with each such holder
entitled to cast one vote for each share of Class A Preferred Stock registered
in the name of such holder, to elect two directors to the Board.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up the Company, whether voluntary or involuntary, the holders of shares
of Class A Preferred Stock are entitled to receive out of assets of the Company
legally available for distribution to stockholders before any payment or
distribution is made on the Common Stock cash in the amount of $5.50 per share
plus any accumulated but unpaid dividends thereon (the "Class A Preferred
Liquidation Distribution"). If the assets distributable upon such dissolution,
liquidation or winding up are insufficient to pay cash in an amount equal to the
Class A Preferred Liquidation Distribution to the holders of the shares of Class
A Preferred Stock, then such assets or the proceeds thereof are distributed
among the holders of the Class A Preferred Stock ratably in proportion to the
respective amounts of the Class A Preferred Liquidation Distribution to which
they would otherwise be entitled.
Dividends. The Class A Preferred Stock ranks, as to dividends, senior and
prior to the Common Stock and to all other classes or series of stock issued by
the Company.
Mandatory Redemption. The shares of Class A Preferred Stock will be
redeemed by the Company, at $5.50 per share plus accumulated but unpaid
dividends thereon, to the extent of the Company's cash available for such
redemption pursuant to a formula, provided that if any dividends on the Class A
Preferred Stock are in arrears, no such redemption will occur unless (i) the
holders of two-thirds of the outstanding shares of Class A Preferred Stock
consent thereto, or (ii) all outstanding shares of the Class A Preferred Stock
are redeemed.
OTHER AUTHORIZED PREFERRED STOCK
The Restated Certificate authorizes the Board, from time to time and
without further stockholder action, to provide for the issuance of up to
2,000,000 shares of Preferred Stock, par value $.01 per share, in one or more
series, and to fix the relative rights and preferences of the shares, including
voting powers, dividend rights, liquidation preferences, redemption rights and
conversion privileges. As of the date hereof, the Board has not provided for the
issuance of any series of such
63
<PAGE> 69
Preferred Stock and there are no agreements or understandings for the issuance
of any such Preferred Stock. Because of its broad discretion with respect to the
creation and issuance of Preferred Stock without stockholder approval, the Board
could adversely affect the voting power of the holders of Common Stock and, by
issuing shares of Preferred Stock with certain voting, conversion and/or
redemption rights, could discourage any attempt to obtain control of the
Company.
CERTAIN CHARTER AND STATUTORY PROVISIONS
The Restated Certificate provides for the division of the Board into three
classes of directors, serving staggered three-year terms. The Restated
Certificate further provides that the approval of the holders of at least
two-thirds of the shares entitled to vote thereon and the approval of a majority
of the entire Board are necessary for the alteration, amendment or repeal of
certain sections of the Restated Certificate relating to the election and
classification of the Board, limitation of director liability, indemnification
and the vote requirements for such amendments to the Restated Certificate. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to such date, the board approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder,
(ii) upon consummation of the transaction that resulted in such person becoming
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, shares owned by certain directors or certain employee stock plans),
or (iii) on or after the date the stockholder became an interested stockholder,
the business combination is approved by the board of directors and authorized by
the affirmative vote (and not by written consent) of at least two-thirds of the
outstanding voting stock excluding that stock owned by the interested
stockholder. A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who (other than the corporation and any
direct or indirect majority-owned subsidiary of the corporation), together with
affiliates and associates, owns (or, as an affiliate or associate, within three
years prior, did own) 15% or more of the corporation's outstanding voting stock.
Section 203 expressly exempts from the requirements described above any
business combination by a corporation with an interested stockholder who became
an interested stockholder at a time when the section did not apply to the
corporation. As permitted by the Delaware General Corporation Law, the Company's
original certificate of incorporation provided that it would not be governed by
Section 203. Clark E. McLeod, Mary E. McLeod, IES and MidAmerican became
interested stockholders within the meaning of Section 203 while that certificate
of incorporation was in effect. Accordingly, future transactions between the
Company and any of such stockholders will not be subject to the requirements of
Section 203.
The Restated Certificate empowers the Board to redeem any of the Company's
outstanding capital stock, at a price determined by the Board, which price shall
be at least equal to the lesser of (i) fair market value (as determined in
accordance with the Restated Certificate) or (ii) in the case of a "Disqualified
Holder," such holder's purchase price (if the stock was purchased within one
year of such redemption), to the extent necessary to prevent the loss or secure
the reinstatement of any license, operating authority or franchise from any
governmental agency. A "Disqualified Holder" is any holder of shares of stock of
the Company whose holding of such stock may result in the loss of, or the
failure to secure the reinstatement of, any license or franchise from any
governmental agency held by the Company or any of its subsidiaries to conduct
any portion of the business of the
64
<PAGE> 70
Company or any of its subsidiaries. Under the Telecommunications Act, non-U.S.
citizens or their representatives, foreign governments or their representatives,
or corporations organized under the laws of a foreign country may not own, in
the aggregate, more than 20% of a common carrier licensee or more than 25% of
the parent of a common carrier licensee if the FCC determines that the public
interest would be served by prohibiting such ownership. Additionally, the FCC's
rules may under certain conditions limit the size of investments by foreign
telecommunications carriers in U.S. international carriers. See
"Business -- Regulation."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock is Norwest
Bank of Minnesota, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there was no public market for the Class A Common
Stock. Sales of a substantial amount of Class A Common Stock in the public
market, or the perception that such sales may occur, could adversely affect the
market price of the Class A Common Stock prevailing from time to time in the
public market and could impair the Company's ability to raise additional capital
through the sale of its equity securities in the future.
Upon completion of the Offering, the Company will have approximately
42,036,448 shares of Common Stock outstanding, including 10,000,000 shares of
Class A Common Stock offered hereby and 32,036,448 "restricted" shares of Common
Stock. Of these restricted shares, 22,126,437 shares of Common Stock generally
are currently eligible for sale under Rule 144 as currently in effect, and
9,910,011 shares of Common Stock generally will be eligible for sale under Rule
144 as currently in effect beginning in January 1997 through February 1998.
The shares of Class A Common Stock offered hereby will be freely tradable
without restriction or further registration under the Securities Act by persons
other than "affiliates" of the Company within the meaning of Rule 144
promulgated under the Securities Act. The holders of restricted shares generally
will be entitled to sell these shares in the public securities market without
registration under the Securities Act to the extent permitted by Rule 144 (or
Rule 145, as applicable) promulgated under the Securities Act or any exemption
under the Securities Act.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the holder is entitled to sell within any three-month period a
number of shares of Class A Common Stock that does not exceed the greater of 1%
of the then-outstanding shares of Class A Common Stock or the average weekly
trading volume of shares of Class A Common Stock on all exchanges and reported
through the automated quotation system of a registered securities association
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
restrictions on the manner of sales, notice requirements and the availability of
current public information about the Company. If three years have elapsed since
the date of acquisition of restricted shares from the Company or from any
"affiliate" of the Company, and the holder thereof is deemed not to have been an
affiliate of the Company at any time during the 90 days preceding a sale, such
person would be entitled to sell such Class A Common Stock in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
The Company, its directors and officers and certain other stockholders have
entered into "lock-up" agreements with the Underwriters, providing that, subject
to certain exceptions, they will not, for a period from 180 days to one year
after the date of this Prospectus, without the prior written consent of the
Representatives, offer, sell or contract to sell, or otherwise dispose of,
directly or
65
<PAGE> 71
indirectly, or announce an offering of, any shares of Common Stock or any
securities convertible into, or exchangeable for, shares of Common Stock. See
"Underwriting."
The Company has reserved 12,112,679 shares of Class A Common Stock for
issuance under the Company's employee stock purchase plan and upon exercise of
options outstanding or to be granted pursuant to the Company's stock option
plans. As of March 31, 1996, options to purchase 6,403,304 shares of Class A
Common Stock were outstanding and unexercised under the Company's stock option
plans. See "Management -- Stock Option Plans" and "Management -- The Employee
Stock Purchase Plan." In addition, options to purchase 3,787,500 shares of Class
B Common Stock, which were granted to IES in connection with the IES Guarantee,
were outstanding and unexercised as of March 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company currently intends to
register the shares of Class A Common Stock reserved for issuance under the
Company's stock option plans and stock purchase plan following the date of this
Prospectus.
66
<PAGE> 72
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the Underwriters (the "Underwriting Agreement"), the
Company has agreed to sell to each of the Underwriters named below (the
"Underwriters"), for whom Salomon Brothers Inc, Bear, Stearns & Co. Inc. and
Morgan Stanley & Co. Incorporated are acting as representatives (the
"Representatives"), and each of the Underwriters has severally agreed to
purchase from the Company, the aggregate number of shares of Class A Common
Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Salomon Brothers Inc .....................................................
Bear, Stearns & Co. Inc. .................................................
Morgan Stanley & Co. Incorporated ........................................
-------
Total...........................................................
=======
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Class A Common Stock offered hereby (other than those subject to the
over-allotment option described below) if any such shares are purchased. In the
event of a default by any Underwriter, the Underwriting Agreement provides that,
in certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representatives that the several
Underwriters propose initially to offer the shares of Class A Common Stock to
the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
public offering, the public offering price and such concessions may be changed.
The Company has granted the Underwriters an option, exercisable within 30
days of the date of this Prospectus, to purchase up to 1,500,000 additional
shares of Class A Common Stock from the Company to cover over-allotments, if
any, at the initial price to the public set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, in whole
or in part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the same proportion of the option shares as the number
of shares of Class A Common Stock to be purchased by such Underwriter in the
above table bears to the total number of shares of Class A Common Stock offered
by the Underwriters hereby.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or contribute to payments the Underwriters may be required
to make in respect thereof.
The Underwriters have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
The Company, its directors and officers (other than Clark E. McLeod) and
Allsop have each agreed with the Underwriters that they will not offer, sell or
contract to sell, or otherwise dispose of, directly or indirectly, or announce
an offering of, any shares of Common Stock or any securities convertible into,
or exchangeable for, shares of Common Stock for a period of 180 days from the
date of this Prospectus, without the prior written consent of the
Representatives, and Clark E. McLeod, Mary E. McLeod, IES and MidAmerican have
each agreed with the Underwriters that they will not offer, sell or contract to
sell, or otherwise dispose of, directly or indirectly, or announce an offering
of, shares of Common Stock or any securities convertible into, or exchangeable
for, any shares of Common Stock for a period of one year from the date of this
Prospectus, without the prior written consent of the Representatives, except (a)
in the case of the Company, (i) Common Stock issued pursuant to any employee or
director stock option plan or employee stock purchase plan in
67
<PAGE> 73
effect on the date the Underwriting Agreement is executed or (ii) issuances of
Common Stock upon the conversion of securities or the exercise of warrants
outstanding on the date the Underwriting Agreement is executed; and (b) in the
case of directors, officers and stockholders of the Company, shares of Common
Stock disposed of as bona fide gifts or pledges where the recipients of such
gifts or the pledgees, as the case may be, agree in writing with the
Underwriters to be bound by the terms of such agreement. In addition, the
Investor Agreement provides that, for a two-year period commencing on the
effective date of this Prospectus, none of Clark E. McLeod, Mary E. McLeod, IES
or MidAmerican will sell or otherwise dispose of any equity securities of the
Company without the consent of the Board. See "Management -- Stockholders'
Agreements."
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Class A Common Stock will be
determined by negotiation among the Company and the Representatives. Among the
factors to be considered in determining the initial public offering price are
the Company's financial and operating history and condition, the future
prospects of the Company and its industry in general, an assessment of the
management of the Company, the general conditions of the securities market at
the time of the Offering and the market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of the Company. There can be no assurance that the prices at which the
Class A Common Stock will sell in the public market after the Offering will not
be lower than the price at which they are sold in the Offering by the
Underwriters.
The Class A Common Stock has been approved for quotation on the Nasdaq
National Market.
Of the 10,000,000 shares of Class A Common Stock offered hereby, Clark E.
and Mary E. McLeod, MidAmerican, IES and Theodore G. Schwartz have indicated an
interest in purchasing shares of Class A Common Stock with a value of $5
million, $20 million, $10 million and $2 million, respectively, at the initial
public offering price without any underwriting discount. See
"Management -- Compensation Committee Interlocks and Insider Participation" and
"Principal Stockholders." No sales agreement has been entered into with respect
to these shares, and none will be entered into (if at all) until the
Registration Statement of which this Prospectus is a part becomes effective. If
the Investors purchase such shares, they will be sold directly by the Company to
the Investors and will not be subject to the terms and conditions of the
Underwriting Agreement. If any of these shares are not purchased by the
Investors, they will be sold to the Underwriters pursuant to the terms of the
Underwriting Agreement.
VALIDITY OF SECURITIES
The validity of the Class A Common Stock and certain other legal matters in
connection with the Class A Common Stock offered hereby are being passed upon
for the Company by Hogan & Hartson L.L.P., Washington, D.C., special counsel for
the Company. The validity of the Class A Common Stock is being passed upon for
the Underwriters by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1994 and
1995, and the consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1995 and financial statement schedule included herein and elsewhere in the
Registration Statement have been audited by McGladrey & Pullen, LLP, as
indicated in their reports with respect thereto, and are included herein in
reliance and upon the authority of said firm as experts in giving said reports.
The statements of income, stockholders' equity and cash flows for MWR
Telecom, Inc., for the years ended December 31, 1993 and December 31, 1994 and
for the period from January 1, 1995 to April 28, 1995, included herein and
elsewhere in the Registration Statement have been audited by McGladrey & Pullen,
LLP, as indicated in their reports with respect thereto, and are included herein
in reliance and upon the authority of said firm as experts in giving said
reports.
68
<PAGE> 74
GLOSSARY
Access -- Telecommunications services that permit long distance carriers to
use local exchange facilities to originate and/or terminate long distance
service.
Access to Rights-of-Way -- Access to poles, ducts, conduits and other
rights-of-way.
CAP (competitive access provider) -- A company that provides its customers
with an alternative to the local exchange company for local transport of private
line and special access telecommunications services.
Central offices -- The switching centers or central switching facilities of
the local exchange companies.
Collocation -- The ability of a CAP such as the Company to connect its
network to the LECs central offices. Physical collocation occurs when a CAP
places its network connection equipment inside the local exchange company's
central offices. Virtual collocation is an alternative to physical collocation
pursuant to which the local exchange company permits a CAP to connect its
network to the local exchange company's central offices on comparable terms,
even through the CAP's network connection equipment is not physically located
inside the central offices.
Dedicated -- Telecommunications lines reserved for use by particular
customers.
Dialing Parity -- The ability of a competing local or toll service provider
to provide telecommunications services in such a manner that customers have the
ability to route automatically, without the use of any access code, their
telecommunications to the service provider of the customer's designation.
Digital -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
FCC -- Federal Communications Commission.
Interconnection -- Interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.
Interconnection Decisions -- Rulings by the FCC announced in September 1992
and August 1993, which require the Regional Bell Operating Companies and most
other large local exchange carriers to provide interconnection in local exchange
company central offices to any CAP, long distance carrier or end user seeking
such interconnection for the provision of interstate special access and switched
access transport services.
InterLATA -- Telecommunications services originating in a LATA and
terminating outside of that LATA.
IntraLATA -- Telecommunications services originating and terminating in the
same LATA.
LATA (local access and transport area) -- A geographic area composed of
contiguous local exchanges, usually but not always within a single state. The
State of Iowa contains all or part of five LATAs; the State of Illinois contains
all or part of 17 LATAs. There are approximately 200 LATAs in the United States.
Local exchange -- A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.
LEC (local exchange carrier) -- A company providing local telephone
services.
G-1
<PAGE> 75
Long distance carriers (interexchange carriers) -- Long distance carriers
provide services between local exchanges on an interstate or intrastate basis. A
long distance carrier may offer services over its own or another carrier's
facilities.
Number portability -- The ability of an end user to change local exchange
carriers while retaining the same telephone number.
POPs (points of presence) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PUC (public utilities commission) -- A state regulatory body, established
in most states, which regulates utilities, including telephone companies
providing intrastate services.
Private line -- A dedicated telecommunications connection between end user
locations.
Public switched network -- That portion of a local exchange company's
network available to all users generally on a shared basis (i.e., not dedicated
to a particular user). Traffic along the public switched network is generally
switched at the local exchange company's central offices.
Reciprocal compensation -- The same compensation of a new competitive local
exchange carrier for termination of a local call by the local exchange carrier
on its network, as the new competitor pays the local exchange carrier for
termination of local calls on the local exchange carrier network.
Resale -- Resale by a provider of telecommunications services (such as a
local exchange carrier) of such services to other providers or carriers on a
wholesale or a retail basis.
Route mile -- The number of miles of the telecommunications path in which
fiber optic cables are installed.
Self-healing ring -- A self-healing ring is a network design in which the
network backbone consists of a continuous ring connecting a central hub facility
with one or more network nodes (such as customer premises). Traffic is routed
between the hub and each of the nodes simultaneously in both a clockwise and a
counterclockwise direction. In the event of a cable cut or component failure
along one of these paths, traffic will continue to flow along the alternate path
so no traffic is lost. In the event of a catastrophic node failure, other nodes
will be unaffected because traffic will continue to flow along whichever path
(primary or alternate) does not pass through the affected node. The switch from
the primary to the alternate path will be imperceptible to most users.
Special access services -- The lease of private, dedicated
telecommunications lines or "circuits" along the network of a local exchange
company or a CAP, which lines or circuits run to or from the long distance
carrier POPs. Examples of special access services are telecommunications lines
running between POPs of a single long distance carrier, from one long distance
carrier POP to the POP of another long distance carrier or from an end user to a
long distance carrier POP.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Switched access transport services -- Transportation of switched traffic
along dedicated lines between the local exchange company central offices and
long distance carrier POPs.
Switched traffic -- Telecommunications traffic along the public switched
network. This traffic is generally switched at the local exchange company's
central offices.
Unbundled Access -- Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment, features,
functions and capabilities, at any technically feasible point within such
network.
G-2
<PAGE> 76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MCLEOD, INC. AND SUBSIDIARIES
Independent Auditor's Report....................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996
(Unaudited)..................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995 and the three months ended March 31, 1995 and 1996 (Unaudited)......... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995 and the three months ended March 31, 1996 (Unaudited)....... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and the three months ended March 31, 1995 and 1996 (Unaudited)......... F-6
Notes to Consolidated Financial Statements......................................... F-7
MWR TELECOM, INC.
Independent Auditor's Report....................................................... F-19
Statements of Income for the years ended December 31, 1993 and 1994 and
for the period from January 1, 1995 to April 28, 1995 and the three months ended
March 31, 1995 (Unaudited)...................................................... F-20
Statements of Stockholder's Equity for the years ended December 31, 1993 and 1994
and for the period from January 1, 1995 to April 28, 1995....................... F-21
Statements of Cash Flows for the years ended December 31, 1993 and 1994
and for the period from January 1, 1995 to April 28, 1995 and the three months
ended March 31, 1995 (Unaudited)................................................ F-22
Notes to Financial Statements...................................................... F-23
</TABLE>
F-1
<PAGE> 77
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
McLeod, Inc.
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheets of McLeod, Inc. and
subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of McLeod, Inc. and
subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
March 28, 1996, except
for Note 11, as to
which the date is
April 30, 1996
F-2
<PAGE> 78
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 3)
Current Assets
Trade receivables, less allowance for doubtful accounts and
discounts 1994 $84,000; 1995 $219,000; 1996 $272,000 (Note 2)........... $ 2,723,249 $ 6,689,069 $11,621,150
Inventory................................................................. 1,930,208 2,638,829 2,842,882
Prepaid expenses and other................................................ 208,776 295,689 398,347
----------- ----------- -----------
TOTAL CURRENT ASSETS................................................ 4,862,233 9,623,587 14,862,379
----------- ----------- -----------
Property and Equipment
Land...................................................................... 310,917 310,917 309,539
Telecommunication networks................................................ 922,769 7,696,101 10,928,387
Equipment................................................................. 4,328,732 6,100,470 7,347,462
Networks in progress (Note 2)............................................. -- 3,115,361 3,023,120
----------- ----------- -----------
5,562,418 17,222,849 21,608,508
Less accumulated depreciation............................................. 846,203 2,144,615 2,652,528
----------- ----------- -----------
4,716,215 15,078,234 18,955,980
----------- ----------- -----------
Intangibles and Other Assets
Deferred line installation costs, less accumulated amortization
1994 $126,000; 1995 $518,000; 1996 $608,000............................. 1,010,704 1,424,685 1,564,539
Goodwill, less accumulated amortization 1995 $117,000; 1996 $162,000...... -- 2,525,091 2,480,363
Other..................................................................... 97,544 334,855 412,028
----------- ----------- -----------
1,108,248 4,284,631 4,456,930
----------- ----------- -----------
$10,686,696 $28,986,452 $38,275,289
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................................... $ 1,689,216 $ 5,832,543 $ 8,944,974
Checks issued not yet presented for payment............................... 34,115 918,932 1,042,163
Accrued payroll and payroll related expenses.............................. 1,216,144 1,954,621 1,709,378
Other accrued liabilities................................................. 239,669 874,916 1,170,159
Deferred revenue, current portion......................................... 24,107 134,325 400,115
----------- ----------- -----------
TOTAL CURRENT LIABILITIES........................................... 3,203,251 9,715,337 13,266,789
----------- ----------- -----------
Long-Term Debt (Note 3)..................................................... 3,500,000 3,600,000 11,300,000
----------- ----------- -----------
Deferred Revenue, less current portion...................................... 692,263 713,173 2,565,737
----------- ----------- -----------
Commitments (Notes 2, 3 and 4)
Stockholders' Equity (Notes 3, 6, 7 and 11)
Capital stock:
Preferred, Class A, $5.50 par value; authorized 1,150,000 shares; none
issued................................................................ -- -- --
Preferred, $.01 par value; authorized 2,000,000 shares; none issued;
terms determined upon issuance........................................ -- -- --
Common, Class A, $.01 par value; authorized 75,000,000 shares; issued
1994 14,478,481 shares; 1995 16,387,081 shares; 1996 16,410,519
shares................................................................ 144,785 163,871 164,105
Common, Class B, convertible, $.01 par value; authorized 22,000,000
shares; issued 1994 7,670,457 shares; 1995 and 1996 15,625,929
shares................................................................ 76,705 156,259 156,259
Additional paid-in capital................................................ 17,253,105 40,117,164 40,642,055
Accumulated deficit....................................................... (14,150,413) (25,479,352) (29,819,656)
Cost of common stock reacquired for the treasury, 1994 22,500 shares; 1995
and 1996 none........................................................... (33,000) -- --
----------- ----------- -----------
3,291,182 14,957,942 11,142,763
----------- ----------- -----------
$10,686,696 $28,986,452 $38,275,289
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 79
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Telecommunications revenue (Note
2)................................ $ 1,550,098 $ 8,014,093 $ 28,997,880 $ 4,761,307 $12,487,519
----------- ------------ ------------ ----------- -----------
Operating expenses:
Cost of service................... 1,527,658 6,211,783 19,667,138 3,266,666 9,249,981
Selling, general and
administrative.................. 2,389,890 12,373,411 18,053,431 3,978,740 6,344,907
Depreciation and amortization..... 235,013 771,879 1,835,127 317,653 968,614
----------- ------------ ------------ ----------- -----------
TOTAL OPERATING EXPENSES... 4,152,561 19,357,073 39,555,696 7,563,059 16,563,502
----------- ------------ ------------ ----------- -----------
OPERATING LOSS............. (2,602,463) (11,342,980) (10,557,816) (2,801,752) (4,075,983)
Financial income (expense):
Interest income................... 162,846 145,193 138,691 50 1,049
Interest (expense)................ -- (218,175) (909,814) (155,018) (265,370)
----------- ------------ ------------ ----------- -----------
LOSS BEFORE INCOME TAXES... (2,439,617) (11,415,962) (11,328,939) (2,956,720) (4,340,304)
Income taxes (Note 5)............... -- -- -- -- --
----------- ------------ ------------ ----------- -----------
NET LOSS................... $ (2,439,617) $ (11,415,962) $ (11,328,939) $(2,956,720) $(4,340,304)
=========== ============ ============ =========== ===========
Loss per common and common
equivalent share (Note 11)........ $ (0.08) $ (0.31) $ (0.31) $ (0.08) $ (0.12)
=========== ============ ============ =========== ===========
Weighted average common and common
equivalent shares outstanding
(Note 11)......................... 29,655,063 36,369,916 37,054,744 37,053,802 37,055,053
=========== ============ ============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 80
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 3, 6, 7 AND 11)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THREE MONTHS ENDED
MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
CAPITAL STOCK
---------------------------------
COMMON ADDITIONAL
-------------------- PAID-IN ACCUMULATED TREASURY
PREFERRED CLASS A CLASS B CAPITAL DEFICIT STOCK TOTAL
--------- -------- -------- ----------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992........ $ $ 188 $ -- $ 4,812 $ (294,834) $ -- $ (289,834)
Net loss......................... -- -- -- -- (2,439,617) -- (2,439,617)
Issuance of 11,975,010 shares of
Class A
common stock................... -- 119,750 -- 6,045,575 -- -- 6,165,325
Issuance of 5,625,000
shares of Class B
common stock................... -- 56,250 4,443,750 -- -- 4,500,000
-------- -------- -------- ----------- ------------ -------- ------------
Balance, December 31, 1993........ -- 119,938 56,250 10,494,137 (2,734,451) -- 7,935,874
Net loss......................... -- -- -- -- (11,415,962) -- (11,415,962)
Issuance of 2,484,720
shares of Class A
common stock................... -- 24,847 -- 3,604,420 -- -- 3,629,267
Issuance of 2,045,457
shares of Class B
common stock................... -- -- 20,455 2,979,548 -- -- 3,000,003
Purchase of 22,500 shares
of common stock for the
treasury....................... -- -- -- -- -- (33,000) (33,000)
Amortization of fair value of
stock options issued to
non-employees (Note 3)......... -- -- -- 175,000 -- -- 175,000
-------- -------- -------- ----------- ------------ -------- ------------
Balance, December 31, 1994........ -- 144,785 76,705 17,253,105 (14,150,413) (33,000) 3,291,182
Net loss......................... -- -- -- -- (11,328,939) -- (11,328,939)
Issuance of 1,908,600
shares of Class A
common stock................... -- 19,086 -- 4,278,164 -- -- 4,297,250
Issuance of 4,279,414
shares of Class B
common stock................... -- -- 42,794 9,652,258 -- -- 9,695,052
Issuance of 3,676,058
shares of Class B
common stock in connection with
the acquisition of MWR Telecom
Inc. (Note 9).................. -- -- 36,760 8,295,637 -- -- 8,332,397
Reissuance of 22,500 shares of
treasury stock................. -- -- -- 6,000 -- 33,000 39,000
Amortization of fair value of
stock options issued to
non-employees (Note 3)......... -- -- -- 632,000 -- -- 632,000
-------- -------- -------- ----------- ------------ -------- ------------
Balance, December 31, 1995........ -- 163,871 156,259 40,117,164 (25,479,352) -- 14,957,942
Net loss (Unaudited)............. -- -- -- -- (4,340,304) -- (4,340,304)
Issuance of 23,438
shares of Class A
common stock (Unaudited)....... -- 234 -- 22,891 -- -- 23,125
Amortization of fair value of
stock options issued to
non-employees (unaudited) (Note
3)............................. -- -- -- 187,000 -- -- 187,000
Amortization of compensation
expense related to stock
options (unaudited) (Note 6)... -- -- -- 315,000 -- -- 315,000
-------- -------- -------- ----------- ------------ -------- ------------
Balance, March 31, 1996
(Unaudited)...................... $ -- $164,105 $156,259 $40,642,055 $(29,819,656) $ -- $ 11,142,763
======== ======== ======== =========== ============ ======== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 81
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net loss.......................................... $(2,439,617) $(11,415,962) $(11,328,939) $ (2,956,720) $ (4,340,304)
Adjustments to reconcile net loss to net cash
(used in)
operating activities:
Depreciation.................................... 230,321 632,472 1,299,381 216,086 511,891
Amortization.................................... 4,692 314,407 1,167,746 171,567 643,723
Changes in assets and liabilities, net of
effects of purchase of MWR Telecom Inc. (Note
9):
(Increase) in trade receivables............... (200,813) (2,272,436) (3,574,894) (97,762) (4,932,081)
(Increase) decrease in inventory.............. (1,739,861) (184,845) (269,128) 51,435 (204,053)
(Increase) in deferred line installation
costs....................................... -- (1,136,504) (806,146) (246,665) (229,974)
Increase in accounts payable and accrued
expenses.................................... 827,230 2,000,753 4,095,478 56,465 2,714,934
Increase in deferred revenue.................. -- 716,370 8,749 (6,027) 2,118,354
Other, net.................................... (134,104) (16,302) (70,026) (24,903) (186,705)
------------ ------------- ------------- ------------- -------------
NET CASH (USED IN) OPERATING ACTIVITIES..... (3,452,152) (11,362,047) (9,477,779) (2,836,524) (3,904,215)
------------ ------------- ------------- ------------- -------------
Cash Flows from Investing Activities
Purchase of property and equipment................ (1,940,893) (3,363,223) (5,272,248) (297,982) (3,942,141)
Other............................................. 152,019 (78,773) (266,092) (24,377) --
------------ ------------- ------------- ------------- -------------
NET CASH (USED IN) INVESTING ACTIVITIES..... (1,788,874) (3,441,996) (5,538,340) (322,359) (3,942,141)
------------ ------------- ------------- ------------- -------------
Cash Flows from Financing Activities
Increase in checks issued not yet presented for
payment......................................... -- 34,115 884,817 219,883 123,231
Proceeds from line of credit agreement............ -- 8,400,000 42,200,000 18,500,000 25,100,000
Payments on line of credit agreement.............. -- (4,900,000) (42,100,000) (15,600,000) (17,400,000)
Net proceeds from issuance of common stock........ 9,857,908 6,629,270 13,992,302 -- 23,125
Reissuance (purchase) of treasury stock........... -- (33,000) 39,000 39,000 --
------------ ------------- ------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES... 9,857,908 10,130,385 15,016,119 3,158,883 7,846,356
------------ ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 4,616,882 (4,673,658) -- -- --
Cash and cash equivalents:
Beginning......................................... 56,776 4,673,658 -- -- --
------------ ------------- ------------- ------------- -------------
Ending............................................ $ 4,673,658 $ -- $ -- $ -- $ --
============ ============= ============= ============= =============
Supplemental Disclosure of Cash Flow Information
Cash payment for interest, net of interest
capitalized 1993 and 1994 none; 1995 $61,914;
1996 $61,192.................................... $ -- $ 35,345 $ 260,922 $ 76,588 $ 98,984
============ ============= ============= ============= =============
Supplemental Schedule of Noncash Investing and
Financing Activities
Conversion of stockholder advances
into 3,027,814 shares of Class A common stock... $ 807,417
============
Accounts payable incurred for property and
equipment....................................... $ 111,582 $ 141,022 $ 1,233,779 $ 31,400 $ 1,681,276
============ ============= ============= ============= =============
Acquisition of MWR Telecom Inc. (Note 9):
Working capital acquired, net................... $ 392,508
Fair value of other assets acquired, principally
fiber optic telecommunication networks........ 5,298,082
Goodwill........................................ 2,641,807
-------------
Stock issued.................................... $ 8,332,397
=============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 82
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: The Company is a diversified telecommunications
company that provides a broad range of products and services to business and
residential customers and government agencies in Iowa and Illinois. The
Company's services primarily include local and long distance telephone services,
communication services between interexchange carriers and customers and
maintenance and installation services on fiber optic telecommunication networks.
The Company's business is highly competitive and is subject to various federal,
state and local regulations.
Accounting estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies is as follows:
Principles of consolidation: The accompanying financial statements include
those of the Company and its subsidiaries, all of which are wholly-owned. All
significant intercompany items and transactions have been eliminated in
consolidation.
Cash and cash equivalents: For purposes of reporting cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Inventory: Inventory is carried principally at the lower of average cost
or market and consists primarily of new and reusable parts to maintain and build
fiber optic networks. Inventories of approximately $1.6 million used to support
a maintenance agreement are amortized on a straight-line basis over the 10-year
life of the agreement (see Note 2).
Property and equipment: Property and equipment is stated at cost.
Construction costs, including interest, are capitalized during the installation
of fiber optic telecommunication networks. Depreciation is computed by the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Telecommunication networks........................... 15
Equipment............................................ 2-7
</TABLE>
The Company's telecommunications networks are subject to technological
risks and rapid market changes due to new products and services and changing
customer demand. These changes may result in changes in the estimated economic
lives of these assets.
Deferred line installation costs: Deferred line installation costs include
costs incurred in the establishment of local access lines for customers and are
being amortized on the straight-line method over the life of the average
customer contract as cost of telecommunications services. The contracts' terms
do not exceed 60 months.
Goodwill: Goodwill resulting from an acquisition is being amortized over
15 years using the straight-line method and is periodically reviewed for
impairment based upon an assessment of future operations to ensure that it is
appropriately valued.
Income tax matters: The Company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or
F-7
<PAGE> 83
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Net deferred tax assets are
reduced by a valuation allowance when appropriate. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Deferred revenue: Amounts received in advance under long-term leases of
fiber optic telecommunication networks are recognized as revenue on a
straight-line basis over the life of the leases.
Revenue recognition: Revenues for local and long-distance services are
recognized when subscribers use telecommunication services. The revenue from
long-term leases of fiber optic telecommunication networks is recognized over
the term of the lease. Base annual revenue for telecommunication contract
maintenance is recognized on a straight line basis over the term of the
contract. Additional services provided under these contracts are recognized as
the services are performed.
Cost of service: Includes local and long-distance services purchased
primarily from two Regional Bell Operating Companies and one interexchange
carrier and the cost of operating the Company's fiber optic telecommunication
networks. The agreement with the interexchange carrier requires minimum monthly
purchase and minutes-of-usage commitments.
Stock options issued to employees: Compensation expense for stock issued
through stock option plans is accounted for using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued for Employees." Under this method, compensation is measured as the
difference between the estimated market value of the stock at the date of award
less the amount required to be paid for the stock. The difference, if any, is
charged to expense over the periods of service.
The estimated market value used for the stock options granted is determined
on a periodic basis by the Company's Board of Directors.
Stock options issued to non-employees: The Company uses the Black-Scholes
model to determine the fair value of the stock options issued to non-employees
at the date of grant. This amount is amortized to expense over the vesting
period of the options.
Loss per common and common equivalent share: Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, stock issued and stock
options granted with exercise prices below the assumed initial public offering
price during the twelve-month period preceding the date of the initial filing of
the Registration Statement have been included in the calculation as if they were
outstanding for all years presented.
Recently issued accounting standards: In March 1995, the Financial
Accounting Standards Board (FASB) issued SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which will require the Company to review for the impairment of long-lived assets
and certain identifiable intangibles to be held and used by the Company whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Adoption of SFAS No. 121 is required in fiscal 1996.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value based method for financial
accounting and reporting for stock-based
F-8
<PAGE> 84
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
employee compensation plans. However, the new standard allows compensation to
continue to be measured by using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, but requires expanded disclosures. SFAS No. 123 is
effective in fiscal year 1996. The Company has elected to continue to apply the
intrinsic value based method of accounting for stock options.
While the Company does not know precisely the impact that will result from
adopting SFAS No. 121 and SFAS No. 123, the Company does not expect the adoption
of SFAS No. 121 or SFAS No. 123 to have a material effect on the Company's
consolidated financial statements.
Fair value of financial instruments: The carrying amount of long-term debt
approximates fair value because these obligations bear interest at current
rates.
Interim Financial Information (unaudited): The financial statements and
notes related thereto as of March 31, 1996, and for the three month periods
ended March 31, 1995 and 1996, are unaudited, but in the opinion of management
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations. The operating results for the interim periods are not indicative of
the operating results to be expected for a full year or for other interim
periods. Not all disclosures required by generally accepted accounting
principles necessary for a complete presentation have been included.
NOTE 2. MAJOR CUSTOMER AND COMMITMENTS
During 1992, the Company obtained an assignment of a contract covering the
maintenance and operations responsibilities for the State of Iowa Fiber Optic
Communications Network through October 2004. The annual fee for performing this
maintenance is adjusted annually by the change in the Consumer Price Index and
for additions to the network. The revenue from this and related contracts
amounted to approximately $1,550,000, $3,407,000 and $4,937,000 for 1993, 1994
and 1995, respectively. In addition, the Company had additional revenues from
this customer during 1995 of approximately $403,000. Trade receivables include
approximately $1,147,000 and $2,143,000 from this customer at December 31, 1994
and 1995, respectively.
During 1995, the Company was awarded contracts from the State of Iowa to
build 265 fiber optic telecommunication network segments throughout the State of
Iowa. Upon completion of each segment, the Company will receive approximately
$115,000 for a seven year lease for certain capacity on that segment. The
Company will recognize this revenue of approximately $30,475,000 on a
straight-line basis over the term of the lease based on the relationship of
individual segment costs to total projected costs. As of December 31, 1995, no
revenue had been recognized under these contracts.
The Company estimates that minimum future construction costs required to
fulfill its obligations under the 1995 contract with the State of Iowa would be
approximately $34,000,000. The Company, however, expects that its actual
construction costs will be higher with respect to such network segments, because
the Company is adding more fiber and route miles than is contractually required
with respect to such construction, in order to optimize the design of its
network. In addition, the Company estimates that it will incur additional
construction costs of approximately $2,000,000 to
F-9
<PAGE> 85
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 2. MAJOR CUSTOMER AND COMMITMENTS -- (CONTINUED)
complete two other fiber optic telecommunication networks in process. The
Company presently anticipates that the costs to complete these projects will be
incurred as follows:
<TABLE>
<S> <C>
1996.......................................... $20,400,000
1997.......................................... 11,800,000
1998.......................................... 3,400,000
1999.......................................... 400,000
-----------
$36,000,000*
===========
</TABLE>
- ---------------
* At December 31, 1995, the Company had actual remaining contractual commitments
of approximately $8,700,000 for costs associated with the construction of
fiber optic telecommunications networks. Subsequent to December 31, 1995, the
Company entered into $4,000,000 of similar construction contracts.
The Company plans to finance the completion of these contracts with the
above mentioned revenues and external financing.
NOTE 3. PLEDGED ASSETS, RELATED DEBT AND SUBSEQUENT EVENTS
At March 31, 1996, the Company had two line of credit agreements with The
First National Bank of Chicago under which it may borrow up to a total of
$32,000,000. The first agreement expires on May 16, 1998 with a one year
extension upon mutual agreement. The second agreement expires on September 30,
1996. The Company is required to maintain a $2,000,000 term life insurance
policy on the chief executive officer and a $1,000,000 term life insurance
policy on the chief operating officer. Proceeds from the policies are pledged as
collateral under these agreements. Additionally, the agreements contain various
restrictive covenants, including, among others, ones which prohibit the payment
of any dividends, limit additional indebtedness, limit the annual repurchase of
stock by the Company and require the Company to maintain a financial ratio. At
December 31, 1995 and March 31, 1996, the Company was in compliance with all
covenants.
The agreements are structured as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996 BORROWINGS
MAXIMUM BORROWINGS AT DECEMBER 31, MAXIMUM AT
BORROWING ---------------------------- BORROWING MARCH 31,
LIMIT 1994 1995 LIMIT 1996
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
First Credit Facility:
Facility A.............. $ 6,000,000 $ 3,500,000 $ 3,600,000 $ 6,000,000 $ 6,000,000
Facility B.............. 6,000,000 -- -- 10,000,000 5,300,000
Facility C.............. 8,000,000 -- -- 8,000,000 --
----------- ---------- ---------- ----------- -----------
20,000,000 3,500,000 3,600,000 24,000,000 11,300,000
Second Credit Facility:... -- -- -- 8,000,000 --
----------- ---------- ---------- ----------- -----------
Total................. $20,000,000 $ 3,500,000 $ 3,600,000 $32,000,000 $11,300,000
=========== ========== ========== =========== ===========
</TABLE>
F-10
<PAGE> 86
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 3. PLEDGED ASSETS, RELATED DEBT AND SUBSEQUENT EVENTS -- (CONTINUED)
First Credit Facility:
Facility A: The interest rate is effective on the date of the borrowings
and may be designated by the Company as either (1) the higher of the prime rate
or Federal Funds effective rate plus 0.5% or (2) London Interbank Offered Rate
plus 0.375%. The Company also pays a facilities fee of 0.1875% per annum on the
average daily commitment.
Borrowings under Facility A are unsecured and are guaranteed by a
stockholder which requires a 1% annual fee on the maximum borrowing limit. At
the inception of the agreement, the stockholder was granted 1,875,000 Class B
common stock options at $1.47 per share, the estimated market price at that
date. The options vest quarterly at the rate of 93,750 shares. Vesting would be
reduced if the maximum borrowing limit amount is reduced. The options are
exercisable for five years from the date the last options are vested. As of
December 31, 1995 and March 31, 1996, respectively, 562,500 and 656,250 stock
options are vested.
In the event of a default under Facility A, the Company must issue to the
guarantor shares of $5.50 par value preferred stock equal to the payment made by
the guarantor divided by $5.50.
Facility B: The interest rate is effective on the date of the borrowings
at the higher of the prime rate plus 0.25% or Federal Funds effective rate plus
0.75%. The effective rate at March 31, 1996 is 8.50%. The Company also pays an
annual facilities fee of 0.25% on the average daily commitment. Borrowings under
Facility B are limited based on the Company's borrowing base which includes
trade receivables and inventories. The borrowings under Facility B are
collateralized by trade receivables and inventory. As of December 31, 1995, the
maximum borrowing limit was available to the Company.
In March 1996, the Bank and the Company agreed to increase the maximum
borrowing limit under Facility B from $6,000,000 to $10,000,000.
Facility C: The Company can borrow under this facility if the aggregate
borrowings are in excess of the Facility A maximum borrowing amount plus the
borrowing base of Facility B. The interest rate is the higher of the prime rate
plus 0.75% or Federal Funds effective rate plus 1.25% on the date of the
borrowing. The borrowings under Facility C are collateralized by trade
receivables and inventory.
Upon the use of Facility C, the Company pays an annual facilities fee of
0.5% on the average daily commitment. In addition, Facility C is then guaranteed
by a stockholder which requires an annual fee equal to 0.5% of the difference
between the actual borrowing on Facility C and the total borrowing base
attributable to Facility C which includes trade receivables and inventories.
Facility C was activated in 1995 upon which the Company granted to the
stockholder 1,912,500 Class B common stock options at $2.27 per share, the
estimated market price at that date. The options vest quarterly at the rate of
112,500 shares. Vesting would be reduced if the maximum borrowing limit amount
is reduced. The options are exercisable for five years from the date the last
options are vested. As of December 31, 1995 and March 31, 1996, respectively,
225,000 and 337,500 stock options are vested.
In the event of a default under Facility C, the Company must issue to the
guarantor shares of $5.50 par value preferred stock equal to the payment made by
the guarantor divided by $5.50.
F-11
<PAGE> 87
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 3. PLEDGED ASSETS, RELATED DEBT AND SUBSEQUENT EVENTS -- (CONTINUED)
Stock Options: The Company has used the Black-Scholes model to value the
options issued under Facility A and C. The total value of the options under
Facility A and C was approximately $1,400,000 and $2,000,000, respectively, at
the date of issuance.
Interest expense for the years ended December 31, 1994 and 1995 is composed
of the following:
<TABLE>
<CAPTION>
1994 1995
----------------------------------------------------- -----------------------------------------------------
FACILITY A FACILITY B FACILITY C TOTAL FACILITY A FACILITY B FACILITY C TOTAL
---------- ---------- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts to
bank......... $ 26,706 $-- $-- $ 26,706 $ 253,701 $ 29,750 $ -- $283,451
Facility
fee.......... 7,058 9,411 16,469 11,250 15,000 30,027 56,277
Capitalized
interest..... -- -- -- -- (61,914) -- -- (61,914)
Amortization
of fair value
of
stock options
issued to
non-employees... 175,000 -- -- 175,000 280,000 -- 352,000 632,000
--------- -------- -------- -------- ---------- --------- --------- --------
$ 208,764 $9,411 $-- $218,175 $ 483,037 $ 44,750 $ 382,027 $909,814
========= ======== ======== ======== ========== ========= ========= ========
Effective
average
interest
rate......... 46.8% ** ** 15.9% 13.7% **
======== ======== ======== ========== ======== ========
</TABLE>
- ---------------
** No amounts borrowed during the year.
Second Credit Facility: In March 1996, a Second Credit Facility for
$8,000,000 was established. The borrowings under the Second Credit Facility are
unsecured and bear interest at a rate equal to 1% over the higher of the prime
rate or the Federal Funds effective rate plus 0.5%. The Company also must pay a
facilities fee of 1% on the average daily commitment. At such time as the
Company issues equity or debt for cash, the amount of the Second Credit Facility
commitment is reduced by an amount equal to 100% of the net cash proceeds from
such issuance and any amounts due at that time must be reduced down to the new
commitment amount.
NOTE 4. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The Company leases its facilities under noncancellable agreements which
expire at various times through March 2001. These agreements require various
monthly rentals plus the payment of applicable property taxes, maintenance and
insurance. The Company also leases vehicles and equipment under agreements which
expire at various times through December 2001 and require various monthly
rentals.
The total minimum rental commitment at December 31, 1995 under the leases
mentioned above is as follows:
<TABLE>
<S> <C>
1996............................................ $1,549,000
1997............................................ 1,047,000
1998............................................ 534,000
1999............................................ 454,000
2000............................................ 411,000
Thereafter...................................... 305,000
----------
$4,300,000
==========
</TABLE>
F-12
<PAGE> 88
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 4. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE -- (CONTINUED)
The total rental expense included in the consolidated statements of
operations for 1993, 1994 and 1995 is approximately $125,000, $622,000 and
$1,558,000, respectively, which also includes short-term rentals for office
facilities.
NOTE 5. INCOME TAX MATTERS
Net deferred taxes consist of the following components as of December 31,
1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $5,306,000 $ 9,681,000
Accruals and reserves not currently deductible........ 607,000 529,000
Deferred revenues..................................... 290,000 301,000
Other................................................. 8,000 17,000
---------- -----------
6,211,000 10,528,000
Less valuation allowance.............................. 5,411,000 8,418,000
---------- -----------
800,000 2,110,000
---------- -----------
Deferred tax liabilities:
Deferred line installation cost....................... 404,000 570,000
Property and equipment................................ 396,000 1,540,000
---------- -----------
800,000 2,110,000
---------- -----------
$ -- $ --
========== ===========
</TABLE>
During 1995, the Company increased the valuation allowance to $8,418,000 on
the deferred tax assets. A valuation allowance has been recognized to offset the
related net deferred tax assets due to the uncertainty of realizing the benefit
of the loss carryforwards. The Company has available net operating loss
carryforwards totaling approximately $24 million which expire in various amounts
in the years 2008 to 2010.
The income tax provision differs from the amount of income tax determined
by applying the U.S. Federal income tax rate to pretax income for 1993, 1994 and
1995 due to the following:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax (benefit)......... $(854,000) $(3,934,000) $(3,744,000)
Increase (decrease) in income taxes
resulting from:
Change in valuation allowance........... 789,000 4,622,000 3,007,000
Deferred tax rate differential on
temporary differences................ 104,000 (656,000) 739,000
Other................................... (39,000) (32,000) (2,000)
--------- ----------- -----------
$ -- $ -- $ --
========= =========== ===========
</TABLE>
F-13
<PAGE> 89
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 6. STOCK OPTION PLAN AND SUBSEQUENT EVENTS
The Company has reserved 5,471,630 and 6,676,267 shares of Class A common
stock for issuance to key employees and directors under the 1992, 1993 and 1995
Incentive Stock Option Plans and the Director Stock Option Plan at December 31,
1995 and March 31, 1996, respectively, which have been approved by the Board of
Directors. Options are granted at prices equal to the estimated fair market
value on the dates of grant as determined by the Company's Board of Directors.
Under the 1992, 1993 and Director stock option plans, all options granted become
exercisable at a rate of 25% per year, on a cumulative basis. Under the 1995
stock option plan, all options, except for options issued to the Company's
chairman and chief executive officer, become exercisable at a rate of 25% per
year, on a cumulative basis, beginning five years from the date of grant. The
options issued to the Company's chairman and chief executive officer vest at a
rate of 20% per year, on a cumulative basis.
Other pertinent information related to the plans is as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
--------- -------------
<S> <C> <C>
Outstanding at January 1, 1993............................ 1,004,394 $0.27 - $0.29
Granted................................................. 1,564,414 0.80 - 1.07
---------
Outstanding at December 31, 1993.......................... 2,568,808 0.27 - 1.07
Granted................................................. 786,113 1.47 - 1.73
Forfeited............................................... (232,691) 0.80 - 1.73
---------
Outstanding at December 31, 1994.......................... 3,122,230 0.27 - 1.73
Granted................................................. 2,006,273 1.73 - 2.67
Exercised............................................... (11,532) 0.27 - 1.07
Forfeited............................................... (247,923) 1.07 - 2.27
---------
Outstanding at December 31, 1995.......................... 4,869,048 0.27 - 2.67
Granted................................................. 1,653,668 2.67 - 2.93
Exercised............................................... (23,438) 0.99
Forfeited............................................... (95,974) 0.80 - 2.67
---------
Under option, March 31, 1996.............................. 6,403,304 0.27 - 2.93
=========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- MARCH 31,
1993 1994 1995 1996
------- --------- --------- ---------
NUMBER OF SHARES
<S> <C> <C> <C> <C>
Available for grant, end of year.......... 393,692 590,270 591,988 237,993
======= ========= ========= =========
Options exercisable, end of year.......... 251,100 1,035,143 1,580,989 1,759,424
======= ========= ========= =========
</TABLE>
The Company issued 965,166 and 688,502 of stock options in January and
February 1996. The estimated fair market value of these options at the date of
grant was later determined to exceed the exercise price by $4,170,000 and
$5,020,000, respectively. As a result, the Company will be required to amortize
approximately $9,190,000 over the vesting period of these options. The
amortization for the three months ended March 31, 1996 was approximately
$315,000.
Subsequent to March 31, 1996, the stockholders approved the Amended and
Restated Directors Stock Option Plan, the 1996 Employee Stock Option Plan and
the Employee Stock Purchase Plan (see Note 11).
F-14
<PAGE> 90
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 6. STOCK OPTION PLAN AND SUBSEQUENT EVENTS (CONTINUED)
In addition, the Company has reserved 3,787,500 shares of Class B common
stock for issuance to a stockholder which has guaranteed a debt agreement. As
discussed in Note 3, all options have been granted as of December 31, 1995 and
March 31, 1996.
NOTE 7. INVESTMENT AGREEMENT AND PREFERRED STOCK INFORMATION
The Company has an investment agreement under which the Company issued
7,344,964 shares of Class A common stock and 15,625,929 shares of Class B common
stock as of December 31, 1995 and March 31, 1996. All Class B common stock has
rights identical to Class A common stock other than their voting rights, which
are equal to .40 vote per share. Each share of Class B common stock is
convertible into one share of Class A common stock at the option of the holder.
The agreement also restricts the payment of any dividends and redemption of
stock without the prior consent of five-sevenths of the Company's Board of
Directors. On April 1, 1996, the stockholders agreed to terminate the investment
agreement and enter into a new Investor Agreement, which will be effective upon
effectiveness of the Registration Statement filed in connection with the
contemplated public offering (see Note 11).
The Company has authorized but not issued 1,150,000 shares of $5.50 par
value redeemable Class A preferred stock. If issued, holders of the Class A
preferred stock would be entitled to nominate, vote and elect two additional
members to the Company's Board of Directors and to receive cash dividends on the
par value of the stock at the New York prime plus two percent. Such dividends
are cumulative.
NOTE 8. RETIREMENT PLAN
The Company has a 401(k) profit-sharing plan available to employees who
have completed one year of service and have worked 1,000 hours during the year.
The Company's contribution is discretionary. The Company contributed
approximately none, $12,000 and $44,000 for the years ended December 31, 1993,
1994 and 1995, respectively.
NOTE 9. ACQUISITION
On April 28, 1995, the Company issued 3,676,058 shares or approximately
$8.3 million of the Company's Class B common stock in exchange for all of the
outstanding common stock of MWR Telecom Inc. (MWR). In addition, the Company
granted an option to the seller to purchase 3,529,414 shares of Class B common
stock for $2.27 per share. This option was exercised on June 15, 1995.
MWR provides fiber optics telecommunication services between interexchange
carriers and their customers primarily in the Des Moines, Iowa area. The
goodwill acquired of approximately $2.6 million is being amortized over 15 years
by the straight-line method. The acquisition has been accounted for as a
purchase and results of operations since the date of acquisition are included in
the 1995 consolidated financial statements.
F-15
<PAGE> 91
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 9. ACQUISITION (CONTINUED)
The unaudited consolidated results of operations on a pro forma basis as
though MWR had been acquired as of the beginning of 1994 is as follows:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Service income......................................... $ 10,060,000 $ 29,871,000
Net loss............................................... (11,070,000) (10,561,000)
Loss per common and common equivalent share............ (.31) (.29)
</TABLE>
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the MWR acquisition been consummated as of the above dates, nor are
they necessarily indicative of future operating results.
NOTE 10. RELATED PARTY TRANSACTIONS
During 1995, the Company entered into agreements with two stockholders that
gives certain rights-of-way to the Company for the construction of its
telecommunications network in exchange for capacity on the network. These
agreements were renegotiated in 1996 to clarify various terms of the agreements.
The Company provided and purchased services from various companies, the
principals of which are stockholders or directors of McLeod, Inc. or are
affiliates. These provided and purchased services are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Telecommunications revenue.............................. $ -- $ -- $103,000
======== ======== ========
Operating expenses:
Rent.................................................. $ 36,000 $ 19,000 $383,000
Legal services........................................ 91,000 79,000 147,000
Transportation services............................... 18,000 51,000 38,000
Advertising fees...................................... 1,000 11,000 55,000
Maintenance and installation services................. -- 51,000 36,000
Commission expense.................................... -- 11,000 31,000
Miscellaneous expense................................. -- 3,000 23,000
Reimbursement of general and administrative
expenses........................................... (6,000) (52,000) (38,000)
-------- -------- --------
$140,000 $173,000 $675,000
======== ======== ========
</TABLE>
In addition, at March 31, 1996, the Company has two $75,000 notes
receivable from officers. The notes bear interest at the applicable federal
interest rate for mid-term loans and require interest only payments for two
years and then annual $25,000 payments plus interest until paid in full.
NOTE 11. EVENTS SUBSEQUENT TO DECEMBER 31, 1995
Public offering: The Company has made arrangements with three investment
banking firms to undertake an initial public offering of Class A common stock
for approximately $170 million at a per share price based on market conditions
at the time of effectiveness. The above amount does not include an
over-allotment option to sell additional shares. Although no assurances can be
given that
F-16
<PAGE> 92
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 11. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 -- (CONTINUED)
the offering will be successful, the Company plans to use the proceeds to
finance (i) certain development, construction and operating costs of the
Company's fiber optic network, (ii) to fund market expansion activities of the
telemanagement business, (iii) to repay borrowings and (iv) for additional
working capital and general corporate purposes.
Recapitalization: In March 1996, the Company's Board of Directors
authorized a restatement of its Articles of Incorporation increasing the
authorized Class A common stock from 15,000,000 shares of $.01 par value stock
to 75,000,000 shares of $.01 par value stock and increasing the authorized Class
B common stock from 15,000,000 shares of $.01 par value stock to 22,000,000
shares of $.01 par value stock. The restated Articles of Incorporation also
authorizes the Board of Directors to issue up to 2,000,000 shares of $.01 par
value preferred stock. The terms of the preferred stock are determined at the
time of issuance. The Board of Directors also declared a 3.75 to 1 stock split
for both the Class A and Class B common stock which was effected in the form of
a stock dividend. All references to share and per share amounts give retroactive
effect to this stock split and recapitalization.
Investor agreement: On April 1, 1996, the stockholders entered into an
Investor Agreement, which will be effective upon effectiveness of the
Registration Statement filed in connection with the contemplated public
offering. This agreement provides for the election of directors designated by
certain principal stockholders and prevents certain principal stockholders from
disposing of any equity securities of the Company for a period of two years
unless consented to by the Board of Directors. In addition, certain principal
stockholders agreed that for a period of three years they will not acquire any
securities or options issued by the Company, except as allowed by previous
agreements or by the Board of Directors.
Employee benefit plans: On April 30, 1996, the Company's stockholders
approved the Amended and Restated Directors Stock Option Plan, the 1996 Employee
Stock Option Plan and the Employee Stock Purchase Plan. A summary of these plans
follows:
Amended and Restated Directors Stock Option Plan -- The Directors
Stock Option Plan ("Directors Plan") was amended and restated to be a
"formula" plan under which each eligible non-employee director who
subsequently commences service as a director will be granted an initial
option to purchase 10,000 shares of Class A common stock. An additional
option to purchase 5,000 shares of Class A common stock will be granted in
each of the next two years to each eligible director who remains for the
two year period. Options granted under the Directors Plan, as amended, may
be exercised with respect to 25 percent of the shares subject to such
option one year after the option is granted and with respect to an
additional 25 percent of the shares subject to such option over the next
three years. The Directors Plan, as amended, will terminate in 2006, unless
terminated earlier by the Board of Directors.
1996 Employee Stock Option Plan (1996 Plan) -- The 1996 Plan
supersedes the 1992 Incentive Stock Option Plan, the 1993 Incentive Stock
Option Plan and the 1995 Incentive Stock Option Plan. No future grants of
options will be made under such Plans. The Company has reserved 4,525,000
shares for issuance under the 1996 Plan. All officers and key employees of
the Company are eligible to receive grants under the 1996 Plan, provided
the individual does not have more than 2,000,000 shares subject to
exercise. The option price generally may not be less than 100% of the fair
market value of the Class A common stock on the grant date (or 110% if the
grantee beneficially owns more than 10% of the outstanding Class A common
F-17
<PAGE> 93
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
NOTE 11. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 -- (CONTINUED)
stock). The options granted terminate 10 years after the grant date (or
five years after the grant date if the grantee beneficially owns more than
10% of the outstanding Class A common stock). The options may be exercised
at any time after grant, however, no more than $100,000 worth of stock
covered by the options may become exercisable in any calendar year. The
1996 Plan will terminate in March 2006.
Employee Stock Purchase Plan -- Under the stock purchase plan,
employees may purchase up to an aggregate of 1,000,000 shares of Class A
common stock through payroll deductions. Employees of the Company who have
been employed more than six months and who are regularly scheduled to work
more than 20 hours per week are eligible to participate in the plan,
provided that they own less than five percent of the total combined voting
power of all classes of stock of the Company. The purchase price for each
share will be determined by the Compensation Committee but may not be less
than 85% of the closing price of the shares of Class A common stock on the
first or last trading day of the payroll deduction period, whichever is
lower. No employee may purchase in any calendar year Class A common stock
having an aggregate fair market value in excess of $25,000. Upon
termination of employment, an employee other than a participating employee
who is subject to Section 16(b) under the Securities Exchange Act of 1934,
as amended, will be refunded all monies in his or her account and the
employee's option to purchase shares will terminate. The plan will
terminate in March 2006, unless terminated earlier by the Board of
Directors.
F-18
<PAGE> 94
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
MWR Telecom Inc.
Cedar Rapids, Iowa
We have audited the statements of income, stockholder's equity, and cash
flows of MWR Telecom Inc. for the years ended December 31, 1993 and 1994 and the
period from January 1, 1995 to April 28, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of MWR
Telecom Inc. for the years ended December 31, 1993 and 1994 and the period from
January 1, 1995 to April 28, 1995 in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
March 15, 1996
F-19
<PAGE> 95
MWR TELECOM INC.
STATEMENTS OF INCOME (NOTE 7)
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, THREE MONTHS
-------------------------- 1995 TO ENDED
1993 1994 APRIL 28, 1995 MARCH 31, 1995
----------- ----------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Telecommunications revenue (Note 2)..... $ 1,823,056 $ 2,045,597 $872,809 $661,400
---------- ---------- -------- --------
Operating expenses:
Cost of service....................... 673,925 806,855 375,480 276,986
Selling, general and administrative,
including management fees to parent
company 1993 $18,000; 1994 $31,500;
1995 $12,000....................... 295,831 298,000 98,328 79,029
Depreciation.......................... 428,263 569,151 220,125 162,403
---------- ---------- -------- --------
TOTAL OPERATING EXPENSES...... 1,398,019 1,674,006 693,933 518,418
---------- ---------- -------- --------
OPERATING INCOME.............. 425,037 371,591 178,876 142,982
Financial income (expense):
Interest income, parent company and
its affiliates..................... 51,087 25,305 1,093 403
Interest (expense), parent company and
its affiliates..................... (137,068) (252,904) (55,820) (57,244)
---------- ---------- -------- --------
INCOME BEFORE INCOME TAXES.... 339,056 143,992 124,149 86,141
Income taxes (Note 4)................... 138,028 59,732 51,239 35,808
---------- ---------- -------- --------
NET INCOME.................... $ 201,028 $ 84,260 $ 72,910 $ 50,333
========== ========== ======== ========
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE> 96
MWR TELECOM INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (NOTE 7)
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE
PERIOD FROM JANUARY 1, 1995 TO APRIL 28, 1995
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1992............... $1,000 $1,247,031 $ (16,154) $1,231,877
Net income............................. -- -- 201,028 201,028
Conversion of related party note
payable to equity................... -- 1,200,000 -- 1,200,000
------ ---------- --------- ----------
Balance, December 31, 1993............... 1,000 2,447,031 184,874 2,632,905
Net income............................. -- -- 84,260 84,260
Distribution to parent company
(Note 1)............................ -- -- (412,693) (412,693)
------ ---------- --------- ----------
Balance, December 31, 1994............... 1,000 2,447,031 (143,559) 2,304,472
Net income............................. -- -- 72,910 72,910
Conversion of related party note
payable to equity................... -- 2,500,000 -- 2,500,000
Distribution to parent company
(Note 1)............................ -- -- (302,435) (302,435)
------ ---------- --------- ----------
Balance, April 28, 1995.................. $1,000 $4,947,031 $ (373,084) $4,574,947
====== ========== ========= ==========
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE> 97
MWR TELECOM INC.
STATEMENTS OF CASH FLOWS (NOTE 7)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, THREE MONTHS
YEARS ENDED DECEMBER 31, 1995 TO ENDED
---------------------------- APRIL 28, MARCH 31,
1993 1994 1995 1995
------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income.................................. $ 201,028 $ 84,260 $ 72,910 $ 50,333
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 428,263 569,151 220,125 162,403
Deferred income taxes..................... 105,513 261,290 13,795 67,736
Changes in assets and liabilities:
(Increase) in trade receivables......... (142,965) (65,761) (24,693) (5,088)
(Increase) decrease in related party
receivables.......................... 921,089 28,364 2,957 (1,347)
Increase (decrease) in accounts payable
and accrued expenses................. (96,357) (120,813) 76,509 63,713
Increase (decrease) in related party
payables............................. (80,266) (4,825) 30,028 (3,920)
Increase (decrease) in deferred
revenue.............................. 25,945 (8,142) 83,030 81,981
Other, net.............................. 20,461 (107,607) 115,601 (125,012)
----------- ----------- ---------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES......................... 1,382,711 635,917 590,262 290,799
----------- ----------- ---------- ----------
Cash Flows from Investing Activities
Purchase of property and equipment.......... (1,148,197) (1,032,468) (366,539) (148,409)
Proceeds from payments on notes receivable
from parent company and its affiliates.... 30,000 1,097,000 -- --
Advances on notes receivable from parent
company and its affiliates................ (2,088,000) (712,000) (99,000) (56,000)
Proceeds on notes receivable................ -- 1,383,609 -- --
----------- ----------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES............... (3,206,197) 736,141 (465,539) (204,409)
----------- ----------- ---------- ----------
Cash Flows from Financing Activities
Increase (decrease) in checks issued not yet
presented for payment..................... (228,411) 33,942 (39,723) (1,390)
Proceeds from notes payable to parent
company................................... 4,684,000 581,000 44,000 44,000
Payments on notes payable to parent
company................................... (2,632,103) (1,987,000) (129,000) (129,000)
----------- ----------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES............... 1,823,486 (1,372,058) (124,723) (86,390)
----------- ----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH...... -- -- -- --
Cash:
Beginning................................... -- -- -- --
----------- ----------- ---------- ----------
Ending...................................... $ -- $ -- $ -- $ --
=========== =========== ========== ==========
Supplemental Disclosure of Cash Flow
Information
Cash payment for interest, net of interest
capitalized 1993 $10,777; 1994 $10,276;
1995 $6,827............................... $ 137,068 $ 252,904 $ 55,820 $ 55,820
=========== =========== ========== ==========
Cash payments for income taxes, net of
refunds................................... $ 94,023 $ (144,622) $ 8,000 $ 8,000
=========== =========== ========== ==========
Supplemental Schedule of Noncash Investing and
Financing Activities
Conversion of related party notes payable to
equity.................................... $ 1,200,000 $2,500,000 $2,500,000
=========== ========== ==========
Distribution to parent company of certain
net assets (Note 1)....................... $ 412,693 $ 302,435 $ 302,435
=========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE> 98
MWR TELECOM INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: MWR Telecom Inc. (the "Company") primarily provides
fiber optics telecommunication services between interexchange carriers and their
customers primarily in the Des Moines, Iowa area. The Company was a wholly-owned
subsidiary of Midwest Capital Group, Inc. until April 28, 1995 when all of the
Company's common stock was purchased by McLeod, Inc. (see Note 7).
Accounting estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies is as follows:
Basis of presentation: Prior to the sale of the operating assets of its
wholly-owned subsidiary in March 1994, the financial statements for MWR Telecom
Inc. (MWR) included the results of operations and cash flows of its subsidiary.
Subsequent to the sale, the subsidiary was liquidated and certain remaining net
assets were transferred to MWR's parent company. Since MWR's subsidiary was not
acquired by McLeod, Inc. (see Note 7), these financial statements only include
the results of operations and cash flows of MWR.
Inventory: Inventory is carried principally at average cost and consists
primarily of new and reusable parts to maintain and build fiber optic networks.
Property and equipment: Property and equipment is stated at cost.
Construction costs, including interest, are capitalized during the installation
of fiber optic telecommunication networks. Depreciation is computed by the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Telecommunication networks........................... 7-15
Equipment............................................ 3-7
</TABLE>
Deferred revenue: Amounts received in advance under long-term leases of
fiber optic telecommunication networks are recognized as revenue on a
straight-line basis over the life of the leases.
Revenue recognition: Revenue from long-term leases of fiber optic
telecommunication networks is recognized over the term of the lease. Additional
services provided under these lease agreements are recognized as the services
are performed. Revenue from construction of fiber optic telecommunication
networks for others is recognized as the services are performed. These
construction contracts are short-term in nature and there were no material
contracts in process at the end of any periods presented.
Cost of service: Includes the cost of operating the Company's fiber optic
telecommunication networks and the cost of construction of networks for others.
Income tax matters: The Company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Net deferred tax assets are reduced by a valuation allowance when appropriate.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
F-23
<PAGE> 99
MWR TELECOM INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
For the periods presented, the Company was a member of a group that filed
consolidated federal and state tax returns. Accordingly, income taxes payable to
(refundable from) the tax authorities was recognized on the financial statements
of the parent company who is the taxpayer for income tax purposes. The members
of the consolidated group allocate payments to any member of the group for the
income tax reduction resulting from the member's inclusion in the consolidated
return, or the member makes payments to the parent company for its allocated
share of the consolidated income tax liability. This allocation approximates the
amounts that would be reported if the Company was separately filing its tax
returns.
Recently issued accounting standards: In March 1995, the Financial
Accounting Standards Board (FASB) issued SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which will require the Company to review for the impairment of long-lived assets
and certain identifiable intangibles to be held and used by the Company whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Adoption of SFAS No. 121 is required in fiscal 1996.
While the Company does not know precisely the impact that will result from
adopting SFAS No. 121, the Company does not expect the adoption of SFAS No. 121
to have a material effect on the Company's financial statements.
Interim Financial Information (Unaudited): The financial statements and
notes related thereto for the three month period ended March 31, 1995 are
unaudited, but in the opinion of management include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations. The operating results for the
interim period are not indicative of the operating results to be expected for a
full year or for other interim periods. Not all disclosures required by
generally accepted accounting principles necessary for a complete presentation
have been included.
NOTE 2. MAJOR CUSTOMERS
Telecommunications revenue includes the following approximate amounts from
major customers.
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1,
------------------------- 1995 TO
1993 1994 APRIL 28, 1995
-------- -------- --------------
<S> <C> <C> <C>
Customer A.......................... $173,000 $268,000 $109,000
Customer B.......................... 354,000 449,000 170,000
-------- -------- --------
$527,000 $717,000 $279,000
======== ======== ========
</TABLE>
NOTE 3. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The Company leased its office and warehouse facilities from an affiliate
through December 1995 when it entered into an agreement to lease its office and
warehouse facilities from McLeod, Inc. on a month-to-month basis.
The total rental expense included in the statements of income for the years
ended December 31, 1993 and 1994 and for the period from January 1, 1995 to
April 28, 1995 is approximately $79,000, $82,000 and $31,000, respectively.
F-24
<PAGE> 100
MWR TELECOM INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. INCOME TAX MATTERS
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER PERIOD FROM
31, JANUARY 1,
---------------------- 1995 TO
1993 1994 APRIL 28, 1995
-------- --------- --------------
<S> <C> <C> <C>
Current................................ $ 32,515 $(201,558) $ 37,444
Deferred............................... 105,513 261,290 13,795
-------- --------- -------
$138,028 $ 59,732 $ 51,239
======== ========= =======
</TABLE>
The income tax provision differs from the amount of income tax determined
by applying the U.S. Federal income tax rate to pretax income due to the
following:
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1,
------------------------ 1995 TO
1993 1994 APRIL 28, 1995
-------- ------- --------------
<S> <C> <C> <C>
Computed "expected" tax............... $118,670 $50,397 $ 43,452
Increase (decrease) in income taxes
resulting from:
State tax, net of federal benefit... 22,276 9,460 8,157
Other............................... (2,918) (125) (370)
-------- ------- -------
$138,028 $59,732 $ 51,239
======== ======= =======
</TABLE>
NOTE 5. RETIREMENT PLANS
The Company's employees who had completed certain service and hour
requirements participated in certain retirement plans sponsored by the parent
company. The Company's expense related to these benefit plans was approximately
none, $76,000 and $21,000 for the years ended December 31, 1993 and 1994 and the
period from January 1, 1995 to April 28, 1995, respectively.
NOTE 6. RELATED PARTY TRANSACTION AND RIGHTS-OF-WAY
Prior to the sale discussed in Note 7, the Company and an affiliate entered
into a Joint Ownership Agreement which provides for the ownership and
maintenance of each entity's fiber optic networks in the Des Moines, Iowa area.
Some of the fiber optics network are constructed within rights-of-way owned by
affiliated companies. This agreement remains in force after the above mentioned
sale.
The Company also had agreements with an affiliate to use certain of their
rights-of-way at no charge. These agreements continued in force after the sale
to McLeod, Inc.
NOTE 7. SALE OF COMPANY
On April 28, 1995, all of the outstanding common stock of MWR Telecom Inc.
was sold to McLeod, Inc. of Cedar Rapids, Iowa.
F-25
<PAGE> 101
McLEOD NETWORK ARCHITECTURE GRAPHIC
A diagram representing the Company's network architecture, consisting of an
oval depicting the Company's "self-healing fiber ring." Seven dots are spaced
approximately evenly around the oval, one dot for each of (i) McLeod Customers
(Retain and/or Wholesale); (ii) Local Access; (iii) Wireless; (iv) Cable; (v)
Video Service; (vi) Internet; and (vii) Long Distance. The following paragraph
appears below the diagram:
This diagram depicts the capability of the Company's fiber optic network to
carry a variety of communications services, including some not now provided by
the Company on a retail basis. The Company is a provider of integrated local and
long distance telecommunications services to small and medium-sized businesses
primarily in Iowa and Illinois. The Company currently provides local, long
distance, 800, international, travel card and, to a very limited extent, video
and Internet access services and is constructing a state-of-the-art digital
fiber optic telecommunications network. This network will enable the Company to
have greater control over its infrastructure. In addition, the Company's network
is interconnected to the cable facilities of two third-party providers. The
Company also is providing space on towers controlled by the Company to a
third-party wireless service provider. The Company does not offer any retail
cable or wireless services. See "Risk Factors -- Wireless Competition" and
"Business."
<PAGE> 102
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH SOLICITATION.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 6
Use of Proceeds...................... 15
Dividend Policy...................... 15
Dilution............................. 16
Capitalization....................... 18
Selected Consolidated Financial
Data............................... 19
Pro Forma Statement of Operations.... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................. 28
Management........................... 47
Certain Transactions................. 59
Principal Stockholders............... 60
Description of Capital Stock......... 62
Shares Eligible for Future Sale...... 65
Underwriting......................... 67
Validity of Securities............... 68
Experts.............................. 68
Glossary............................. G-1
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
10,000,000 SHARES
MCLEOD, INC.
CLASS A COMMON STOCK
($.01 PAR VALUE)
[MCLEOD, INC. CORPORATE LOGO]
SALOMON BROTHERS INC
BEAR, STEARNS & CO. INC.
MORGAN STANLEY & CO.
INCORPORATED
PROSPECTUS
DATED , 1996
<PAGE> 103
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses in connection with the
distribution of the securities hereunder.
<TABLE>
<S> <C>
SEC registration fee...................................................... $71,379
NASD filing fee........................................................... 21,200
Nasdaq National Market listing fee........................................ *
Accounting fees and expenses.............................................. *
Legal fees and expenses................................................... *
Printing and engraving expenses........................................... *
Blue Sky fees and expenses................................................ *
Transfer Agent fees and expenses.......................................... *
Miscellaneous expenses.................................................... *
-------
Total........................................................... $ *
=======
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have had
no reasonable cause to believe his or her conduct was unlawful. In addition, the
DGCL does not permit indemnification in an action or suit by or in the right of
the corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
The Restated Certificate contains provisions that provide that no director
of the Company shall be liable for breach of fiduciary duty as a director except
for (1) any breach of the directors' duty of loyalty to the Company or its
stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (3) liability under
Section 174 of the DGCL; or (4) any transaction from which the director derived
an improper personal benefit. The Restated Certificate contains provisions that
further provide for the indemnification of directors and officers to the fullest
extent permitted by the DGCL. Under the Bylaws of the Company, the Company is
required to advance expenses incurred by an officer or director in defending any
such action if the director or officer undertakes to repay such amount if it is
determined that the director or officer is not entitled to indemnification. In
addition, the Company intends to enter into indemnity agreements with each of
its directors pursuant to which the Company will agree to indemnify the
directors as permitted by the DGCL. The Company is in the process of obtaining
directors and officers liability insurance.
II-1
<PAGE> 104
The Underwriting Agreement provides for indemnification by the Underwriters
of the directors, officers and controlling persons of the Company against
certain liabilities, including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
From the Company's inception on June 6, 1991 through March 31, 1996, the
Company has issued and sold the following securities (as adjusted to give effect
to the 3.75-for-one stock split of the Company's Class A Common Stock and Class
B Common Stock):
(1) In July 1991, the Company issued 18,750 shares of Class A Common
Stock to its founder, Clark E. McLeod. The price per share was $.27, for an
aggregate consideration of $5,000.
(2) In September 1992, the Company granted stock options to five of
its employees to purchase an aggregate of 832,096 shares of Class A Common
Stock pursuant to the 1992 Plan at an exercise price of $.27 per share and
granted Clark E. McLeod stock options to purchase an aggregate of 172,298
shares of Class A Common Stock pursuant to the 1992 Plan at an exercise
price of $.29 per share.
(3) In January 1993, the Company issued an aggregate of 6,356,256
shares of Class A Common Stock to Clark E. McLeod (2,462,334), Mary E.
McLeod (2,481,080), Holly A. McLeod (34,459), James L. Cram (153,548),
Virginia A. Cram (153,548), William A. Cram (18,750), Kristin J. Cram
(18,750), Stephen C. and Sally W. Gray (86,149), Scott L. and Julie A.
Goldberg (68,918), Kirk E. Kaalberg (17,232), and Bruce A. and Susan M.
Thayer (861,488). The price per share was $.27, for an aggregate
consideration of $1,695,000.
(4) Between March and November 1993, the Company granted stock options
to 35 of its employees to purchase an aggregate of 1,193,438 shares of
Class A Common Stock pursuant to the 1992 Plan (198,750) and the 1993 Plan
(994,688), at an exercise price of $.80 per share and granted Clark E.
McLeod stock options to purchase an aggregate of 180,000 shares of Class A
Common Stock pursuant to the 1992 Plan (56,250) and the 1993 Plan
(123,750), at an exercise price of $.88 per share.
(5) In April 1993, the Company issued an aggregate of 5,618,754 shares
of Class A Common Stock to Mary E. McLeod (1,249,999), Clark E. McLeod
(1,250,003), Allsop (2,500,002), David C. Stanard (123,750), Judith A.
Stanard (56,250), Douglas McGowan (153,750), Stephen C. and Sally W. Gray
(18,750), James L. Cram (18,750), Virginia A. Cram (18,750), John D. and
Karleen M. Hagan (18,750), Scott L. and Julie A. Goldberg (18,750), Robert
C. and Deborah B. Taylor (18,750), Mernat & Co. f/b/o Henry Royer IRA
(37,500), Gene L. Hassman (41,250), Stephen Samuel Gray Irrevocable Trust
(3,750), Mernat & Co. f/b/o Joanne H. Collins Trust (45,000), and Mernat &
Co. f/b/o Thomas M. Collins (45,000). The price per share was $.80, for an
aggregate consideration of $4,495,002.
(6) In April 1993, the Company issued 5,625,000 shares of Class B
Common Stock to IES. The price per share was $.80, for an aggregate
consideration of $4,500,000.
(7) In May 1993, the Company granted to four of its directors,
pursuant to the Director Plan, stock options to purchase an aggregate of
150,000 shares of Class A Common Stock at an exercise price of $.80 per
share.
(8) In December 1993, the Company issued an aggregate of 307,096
shares of Class A Common Stock to William A. Cram (14,063), Kristin J. Cram
(14,063), James L. Cram (139,485) and Virginia A. Cram (139,485) in
exchange for 307,096 shares of Class A Common Stock previously issued to
James L. Cram (153,548) and Virginia A. Cram (153,548).
II-2
<PAGE> 105
(9) In December 1993, the Company granted to 44 of its employees,
pursuant to the 1993 Plan, stock options to purchase an aggregate of 40,976
shares of Class A Common Stock at an exercise price of $1.07 per share.
(10) Between January and June 1994, the Company granted to 47 of its
employees, pursuant to the 1993 Plan, stock options to purchase an
aggregate of 535,314 shares of Class A Common Stock at an exercise price of
$1.47 per share.
(11) In February 1994, the Company issued 2,045,457 shares of Class B
Common Stock to IES. The price per share was $1.47, for an aggregate
consideration of $3,000,003.
(12) In February 1994, the Company issued an aggregate of 2,484,720
shares of Class A Common Stock to Allsop (1,022,727), Clark E. McLeod
(511,365), Mary E. McLeod (511,362), Mernat & Co. f/b/o John D. Hagan IRA
(76,875), Bruce A. and Susan M. Thayer (68,183), Judith A. Stanard
(67,500), Mernat & Co. f/b/o Thomas M. Collins (102,274), Mernat & Co.
f/b/o Henry Royer IRA (37,500), Casey D. Mahon (34,092), Dain Bosworth,
Custodian for Casey D. Mahon IRA (34,092), Stephen C. and Sally W. Gray
(15,000), and Robert C. and Deborah B. Taylor (3,750). The price per share
was $1.47, for an aggregate consideration of $3,644,250.
(13) In May 1994, the Company issued an aggregate of 14,478,480 shares
of Class A Common Stock to all existing holders of Class A Common Stock and
an aggregate of 7,670,457 shares of Class B Common Stock to all existing
holders of Class B Common Stock in connection with the reincorporation of
the Company from Iowa to Delaware in August 1993 and in exchange for all
shares of Class A Common Stock and Class B Common Stock previously issued
to such stockholders.
(14) In May 1994, the Company granted to IES, in consideration of the
guaranty executed by IES in connection with the Credit Facility, stock
options to purchase an aggregate of 1,875,000 shares of Class B Common
Stock at an exercise price of $1.47 per share.
(15) Between August 1994 and January 1995, the Company granted to 235
of its employees, pursuant to the 1993 Plan, stock options to purchase an
aggregate of 569,503 shares of Class A Common Stock at an exercise price of
$1.73 per share and granted Clark E. McLeod stock options to purchase an
aggregate of 18,750 shares of Class A Common Stock pursuant to the 1993
Plan at an exercise price of $1.91 per share.
(16) In December 1994, the Company issued an aggregate of 2,482,602
shares of Class A Common Stock to Joni Thornton (3,750), Al and Delores
Lyon (3,750), Aaron McLeod (3,750), Holly McLeod (3,750), Dave and Karen
Lindberg (3,750), Ted McLeod (3,750), Clark E. McLeod (7,500) and Mary E.
McLeod (2,452,602), in exchange for 2,482,602 shares of Class A Common
Stock previously issued to Clark E. McLeod (18,750) and Mary E. McLeod
(2,463,852).
(17) In December 1994, the Company issued an aggregate of 278,972*
shares of Class A Common Stock to William A. Cram (4,688), Kristin J. Cram
(4,688), James L. Cram (134,798) and Virginia A. Cram (134,798) in exchange
for 278,970* shares of Class A Common Stock previously issued to James L.
Cram (139,485) and Virginia A. Cram (139,485).
(18) In January 1995, the Company issued 22,500 shares of Class A
Common Stock to Mernat & Co. f/b/o Stephen C. Gray. The price per share was
$1.73, for an aggregate consideration of $39,000.
- ---------------
* Differences between the number of shares originally issued and the number of
shares exchanged therefor in the described transaction are due to the rounding
up of all fractional shares resulting from the Recapitalization.
II-3
<PAGE> 106
(19) In January 1995, the Company granted to four of its directors,
pursuant to the Director Plan, stock options to purchase an aggregate of
75,000 shares of Class A Common Stock at an exercise price of $1.73 per
share.
(20) Between March and October 1995, the Company granted stock options
to 452 of its employees to purchase an aggregate of 1,339,474 shares of
Class A Common Stock pursuant to the 1992 Plan (105,000), the 1993 Plan
(953,224) and the 1995 Plan (281,250), at an exercise price of $2.27 per
share, and granted Clark E. McLeod stock options to purchase an aggregate
of 56,250 shares of Class A Common Stock pursuant to the 1995 Plan at an
exercise price of $2.49 per share.
(21) In April 1995, the Company issued 3,676,058 shares of Class B
Common Stock to Midwest Capital Group Inc. The price per share was $2.27,
for an aggregate consideration of $8,332,397.
(22) In April 1995, the Company granted to IES, in consideration of
the guaranty executed by IES in connection with the Credit Facility, stock
options to purchase an aggregate of 1,912,500 shares of Class B Common
Stock at an exercise price of $2.27 per share.
(23) In June 1995, the Company issued 3,529,414 shares of Class B
Common Stock to MWR Investments Inc. The price per share was $2.27, for an
aggregate consideration of $8,000,005.
(24) In June 1995, the Company issued 750,000 shares of Class B Common
Stock to IES. The price per share was $2.27, for an aggregate consideration
of $1,700,000.
(25) In June 1995, the Company issued 3,676,058 shares of Class B
Common Stock to MWR Investments Inc., in exchange for 3,676,058 shares of
Class B Common Stock previously issued to Midwest Capital Group Inc.
(26) In June 1995, the Company issued an aggregate of 929,670* shares
of Class A Common Stock to Bruce A. Thayer (464,835) and Susan M. Thayer
(464,835) in exchange for 929,671* shares of Class A Common Stock
previously issued to Bruce A. and Susan M. Thayer.
(27) In June 1995, the Company issued an aggregate of 1,897,068 shares
of Class A Common Stock to Allsop (171,188), Frank N. and Marilyn Y. Magid
(44,119), Fred L. Wham, III, Trustee, Fred L. Wham, III Profit Sharing U/A
dated 1/1/89 f/b/o Fred L. Wham, III (88,238), Scott G. Byers Partnership
(44,119), Craig M. and Susan M. Byers (44,119), Richard C. Young (44,119),
Ross D. Christensen (44,119), William C. Knapp as trustee of the William C.
Knapp Revocable Trust (88,238), Nelson Investment Company (44,119), John W.
Aalfs (44,119), John D. Hagan (44,119), William J. Stevens (11,625), Tami
Young (22,062), Merrill Lynch f/b/o Michael J. Brown IRA (13,238), Ann
Vermeer Stienstra (13,238), Keith R. Molof (2,250), Central Iowa Energy
Cooperative (330,885), Trust for the Benefit of the Children of Frank Magid
(44,119), Iowa Capital Corporation (154,414), Dain Bosworth f/b/o Thomas M.
Brown IRA (32,363), Thomas M. Brown (8,813), Karen Jacobi (450), Philip
Thrasher Kennedy (6,619), IPC Development Co. (45,000), Trusty (44,119),
S.K.E. Investment Partnership (44,119), Thomas M. Hoyt (44,119), James S.
Cownie (88,238), Mernat & Co. f/b/o Stephen C. Gray IRA (3,750), Stephen C.
Gray (26,352), Gregg D. Miller (44,119), Theodore G. Schwartz (44,119),
Clark E. McLeod (64,163), Mary E. McLeod (64,159), Ibak & Company f/b/o
John W. Colloton (25,875), and John W. Colloton (18,244). The price per
share was $2.27, for an aggregate consideration of $4,299,997.
- ---------------
* Differences between the number of shares originally issued and the number of
shares exchanged therefor in the described transaction are due to the rounding
up of all fractional shares resulting from the Recapitalization.
II-4
<PAGE> 107
(28) In July 1995, the Company issued an aggregate of 26,352 shares of
Class A Common Stock to Stephen C. Gray (22,602) and Elizabeth Mary
Fletcher Gray Education Trust (3,750) in exchange for 26,352 shares of
Class A Common Stock previously issued to Stephen C. Gray.
(29) In July 1995, the Company granted to six of its directors,
pursuant to the Director Plan, stock options to purchase an aggregate of
112,500 shares of Class A Common Stock at an exercise price of $2.27 per
share.
(30) In October 1995, the Company issued 282 shares of Class A Common
Stock to Kathleen Sanders. The price per share was $1.06, for an aggregate
consideration of $300.
(31) In October 1995, the Company issued an aggregate of 269,596
shares of Class A Common Stock to William A. Cram (3,750), Kristin J. Cram
(3,750), James L. Cram (131,048) and Virginia A. Cram (131,048) in exchange
for 269,596 shares of Class A Common Stock previously issued to James L.
Cram (134,798) and Virginia A. Cram (134,798).
(32) In December 1995, the Company issued an aggregate of 2,462,330
shares of Class A Common Stock to Joni Thornton (3,750), Dave and Karen
Lindberg (3,750), Aaron McLeod (3,750), Holly McLeod (3,750), Clark E.
McLeod (2,437,602) and Mary E. McLeod (9,728), in exchange for 2,462,330
shares of Class A Common Stock previously issued to Clark E. McLeod
(2,445,102) and Mary E. McLeod (17,228).
(33) In December 1995, the Company issued 11,250 shares of Class A
Common Stock to James L. Cram. The price per share was $.27, for an
aggregate consideration of $3,000.
(34) Between December 1995 and February 1996, the Company granted
stock options to 239 of its employees to purchase an aggregate of 1,514,263
shares of Class A Common Stock pursuant to the 1992 Plan (39,752) and the
1993 Plan (1,474,511), at an exercise price of $2.67 per share and granted
Clark E. McLeod stock options to purchase an aggregate of 112,500 shares of
Class A Common Stock pursuant to the 1993 Plan at an exercise price of
$2.93 per share.
(35) In January 1996, the Company granted to six of its directors,
pursuant to the Director Plan, stock options to purchase an aggregate of
112,500 shares of Class A Common Stock at an exercise price of $2.67 per
share.
(36) In February 1996, the Company issued an aggregate of 262,096
shares of Class A Common Stock to William A. Cram (5,625), Kristin J. Cram
(5,625), Thomas W. Burns (3,750), Rita M. Burns (3,750), James L. Cram
(121,673) and Virginia A. Cram (121,673) in exchange for 262,096 shares of
Class A Common Stock previously issued to James L. Cram (131,048) and
Virginia A. Cram (131,048).
(37) In February 1996, the Company issued 23,438 shares of Class A
Common Stock to Blake O. Fisher, Jr. The price per share was $.99, for an
aggregate consideration of $23,125.
Each issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as a
transaction by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Company, to information about the Company.
II-5
<PAGE> 108
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement among McLeod, Inc., Salomon Brothers Inc, Bear,
Stearns & Co. Inc. and Morgan Stanley & Co. Incorporated.
**2.1 -- Agreement and Plan of Reorganization dated April 28, 1995 among Midwest
Capital Group Inc., MWR Telecom, Inc. and McLeod Inc.
3.1 -- Amended and Restated Certificate of Incorporation of McLeod, Inc.
3.2 -- Amended and Restated Bylaws of McLeod, Inc.
*4.1 -- Form of Class A Common Stock Certificate of McLeod, Inc.
**4.2 -- Investment Agreement dated as of April 1, 1993 among McLeod
Telecommunications, Inc., IES Investments Inc., Allsop Venture Partners III,
L.P. and Clark E. McLeod.
**4.3 -- First Amendment to Investment Agreement dated as of February 23, 1994 among
McLeod, Inc., IES Investments Inc., Allsop Venture Partners III, L.P. and
Clark E. McLeod.
**4.4 -- Second Amendment to Investment Agreement dated as of April 28, 1995 among
McLeod, Inc., IES Investments Inc., Allsop Venture Partners III, L.P., Midwest
Capital Group Inc. and Clark E. McLeod.
**4.5 -- Shareholders' Agreement dated as of April 1, 1993 among Clark E. McLeod, Mary
E. McLeod, Allsop Venture Partners III, L.P., IES Investments Inc. and McLeod
Telecommunications, Inc.
**4.6 -- First Amendment to Shareholders' Agreement dated as of February 23, 1994 among
Clark E. McLeod, Mary E. McLeod, Allsop Venture Partners III, L.P., IES
Investments Inc., McLeod, Inc. and the stockholders thereof parties thereto.
**4.7 -- Second Amendment to Shareholders' Agreement dated as of April 28, 1995 among
Clark E. McLeod, Mary E. McLeod, Allsop Venture Partners III, L.P., IES
Investments Inc., Midwest Capital Group Inc., McLeod, Inc. and the
stockholders thereof parties thereto.
**4.8 -- Form of Investor Agreement dated as of April 1, 1996 among the Company, IES
Investments Inc., Midwest Capital Group Inc., MWR Investments Inc., Clark and
Mary McLeod, and certain other stockholders.
*5.1 -- Opinion of Hogan & Hartson L.L.P.
**10.1 -- Credit Agreement dated as of May 16, 1994 among McLeod, Inc., McLeod Network
Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc.
and The First National Bank of Chicago
**10.2 -- First Amendment to Credit Agreement dated as of June 17, 1994 among McLeod,
Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod
Telecommunications, Inc. and The First National Bank of Chicago.
**10.3 -- Second Amendment to Credit Agreement dated as of December 1, 1994 among
McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc.,
McLeod Telecommunications, Inc. and The First National Bank of Chicago.
**10.4 -- Third Amendment to Credit Agreement dated as of May 31, 1995 among McLeod,
Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod
Telecommunications, Inc., MWR Telecom, Inc. and The First National Bank of
Chicago.
</TABLE>
II-6
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ------------------------------------------------------------------------------
<C> <C> <S>
**10.5 -- Fourth Amendment to Credit Agreement dated as of July 28, 1995 among McLeod,
Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod
Telecommunications, Inc., MWR Telecom, Inc. and The First National Bank of
Chicago.
**10.6 -- Fifth Amendment to Credit Agreement dated as of October 18, 1995 among McLeod,
Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod
Telecommunications, Inc., MWR Telecom, Inc. and The First National Bank of
Chicago.
**10.7 -- Sixth Amendment to Credit Agreement dated as of March 29, 1996 among McLeod,
Inc., McLeod Network Services, Inc., McLeod Telecommunications, Inc., MWR
Telecom, Inc. and The First National Bank of Chicago.
**10.8 -- Security Agreement dated as of May 16, 1994 among McLeod, Inc., McLeod Network
Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc.
and The First National Bank of Chicago.
**10.9 -- First Amendment to Security Agreement dated as of December 1, 1994 among
McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc.,
McLeod Telecommunications, Inc. and The First National Bank of Chicago.
**10.10 -- Support Agreement dated as of December 1, 1994 among IES Diversified Inc.,
McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc.,
McLeod Telecommunications, Inc. and The First National Bank of Chicago.
**10.11 -- Agreement Regarding Support Agreement dated December 1994 between McLeod, Inc.
and IES Diversified Inc.
**10.12 -- Agreement Regarding Guarantee dated May 16, 1994 between McLeod, Inc. and IES
Diversified Inc.
**10.13 -- Joinder to and Assumption of Credit Agreement dated as of April 28, 1995
between McLeod Merging Co. and The First National Bank of Chicago.
**10.14 -- Joinder to and Assumption of Security Agreement dated as of April 28, 1995
between McLeod Merging Co. and The First National Bank of Chicago.
**10.15 -- Letter from The First National Bank of Chicago to James L. Cram dated April
28, 1995 regarding extension of the termination date under the Credit
Agreement.
**10.16 -- Credit Agreement dated as of March 29, 1996 among McLeod, Inc., McLeod Network
Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc.
MWR Telecom, Inc. and The First National Bank of Chicago.
**10.17 -- Agreement for Construction Related Services dated as of October 17, 1995
between City Signal Fiber Services, Inc. and McLeod Network Services, Inc.
**10.18 -- Construction Services Agreement dated March 27, 1996 between City Signal Fiber
Services, Inc. and McLeod Network Services, Inc.
**10.19 -- Fiber Optic Use Agreement dated as of February 14, 1996 between McLeod Network
Services, Inc. and Galaxy Telecom, L.P.
**10.20 -- Agreement dated as of July 11, 1994 between McLeod Network Services, Inc. and
KLK Construction.
**10.21 -- Lease Agreement dated September 5, 1995 between State of Iowa and MWR Telecom,
Inc.
**10.22 -- Lease Agreement dated September 5, 1995 between State of Iowa and McLeod
Network Services, Inc.
</TABLE>
II-7
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ------------------------------------------------------------------------------
<C> <C> <S>
**10.23 -- Contract dated September 5, 1995 between Iowa Telecommunications and
Technology Commission and MWR Telecom, Inc.
**10.24 -- Contract dated June 27, 1995 between Iowa National Guard and McLeod Network
Services, Inc.
**10.25 -- Addendum Number One to Contract dated September 5, 1995 between Iowa National
Guard and McLeod Network Services, Inc.
**10.26 -- U S WEST Centrex Plus Service Rate Stability Plan dated October 15, 1993
between McLeod Telemanagement, Inc. and U S WEST Communications, Inc.
**10.27 -- U S WEST Centrex Plus Service Rate Stability Plan dated July 17, 1993 between
McLeod Telemanagement, Inc. and U S WEST Communications, Inc.
**10.28 -- Ameritech Centrex Service Confirmation of Service Orders dated various dates
in 1994, 1995 and 1996 between McLeod Telemanagement, Inc. and Ameritech
Information Industry Services.
**10.29 -- Lease Agreement dated as of December 28, 1993 between 2060 Partnership and
McLeod Telemanagement, Inc., as amended by Amendments First to Ninth dated as
of July 3, 1994, March 25, 1994, June 22, 1994, August 12, 1994, September 12,
1994, September 20, 1994, November 16, 1994, September 20, 1995 and January 6,
1996, respectively.
**10.30 -- Lease Agreement dated as of May 24, 1995 between 2060 Partnership and McLeod
Telemanagement, Inc.
**10.31 -- Lease Agreement dated October 31, 1995 between I.R.F.B. Joint Venture and
McLeod Telemanagement, Inc.
**10.32 -- First Amendment to Lease Agreement dated as of November 20, 1995 between
I.R.F.B. Joint Venture and McLeod Telemanagement, Inc.
**10.33 -- Uniform Purchase Agreement dated July 22, 1993 between McLeod, Inc. and Hill's
Maple Crest Farms Partnership.
**10.34 -- Master Right-of-Way Agreement dated July 27, 1994 between McLeod Network
Services, Inc. and IES Industries Inc.
**10.35 -- Master Right-of-Way and Tower Use Agreement dated February 13, 1996 between
IES Industries Inc. and McLeod, Inc.
**10.36 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between
MidAmerican Energy Company and McLeod, Inc. (Iowa and South Dakota).
**10.37 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between
MidAmerican Energy Company and McLeod, Inc. (Illinois).
10.38 -- Settlement Agreement dated March 18, 1996 between U S WEST Communications,
Inc. and McLeod Telemanagement, Inc.
**10.39 -- Agreement dated August 4, 1995 between Vadacom, Inc. and McLeod
Telemanagement, Inc.
**10.40 -- McLeod Telecommunications, Inc. 1992 Incentive Stock Option Plan.
**10.41 -- McLeod, Inc. 1993 Incentive Stock Option Plan.
**10.42 -- McLeod, Inc. 1995 Incentive Stock Option Plan.
**10.43 -- McLeod Telecommunications, Inc. Director Stock Option Plan.
**10.44 -- Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and McLeod, Inc.
**10.45 -- Promissory Note dated March 29, 1996 between Stephen K. Brandenburg and
McLeod, Inc.
</TABLE>
II-8
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ------------------------------------------------------------------------------
<S> <C> <C>
**10.46 -- Agreement dated April 28, 1995 among McLeod, Inc., McLeod Telecommunications,
Inc., McLeod Telemanagement, Inc., McLeod Network Services, Inc. and Clark E.
McLeod.
*+10.47 -- Telecommunications Services Agreement dated March 14, 1994 between WilTel,
Inc. and McLeod Telemanagement, Inc., as amended.
10.48 -- Amendment to Contract Addendum A to Contract No. 2102 dated March 31, 1993
between the Iowa Department of General Services and McLeod Telecommunications,
Inc.
10.49 -- Construction Services Agreement dated June 30, 1995 between MFS Network
Technologies, Inc. and MWR Telecom, Inc.
*10.50 -- First Amendment to Agreement Regarding Support Agreement dated May 14, 1996
among McLeod, Inc., IES Diversified Inc. and IES Investments Inc.
*10.51 -- First Amendment to Agreement Regarding Guarantee dated May 14, 1996 among
McLeod, Inc., IES Diversified Inc. and IES Investments Inc.
10.52 -- Amended and Restated Directors Stock Option Plan of McLeod, Inc.
11.1 -- Statement regarding Computation of Per Share Earnings.
**21.1 -- Subsidiaries of McLeod, Inc.
23.1 -- Consents of McGladrey & Pullen, LLP.
*23.2 -- Consent of Hogan & Hartson L.L.P. (to be included in Exhibit 5.1 to this
Registration Statement on Form S-1).
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested.
(b) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is provided in the Financial
Statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby further undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by
II-9
<PAGE> 112
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-10
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Cedar Rapids, Iowa,
on this 15th day of May, 1996.
McLEOD, INC.
By /s/ CLARK E. MCLEOD
------------------------------------
Clark E. McLeod
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment to
Registration Statement has been signed by the following persons, in the
capacities indicated below, on this 15th day of May, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------- --------------------------------------------
<C> <S>
* Chairman, Chief Executive Officer and
- -------------------------------------------- Director (Principal Executive Officer)
Clark E. McLeod
* President, Chief Operating Officer and
- -------------------------------------------- Director
Stephen C. Gray
/s/ BLAKE O. FISHER, JR. Chief Financial Officer and Treasurer
- -------------------------------------------- (Principal Financial Officer)
Blake O. Fisher, Jr.
* Chief Accounting Officer and Director
- -------------------------------------------- (Principal Accounting Officer)
James L. Cram
* Director
- --------------------------------------------
Russell E. Christiansen
* Director
- --------------------------------------------
Thomas M. Collins
* Director
- --------------------------------------------
Paul D. Rhines
* Director
- --------------------------------------------
Lee Liu
*By: /s/ BLAKE O. FISHER, JR.
- --------------------------------------------
Blake O. Fisher, Jr.
Attorney-in-fact
</TABLE>
II-11
<PAGE> 114
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
McLeod, Inc.
Cedar Rapids, Iowa
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
McGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
March 28, 1996
<PAGE> 115
MCLEOD, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN C
ADDITIONS
COLUMN B --------------------- COLUMN E
BALANCE CHARGED CHARGED BALANCE
AT TO TO AT
COLUMN A BEGINNING COST AND OTHER COLUMN D END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------ ---------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993:
Allowance for uncollectible
accounts and discounts......... $ -- $ -- $ -- $ -- $ --
Valuation reserve on deferred
tax assets..................... -- 789,000 -- -- 789,000
---------- ---------- -------- --------- ----------
$ -- $ 789,000 $ -- $ -- $ 789,000
========== ========== ======== ========= ==========
Year Ended December 31, 1994:
Allowance for uncollectible
accounts and discounts......... $ -- $ 84,000 $ -- $ -- $ 84,000
Valuation reserve on deferred
tax assets..................... 789,000 4,622,000 -- -- 5,411,000
---------- ---------- -------- --------- ----------
$ 789,000 $4,706,000 $ -- $ -- $5,495,000
========== ========== ======== ========= ==========
Year Ended December 31, 1995:
Allowance for doubtful accounts
and discounts.................. $ 84,000 $ 135,000 $ -- $ -- $ 219,000
Valuation reserve on deferred
tax assets..................... 5,411,000 3,007,000 -- -- 8,418,000
---------- ---------- -------- --------- ----------
$5,495,000 $3,142,000 $ -- $ -- $8,637,000
========== ========== ======== ========= ==========
/Table>
<PAGE> 116
EXHIBIT INDEX
</TABLE>
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER EXHIBIT DESCRIPTION SYSTEM
- --------- ------------------------------------------------------------------- ----------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement among McLeod, Inc., Salomon Brothers
Inc, Bear, Stearns & Co. Inc. and Morgan Stanley & Co.
Incorporated. .....................................................
**2.1 -- Agreement and Plan of Reorganization dated April 28, 1995 among
Midwest Capital Group Inc., MWR Telecom, Inc. and McLeod Inc. .....
3.1 -- Amended and Restated Certificate of Incorporation of McLeod,
Inc. ..............................................................
3.2 -- Amended and Restated Bylaws of McLeod, Inc. .......................
*4.1 -- Form of Class A Common Stock Certificate of McLeod, Inc. ..........
**4.2 -- Investment Agreement dated as of April 1, 1993 among McLeod
Telecommunications, Inc., IES Investments Inc., Allsop Venture
Partners III, L.P. and Clark E. McLeod. ...........................
**4.3 -- First Amendment to Investment Agreement dated as of February 23,
1994 among McLeod, Inc., IES Investments Inc., Allsop Venture
Partners III, L.P. and Clark E. McLeod. ...........................
**4.4 -- Second Amendment to Investment Agreement dated as of April 28, 1995
among McLeod, Inc., IES Investments Inc., Allsop Venture Partners
III, L.P., Midwest Capital Group Inc. and Clark E. McLeod. ........
**4.5 -- Shareholders' Agreement dated as of April 1, 1993 among Clark E.
McLeod, Mary E. McLeod, Allsop Venture Partners III, L.P., IES
Investments Inc. and McLeod Telecommunications, Inc. ..............
**4.6 -- First Amendment to Shareholders' Agreement dated as of February 23,
1994 among Clark E. McLeod, Mary E. McLeod, Allsop Venture Partners
III, L.P., IES Investments Inc., McLeod, Inc. and the stockholders
thereof parties thereto. ..........................................
**4.7 -- Second Amendment to Shareholders' Agreement dated as of April 28,
1995 among Clark E. McLeod, Mary E. McLeod, Allsop Venture Partners
III, L.P., IES Investments Inc., Midwest Capital Group Inc.,
McLeod, Inc. and the stockholders thereof parties thereto. ........
**4.8 -- Form of Investor Agreement dated as of April 1, 1996 among the
Company, IES Investments Inc., Midwest Capital Group Inc., MWR
Investments Inc., Clark and Mary McLeod, and certain other
stockholders. .....................................................
*5.1 -- Opinion of Hogan & Hartson L.L.P. .................................
**10.1 -- Credit Agreement dated as of May 16, 1994 among McLeod, Inc.,
McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod
Telecommunications, Inc. and The First National Bank of
Chicago. ..........................................................
**10.2 -- First Amendment to Credit Agreement dated as of June 17, 1994 among
McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement,
Inc., McLeod Telecommunications, Inc. and The First National Bank
of Chicago. .......................................................
</TABLE>
<PAGE> 117
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER EXHIBIT DESCRIPTION SYSTEM
- --------- ------------------------------------------------------------------- ----------
<C> <C> <S> <C>
**10.3 -- Second Amendment to Credit Agreement dated as of December 1, 1994
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc. and The First
National Bank of Chicago. .........................................
**10.4 -- Third Amendment to Credit Agreement dated as of May 31, 1995 among
McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement,
Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The
First National Bank of Chicago. ...................................
**10.5 -- Fourth Amendment to Credit Agreement dated as of July 28, 1995
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc., MWR Telecom,
Inc. and The First National Bank of Chicago. ......................
**10.6 -- Fifth Amendment to Credit Agreement dated as of October 18, 1995
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc., MWR Telecom,
Inc. and The First National Bank of Chicago. ......................
**10.7 -- Sixth Amendment to Credit Agreement dated as of March 29, 1996
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telecommunications, Inc., MWR Telecom, Inc. and The First National
Bank of Chicago. ..................................................
**10.8 -- Security Agreement dated as of May 16, 1994 among McLeod, Inc.,
McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod
Telecommunications, Inc. and The First National Bank of
Chicago. ..........................................................
**10.9 -- First Amendment to Security Agreement dated as of December 1, 1994
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc. and The First
National Bank of Chicago. .........................................
**10.10 -- Support Agreement dated as of December 1, 1994 among IES
Diversified Inc., McLeod, Inc., McLeod Network Services, Inc.,
McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and
The First National Bank of Chicago. ...............................
**10.11 -- Agreement Regarding Support Agreement dated December 1994 between
McLeod, Inc. and IES Diversified Inc. .............................
**10.12 -- Agreement Regarding Guarantee dated May 16, 1994 between McLeod,
Inc. and IES Diversified Inc. .....................................
**10.13 -- Joinder to and Assumption of Credit Agreement dated as of April 28,
1995 between McLeod Merging Co. and The First National Bank of
Chicago. ..........................................................
**10.14 -- Joinder to and Assumption of Security Agreement dated as of April
28, 1995 between McLeod Merging Co. and The First National Bank of
Chicago. ..........................................................
**10.15 -- Letter from The First National Bank of Chicago to James L. Cram
dated April 28, 1995 regarding extension of the termination date
under the Credit Agreement. .......................................
</TABLE>
<PAGE> 118
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER EXHIBIT DESCRIPTION SYSTEM
- --------- ------------------------------------------------------------------- ----------
<C> <C> <S> <C>
**10.16 -- Credit Agreement dated as of March 29, 1996 among McLeod, Inc.,
McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod
Telecommunications, Inc. MWR Telecom, Inc. and The First National
Bank of Chicago. ..................................................
**10.17 -- Agreement for Construction Related Services dated as of October 17,
1995 between City Signal Fiber Services, Inc. and McLeod Network
Services, Inc. ....................................................
**10.18 -- Construction Services Agreement dated March 27, 1996 between City
Signal Fiber Services, Inc. and McLeod Network Services, Inc. .....
**10.19 -- Fiber Optic Use Agreement dated as of February 14, 1996 between
McLeod Network Services, Inc. and Galaxy Telecom, L.P. ............
**10.20 -- Agreement dated as of July 11, 1994 between McLeod Network
Services, Inc. and KLK Construction. ..............................
**10.21 -- Lease Agreement dated September 5, 1995 between State of Iowa and
MWR Telecom, Inc. .................................................
**10.22 -- Lease Agreement dated September 5, 1995 between State of Iowa and
McLeod Network Services, Inc. .....................................
**10.23 -- Contract dated September 5, 1995 between Iowa Telecommunications
and Technology Commission and MWR Telecom, Inc. ...................
**10.24 -- Contract dated June 27, 1995 between Iowa National Guard and McLeod
Network Services, Inc. ............................................
**10.25 -- Addendum Number One to Contract dated September 5, 1995 between
Iowa National Guard and McLeod Network Services, Inc. .............
**10.26 -- U S WEST Centrex Plus Service Rate Stability Plan dated October 15,
1993 between McLeod Telemanagement, Inc. and U S WEST
Communications, Inc. ..............................................
**10.27 -- U S WEST Centrex Plus Service Rate Stability Plan dated July 17,
1993 between McLeod Telemanagement, Inc. and U S WEST
Communications, Inc. ..............................................
**10.28 -- Ameritech Centrex Service Confirmation of Service Orders dated
various dates in 1994, 1995 and 1996 between McLeod Telemanagement,
Inc. and Ameritech Information Industry Services. .................
**10.29 -- Lease Agreement dated as of December 28, 1993 between 2060
Partnership and McLeod Telemanagement, Inc., as amended by
Amendments First to Ninth dated as of July 3, 1994, March 25, 1994,
June 22, 1994, August 12, 1994, September 12, 1994, September 20,
1994, November 16, 1994, September 20, 1995 and January 6, 1996,
respectively. .....................................................
**10.30 -- Lease Agreement dated as of May 24, 1995 between 2060 Partnership
and McLeod Telemanagement, Inc. ...................................
**10.31 -- Lease Agreement dated October 31, 1995 between I.R.F.B. Joint
Venture and McLeod Telemanagement, Inc. ...........................
**10.32 -- First Amendment to Lease Agreement dated as of November 20, 1995
between I.R.F.B. Joint Venture and McLeod Telemanagement, Inc. ....
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER EXHIBIT DESCRIPTION SYSTEM
- --------- ------------------------------------------------------------------- ----------
<C> <C> <S> <C>
**10.33 -- Uniform Purchase Agreement dated July 22, 1993 between McLeod, Inc.
and Hill's Maple Crest Farms Partnership. .........................
**10.34 -- Master Right-of-Way Agreement dated July 27, 1994 between McLeod
Network Services, Inc. and IES Industries Inc. ....................
**10.35 -- Master Right-of-Way and Tower Use Agreement dated February 13, 1996
between IES Industries Inc. and McLeod, Inc. ......................
**10.36 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996
between MidAmerican Energy Company and McLeod, Inc. (Iowa and South
Dakota). ..........................................................
**10.37 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996
between MidAmerican Energy Company and McLeod, Inc. (Illinois). ...
10.38 -- Settlement Agreement dated March 18, 1996 between U S WEST
Communications, Inc. and McLeod Telemanagement, Inc. ..............
**10.39 -- Agreement dated August 4, 1995 between Vadacom, Inc. and McLeod
Telemanagement, Inc. ..............................................
**10.40 -- McLeod Telecommunications, Inc. 1992 Incentive Stock Option
Plan. .............................................................
**10.41 -- McLeod, Inc. 1993 Incentive Stock Option Plan. ....................
**10.42 -- McLeod, Inc. 1995 Incentive Stock Option Plan. ....................
**10.43 -- McLeod Telecommunications, Inc. Director Stock Option Plan. .......
**10.44 -- Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and
McLeod, Inc. ......................................................
**10.45 -- Promissory Note dated March 29, 1996 between Stephen K. Brandenburg
and McLeod, Inc. ..................................................
**10.46 -- Agreement dated April 28, 1995 among McLeod, Inc., McLeod
Telecommunications, Inc., McLeod Telemanagement, Inc., McLeod
Network Services, Inc. and Clark E. McLeod. .......................
*+10.47 -- Telecommunications Services Agreement dated March 14, 1994 between
WilTel, Inc. and McLeod Telemanagement, Inc.,
as amended. .......................................................
10.48 -- Amendment to Contract Addendum A to Contract No. 2102 dated March
31, 1993 between the Iowa Department of General Services and McLeod
Telecommunications, Inc. ..........................................
10.49 -- Construction Services Agreement dated June 30, 1995 between MFS
Network Technologies, Inc. and MWR Telecom, Inc. ..................
*10.50 -- First Amendment to Agreement Regarding Support Agreement dated May
14, 1996 among McLeod, Inc., IES Diversified Inc. and IES
Investments Inc. ..................................................
*10.51 -- First Amendment to Agreement Regarding Guarantee dated May 14, 1996
among McLeod, Inc., IES Diversified Inc. and IES Investments
Inc. ..............................................................
10.52 -- Amended and Restated Directors Stock Option Plan of McLeod,
Inc. ..............................................................
11.1 -- Statement regarding Computation of Per Share Earnings. ............
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER EXHIBIT DESCRIPTION SYSTEM
- --------- ------------------------------------------------------------------- ----------
<S> <C> <C> <C>
**21.1 -- Subsidiaries of McLeod, Inc. ......................................
23.1 -- Consents of McGladrey & Pullen, LLP. ..............................
*23.2 -- Consent of Hogan & Hartson L.L.P. (to be included in Exhibit 5.1 to
this Registration Statement on Form S-1). .........................
27.1 -- Financial Data Schedule. ..........................................
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested.
<PAGE> 1
EXHIBIT 1.1
DRAFT DATE: 5/14/96
MCLEOD, INC.
10,000,000 Shares
Class A Common Stock
($.01 par value)
Underwriting Agreement
May , 1996
Salomon Brothers Inc
Morgan Stanley & Co.
Bear, Stearns & Co. Inc.
As Representatives of the several Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Dear Sirs:
McLeod, Inc., a Delaware corporation (the "Company"), proposes to sell
to the underwriters named in Schedule I hereto (the "Underwriters"), for whom
you (the "Representatives") are acting as representatives, shares (the
"Underwritten Securities") of Class A Common Stock, $.01 par value (the "Common
Stock") of the Company. The Company also proposes to grant to the Underwriters
an option to purchase up to additional shares of Common Stock (the "Option
Securities"; the Option Securities, together with the Underwritten Securities,
being hereinafter called the "Securities").
1. Representations and Warranties.
(a) The Company represents and warrants to, and agrees
with, each Underwriter as set forth below in this Section 1. Certain terms
used in this Section 1 are defined in paragraph (iii) hereof.
(i) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration
statement (file number 333-3112) on Form S-1, including a
related preliminary prospectus, for the registration under the
Securities Act of 1933 (the "Act") of the offering and sale of
the Securities. The Company may have filed one or more
amendments thereto, including the related preliminary
prospectus, each of which have previously been furnished to
you. The Company will
<PAGE> 2
2
next file with the Commission either (A) prior to
effectiveness of such registration statement, a further
amendment to such registration statement (including the form
of final prospectus) or (B) after effectiveness of such
registration statement, a final prospectus in accordance with
Rules 430A and 424(b)(1) or (4). In the case of clause (B),
the Company has included in such registration statement, as
amended at the Effective Date, all information (other than
Rule 430A Information) required by the Act and the rules
thereunder to be included in the Prospectus with respect to
the Securities and the offering thereof. As filed, such
amendment and form of final prospectus, or such final
prospectus, shall contain all Rule 430A Information, together
with all other such required information, with respect to the
Securities and the offering thereof and, except to the extent
the Representatives shall agree in writing to a modification,
shall be in all substantive respects in the form furnished to
you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such
specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company
has advised you, prior to the Execution Time, will be included
or made therein.
(ii) On the Effective Date, the Registration
Statement did or will, and when the Prospectus is first filed
(if required) in accordance with Rule 424(b) and on the
Closing Date, the Prospectus (and any supplements thereto)
will, comply in all material respects with the applicable
requirements of the Act and the rules thereunder; on the
Effective Date, the Registration Statement did not or will not
contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus, if not
filed pursuant to Rule 424(b), did not or will not, and on the
date of any filing pursuant to Rule 424(b), the Prospectus
will not, and on the Closing Date, the Prospectus (together
with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no
representations or warranties as to
<PAGE> 3
3
the information contained in or omitted from the Registration
Statement or the Prospectus (or any supplement thereto) in
reliance upon and in conformity with information furnished in
writing to the Company by or on behalf of any Underwriter
through the Representatives specifically for inclusion in the
Registration Statement or the Prospectus (or any supplement
thereto).
(iii) The terms which follow, when used in this
Agreement, shall have the meanings indicated. "Effective
Date" shall mean each date that the Registration Statement and
any post-effective amendment or amendments thereto became or
become effective. "Execution Time" shall mean the date and
time that this Agreement is executed and delivered by the
parties hereto. "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in paragraph (i) above and
any preliminary prospectus included in the Registration
Statement at the Effective Date that omits Rule 430A
Information. "Prospectus" shall mean the prospectus relating
to the Securities that is first filed pursuant to Rule 424(b)
after the Execution Time or, if no filing pursuant to Rule
424(b) is required, shall mean the form of final prospectus
relating to the Securities included in the Registration
Statement at the Effective Date. "Registration Statement"
shall mean the registration statement referred to in paragraph
(i) above, including exhibits and financial statements, as
amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become
effective) and, in the event any post-effective amendment
thereto becomes effective prior to the Closing Date (as
hereinafter defined), shall also mean such registration
statement as so amended. Such term shall include any Rule
430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A. "Rule 424" and "Rule
430A" refer to such rules under the Act. "Rule 430A
Information" means information with respect to the Securities
and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to
Rule 430A.
(iv) Since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no material adverse
change, or any development which will result in a material
adverse change, in the condition (financial or
<PAGE> 4
4
other), earnings, business, prospects or properties of the
Company and its subsidiaries, whether or not arising from
transactions in the ordinary course of business, except as set
forth in the Prospectus (exclusive of any supplement thereto);
and, since the respective dates as of which information is
given in the Registration Statement and the Prospectus,
there has not been any change in the capital stock (other than
grants of options and issuances of common stock pursuant to
existing employee stock option plans, stock ownership plans or
stock purchase plans, repurchases by the Company of its common
stock in the ordinary course of business or conversions of
outstanding convertible securities) or long-term debt (other
than changes as a result of maturities, regularly scheduled
payments and payments contemplated as a result of the
application of proceeds of the offering of the securities,
amortization of debt discount or currency fluctuations) of the
Company or any of its subsidiaries.
(v) Each of (a) the Company and (b) McLeod
Telemanagement, Inc., MWR Telecom, Inc., McLeod Network
Services, Inc., McLeod Wireless, Inc., McLeod Transit, Inc.
and McLeod Telecommunications, Inc. (individually a
"Subsidiary" and collectively the "Subsidiaries") has been
duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction in which it
is chartered or organized, with full corporate power and
authority to own its properties and conduct its business as
described in the Prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing
under the laws of each jurisdiction which requires such
qualification, except where the failure to be so qualified
could not reasonably be expected to have a material adverse
effect on the Company and the Subsidiaries. Except for the
Subsidiaries, the Company has no subsidiaries which,
considered in the aggregate as a single subsidiary, would
constitute a "significant subsidiary" as defined in Rule
1-02(w) of Regulation S-X promulgated under the Act.
(vi) All the outstanding shares of capital stock
of each Subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and, except as
otherwise set forth in the Prospectus, all outstanding shares
of capital stock of the Subsidiaries are owned by the Company
either directly or through
<PAGE> 5
5
wholly owned subsidiaries free and clear of any security
interests, claims, liens or encumbrances.
(vii) The Company's authorized equity capitalization
is as set forth in the Prospectus; the capital stock of the
Company conforms in all material respects to the description
thereof contained in the Prospectus; the outstanding shares of
Common Stock have been duly and validly authorized and issued
and are fully paid and nonassessable; the Securities have been
duly and validly authorized, and, when issued and delivered to
and paid for by the Underwriters pursuant to this Agreement,
will be fully paid and nonassessable; the Securities are duly
authorized for listing, subject to official notice of
issuance, on the Nasdaq National Market; the certificates for
the Securities are in valid and sufficient form; and the
holders of outstanding shares of capital stock of the Company
are not entitled to statutory preemptive or similar
contractual rights to subscribe for the Securities in
connection with the issuance and sale thereof by the Company.
(viii) There is no pending or, to the Company's
knowledge, threatened action, suit or proceeding before any
court or governmental agency, authority or body or any
arbitrator involving the Company or any of its subsidiaries of
a character required to be disclosed in the Registration
Statement which is not adequately disclosed in the Prospectus,
and there is no franchise, contract or other document of a
character required to be described in the Registration
Statement or Prospectus, or to be filed as an exhibit, which
is not described or filed as required; and the statements in
the Prospectus under the headings "Business - Legal Matters,"
"Management-- Stockholders' Agreements" and, with respect to
the Credit Facility (as defined in the Prospectus),
"Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Liquidity and Capital Resources"
fairly summarize the matters therein described.
(ix) This Agreement has been duly authorized,
executed and delivered by the Company.
(x) No consent, approval, authorization or order of
any court or governmental agency or body is required for the
consummation of the transactions contemplated
<PAGE> 6
6
herein, except such as have been or will be obtained under the
Act and such as may be required under all applicable state
securities and blue sky laws of any jurisdiction in connection
with the purchase and distribution of the Securities by the
Underwriters and such other approvals as have been obtained.
(xi) Neither the issue and sale of the Securities,
the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof, in each
case by the Company, will conflict with, result in a breach or
violation of, or constitute a default under the charter or
by-laws of the Company or the terms of any indenture or other
agreement or instrument to which the Company or any of its
Subsidiaries is a party or bound or (assuming compliance with
all applicable state securities and blue sky laws and that the
Registration Statement has been declared effective and, if
required, that the Prospectus has been filed pursuant to Rule
424(b)(1) or 424(b)(4)) any law, rule or regulation applicable
to the Company or any of the Subsidiaries or any judgement,
order or decree applicable to the Company or any of its
subsidiaries of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction
over the Company or any of its subsidiaries.
(xii) No holders of securities of the Company have
rights to the registration of such securities under the
Registration Statement that have not been duly waived.
(xiii) McGladrey & Pullen, LLP, who are reporting
upon the audited financial statements and schedule included in
the Registration Statement, are independent public accountants
as required by the Act and the rules and regulations of the
Commission thereunder.
(xiv) The consolidated financial statements included
in the Registration Statement present fairly the financial
position of the Company and its subsidiaries as of the dates
indicated and the consolidated results of the operations and
cash flows of the Company and its subsidiaries for the periods
specified. Such financial statements (except as disclosed in
the notes thereto or otherwise stated therein) have been
prepared in conformity with generally accepted accounting
principles applied on a
<PAGE> 7
7
consistent basis throughout the entire period involved. The
financial statement schedules, if any, included in the
Registration Statement present fairly the information stated
therein. The selected financial data included in the
Prospectus present fairly the information shown therein and
have been compiled on a basis consistent with that of the
audited consolidated financial statements included in the
Registration Statement. The pro forma financial statements
and other pro forma financial information, if any, included in
the Registration Statement present fairly the information
shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma
financial statements, have been properly compiled on the pro
forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to
give effect to the transactions or circumstances referred to
therein.
(xv) Neither the Company nor any of the Subsidiaries
is in violation of its charter or in default in the
performance or observance of any obligation, agreement,
covenant or condition contained in any indenture or other
agreement or instrument to which the Company or any of the
Subsidiaries is a party or by which it or any of them may be
bound, or to which any of the property or assets of the
Company or any of the Subsidiaries is subject, other than
defaults (considered in the aggregate) which could not
reasonably be expected to have a material adverse effect on
the condition (financial or other), earnings, business,
prospects or properties of the Company and its subsidiaries.
(xvi) The Company and the Subsidiaries possess
adequate certificates, authorities or permits issued by the
appropriate state, federal or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them
and are in compliance in all material respects with all such
certificates, authorities and permits. Neither the Company
nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any
such certificate, authority or permit, with such exceptions as
could not reasonably be expected to, singly or in the
aggregate, have a material adverse effect on the condition
(financial or other), earnings,
<PAGE> 8
8
business, prospects or properties of the Company and its
subsidiaries.
(xvii) The Company and its subsidiaries have timely
filed all United States federal income tax returns and all
other material tax returns which are required to be filed by
them and have paid all taxes due and payable (other than
taxes, the payment of which are being contested in good
faith), and no tax liens have been filed and no claims are
being asserted with respect to any such taxes, which could
reasonably be expected to have a material adverse effect on
the condition (financial or other), earnings, business,
prospects or properties of the Company and the Subsidiaries.
The provisions for taxes on the books of the Company are
adequate in all material respects for all open years and for
its current fiscal period.
(xviii) The Company and the Subsidiaries (A) are in
compliance with all applicable federal, state, local or
foreign or other laws and regulations relating to the
protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (B) have received all
permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective
businesses and (C) are in compliance with all terms and
conditions of any such permit, license or approval, except, in
each case, where such noncompliance with Environmental Law,
failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals could not reasonably be
expected, singly or in the aggregate, to have a material
adverse effect on the condition (financial or other),
earnings, business, prospects or properties of the Company and
its subsidiaries.
(xix) The Company and the Subsidiaries have good and
marketable title to all real property and good and valid title
to all personal property owned by them, in each case free and
clear of all liens, encumbrances and defects, and any real
property and buildings held under lease by the Company and the
Subsidiaries are held by them under valid, subsisting and
enforceable leases, except, in each case, for such exceptions
as are set forth in the Prospectus or which could not
reasonably be expected to have a material adverse effect on
the
<PAGE> 9
9
condition (financial or other), earnings, business, prospects
or properties of the Company and its subsidiaries.
(xx) The Company together with the Subsidiaries own
and possess all right, title and interest in and to, or have
duly licensed from third parties a valid, enforceable right to
use, all patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other
unpatented or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks
and trade names (collectively, "Patent and Proprietary
Rights") currently employed by it in connection with its
business and neither the Company nor any of its subsidiaries
has received notice of infringement or misappropriation of or
conflict with asserted rights of others with respect to any
Patent and Proprietary Rights, or of any facts which would
render any Patent and Proprietary Rights invalid or inadequate
to protect the interest of the Company or and of the
Subsidiaries therein, and which infringement, misappropriation
or conflict or invalidity or inadequacy, individually or in
the aggregate, could reasonably be expected to result in a
material adverse effect on the condition (financial or other),
earnings, business, prospects or properties of the Company and
its subsidiaries.
(xxi) The Company has complied with all provisions
of Section 1 of Laws of Florida, Chapter 92-198 Securities-
Business with Cuba.
2. Purchase and Sale. (a) Subject to the terms and
conditions and in reliance upon the representations and warranties herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of $ per share, the amount of the Underwritten Securities set forth
opposite such Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance
upon the representations and warranties herein set forth, the Company hereby
grants an option to the several Underwriters to purchase, severally and not
jointly, up to shares of the Option Securities at the same purchase price per
share as the Underwriters shall pay for the Underwritten Securities. Said
option may be exercised only to cover over-allotments in the sale of the
Underwritten Securities by the Underwriters. Said option may be exercised in
whole or in part
<PAGE> 10
10
at any time on or before the 30th day after the date of the Prospectus upon
written notice by the Representatives to the Company setting forth the number
of shares of the Option Securities as to which the several Underwriters are
exercising the option and the settlement date. The number of shares of the
Option Securities to be purchased by each Underwriter shall be the same
percentage of the total number of shares of the Option Securities to be
purchased by the several Underwriters as such Underwriter is purchasing of the
Underwritten Securities, subject to such adjustments as the Representatives in
their absolute discretion shall make to eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for
the Underwritten Securities and the Option Securities (if the option provided
for in Section 2(b) hereof shall have been exercised on or before the third
business day prior to the Closing Date) shall be made at 10:00 AM, New York
City time, on , 1996, or such later date (not later than
, 1996) as the Representatives shall designate, which date and time may be
postponed by agreement among the Representatives and the Company or as provided
in Section 9 hereof (such date and time of delivery and payment for the
Securities being herein called the "Closing Date"). Delivery of the Securities
shall be made to the Representatives for the respective accounts of the several
Underwriters against payment by the several Underwriters through the
Representatives of the respective aggregate purchase prices of the Securities
being sold by the Company to or upon the order of the Company by Federal Funds
check or checks and payable in same day funds. Delivery of the Securities
shall be made at such location as the Representatives shall reasonably
designate at least one business day in advance of the Closing Date and payment
for such Securities shall be made at the office of Mayer, Brown & Platt, 1675
Broadway, New York, New York 10019-5820. Certificates for the Securities shall
be registered in such names and in such denominations as the Representatives
may request not less than three full business days in advance of the Closing
Date.
The Company agrees to have the certificates for the Securities
available for inspection, checking and packaging by the Representatives in New
York, New York, not later than 1:00 PM on the business day prior to the Closing
Date.
If the option provided for in Section 2(b) hereof is exercised
after the third business day prior to the Closing Date, the Company will
deliver (at the expense of the Company) to the Representatives, at One New York
Plaza, New York, New York, on the date specified by the Representatives (which
shall be within three business days after exercise of said option),
certificates
<PAGE> 11
11
for the Option Securities in such names and denominations as the
Representatives shall have requested at least three full business days in
advance of the settlement date against payment of the purchase price thereof to
or upon the order of the Company by certified or official bank check or checks
drawn on or by a New York Clearing House bank and payable in next day funds.
The Company agrees to have the certificates for the Option Securities available
for inspection, checking and packaging by the Representatives in New York, New
York, not later than 1:00 p.m. on the business day prior to the settlement
date. If settlement for the Option Securities occurs after the Closing Date,
the Company will deliver to the Representatives on the settlement date for the
Option Securities, and the obligation of the Underwriters to purchase the
Option Securities shall be conditioned upon receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered on the Closing Date pursuant to Section 6 hereof.
4. Offering by Underwriters. It is understood that the
several Underwriters propose to offer the Securities for sale to the public as
set forth in the Prospectus.
5. Agreements.
(a) The Company agrees with the several Underwriters
that:
(i) The Company will use its best efforts to
cause the Registration Statement, if not effective at the
Execution Time, and any amendment thereof to become effective.
Prior to the termination of the offering of the Securities,
the Company will not file any amendment of the Registration
Statement or supplement to the Prospectus without the prior
consent of the Representatives (which consent shall not be
unreasonably delayed or withheld). Subject to the foregoing
sentence, if the Registration Statement has become or becomes
effective pursuant to Rule 430A, or filing of the Prospectus
is otherwise required under Rule 424(b), the Company will
cause the Prospectus, properly completed, and any supplement
thereto to be filed with the Commission pursuant to the
applicable paragraph of Rule 424(b) within the time period
prescribed and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will
promptly advise the Representatives (A) when the Registration
Statement, if not effective at the Execution Time, and any
amendment thereto, shall have
<PAGE> 12
12
become effective, (B) when the Prospectus, and any supplement
thereto, shall have been filed (if required) with the
Commission pursuant to Rule 424(b), (C) when, prior to
termination of the offering of the Securities, any amendment
to the Registration Statement shall have been filed or become
effective, (D) of any request by the Commission for any
amendment of the Registration Statement or supplement to the
Prospectus or for any additional information with respect to
the Registration Statement or the Prospectus, (E) of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution
or threatening of any proceeding for that purpose and (F) of
the receipt by the Company of any notification with respect to
the suspension of the qualification of the Securities for sale
in any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company will use its best
efforts to prevent the issuance of any such stop order and, if
issued, to obtain as soon as possible the withdrawal thereof.
(ii) If, at any time when a prospectus relating to
the Securities is required to be delivered under the Act, any
event occurs as a result of which the Prospectus as then
supplemented would include any untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein in the light of the circumstances under
which they were made not misleading, or if it shall be
necessary to amend the Registration Statement or supplement
the Prospectus to comply with the Act or the rules thereunder,
the Company promptly will prepare and file with the
Commission, subject to the second sentence of paragraph (a)
(i) of this Section 5, an amendment or supplement which will
correct such statement or omission or effect such compliance.
(iii) As soon as reasonably practicable, the Company
will make generally available to its security holders and to
the Representatives an earnings statement or statements of the
Company and its subsidiaries which will satisfy the provisions
of Section 11(a) of the Act and Rule 158 under the Act.
(iv) The Company will furnish to the
Representatives and counsel for the Underwriters, without
charge, signed copies of the Registration Statement (including
exhibits thereto) and to each
<PAGE> 13
13
other Underwriter a copy of the Registration Statement
(without exhibits thereto) and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the
Act, as many copies of each Preliminary Prospectus and the
Prospectus and any supplement thereto as the Representatives
may reasonably request. The Company will furnish or cause to
be furnished to the Representatives copies of all reports on
Form SR required by Rule 463 under the Act. The Company will
pay the expenses of printing or other production of all
documents relating to the offering.
(v) The Company will cooperate with the
Representatives and counsel for the Underwriters in order to
register or qualify the Securities for sale under the laws of
such jurisdictions as the Representatives may designate, will
maintain such registrations or qualifications in effect so
long as required for the distribution of the Securities and
will pay the fee of the National Association of Securities
Dealers, Inc., in connection with its review of the offering;
provided, however, that in no event shall the Company be
obligated to register or qualify as a foreign corporation or
to take any action that would subject it to general service of
process in any jurisdiction where it is not now so subject.
(vi) The Company will not, for a period of 180 days
following the Execution Time, without the prior written
consent of the Representatives, offer, sell or contract to
sell, or otherwise dispose of, directly or indirectly, or
announce the offering of, any other shares of Common Stock or
any securities convertible into, or exchangeable for, shares
of Common Stock; provided, however, that the Company may grant
options and issue and sell Common Stock pursuant to any
employee stock option plan, stock ownership plan or stock
purchase plan of the Company in effect at the Execution Time
and the Company may issue Common Stock issuable upon the
conversion of securities or the exercise of warrants
outstanding at the Execution Time.
<PAGE> 14
14
6. Conditions to the Obligations of the Underwriters.
The obligations of the Underwriters to purchase the Underwritten Securities and
the Option Securities, as the case may be, shall be subject to the accuracy of
the representations and warranties on the part of the Company contained herein
as of the Execution Time, the Closing Date and any settlement date pursuant to
Section 3 hereof, to the accuracy of the statements of the Company made in any
certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional
conditions:
(a) If the Registration Statement has not become
effective prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become effective not
later than (i) 6:00 PM New York City time on the date of determination of the
public offering price, if such determination occurred at or prior to 3:00 PM
New York City time on such date or (ii) 12:00 Noon on the business day
following the day on which the public offering price was determined, if such
determination occurred after 3:00 PM New York City time on such date; if filing
of the Prospectus, or any supplement thereto, is required pursuant to Rule
424(b), the Prospectus, and any such supplement, will be filed in the manner
and within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or
threatened.
(b) The Company shall have furnished to the
Representatives the opinion of counsel for the Company, dated the Closing Date,
substantially in the form of Exhibit A.
(c) The Company shall have furnished to the
Representatives the opinion of Swidler & Berlin, special counsel
<PAGE> 15
15
to the Company on regulatory matters, dated the Closing Date, to the effect
that:
(i) the statements in the Prospectus under the
headings "Risk Factors - Competition," "Risk Factors -
Regulation," "Business-Market Potential" "Business -
Competition" and "Business - Regulation" fairly and accurately
summarize the laws, rules and regulations of the Federal
Communications Commission ("FCC") and the comparable state
regulatory agencies or bodies with direct regulatory
jurisdiction over telecommunications matters in the states in
which the Company and any of the Subsidiaries provide
intrastate services (the "State Regulatory Agencies") and, to
the best knowledge of such counsel, the statements in the
Prospectus under the heading "Business - Legal Proceedings"
fairly and accurately summarize the legal proceedings set
forth therein that concern the provision of telecommunications
services;
(ii) the Company and the Subsidiaries possess all
telecommunic material certificates, authorities or permits
required by the FCC and State Regulatory Agencies for the
provision of the telecommunications services currently
provided by the Company and the Subsidiaries, except where the
failure to possess such certificates, authorities or permits
could not reasonably be expected to have a material adverse
effect in the Company and its subsidiaries; and the Company
and the Subsidiaries are in compliance in all material
respects with such certificates, authorities and permits;
(iii) to the best knowledge of such counsel, neither
the Company nor any of the Subsidiaries is subject to any
pending or threatened action, suit or proceeding before the
FCC or any State Regulatory Agency or (with respect to federal
or state telecommunications laws) any court of a character
required to be disclosed in the Registration Statement, which
is not described as required;
(iv) no consent, approval, authorization or order of
the FCC or any State Regulatory Agency is required for the
issuance and sale of the Securities or the consummation of the
transactions contemplated hereby; and
<PAGE> 16
16
(v) neither the issuance and sale of the Securities
nor the consummation of the transactions contemplated hereby
will result in a breach or violation of any law, rule,
regulation, judgment, order or decree of the FCC or any State
Regulatory Agency applicable to the Company or any of the
Subsidiaries.
In rendering such opinion, such counsel may rely as to matters of fact, to the
extent they deem proper and reasonable, on certificates of public officials and
responsible officers of the Company, including certificates that define the
scope of the telecommunications services provided by the Company and the
Subsidiaries.
(d) The Representatives shall have received from Mayer,
Brown & Platt, counsel for the Underwriters, such opinion or opinions, dated
the Closing Date, with respect to the issuance and sale of the Securities, the
Registration Statement, the Prospectus (together with any supplement thereto)
and other related matters as the Representatives may reasonably require, and
the Company shall have furnished to such counsel such documents as they request
for the purpose of enabling them to pass upon such matters.
(e) The Company shall have furnished to the
Representatives a certificate of the Company, signed by the Chairman of the
Board or the President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the Prospectus,
any supplements to the Prospectus and this Agreement and that:
(i) the representations and warranties of the
Company in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as
if made on the Closing Date and the Company has complied in
all material respects with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at
or prior to the Closing Date;
(ii) the Registration Statement has become effective
under the Act; any required filing of the Prospectus, and any
supplement thereto, pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b);
and no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that
<PAGE> 17
17
purpose have been instituted or, to the Company's knowledge,
threatened; and
(iii) since the date of the most recent audited
financial statements included in the Prospectus (exclusive of
any supplement thereto), there has been no material adverse
change in the condition (financial or other), earnings,
business, prospects or properties of the Company and its
subsidiaries, whether or not arising from transactions in the
ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement
thereto).
(f) At the Execution Time and at the Closing Date, McGladrey
& Pullen, LLP shall have furnished to the Representatives a letter or letters,
dated respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the applicable
published rules and regulations thereunder and stating in effect that:
(i) in their opinion the audited financial
statements and financial statement schedule and unaudited pro
forma financial statement included in the Registration
Statement and the Prospectus and reported on by them, as
applicable, comply in form in all material respects with the
applicable accounting requirements of the Act and the related
published rules and regulations;
(ii) on the basis of a reading of the latest
unaudited financial statements made available by the Company
and its subsidiaries; carrying out certain specified
procedures (but not an examination in accordance with
generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the
comments set forth in such letter; a reading of the minutes of
the meetings of the stockholders and directors of the Company;
and inquiries of certain officials of the Company who have
responsibility for financial and accounting matters of the
Company and its subsidiaries as to transactions and events
subsequent to December 31, 1995, nothing came to their
attention which caused them to believe that:
(1) any unaudited financial statements included
in the Registration Statement and the Prospectus do not comply
in form in all material respects with applicable
<PAGE> 18
18
accounting requirements of the Act and with the published
rules and regulations of the Commission with respect to
registration statements on Form S-1; and said unaudited
financial statements are not in conformity with generally
accepted accounting principles applied on a basis
substantially consistent with that of the audited financial
statements included in the Registration Statement and the
Prospectus; or
(2) with respect to the period subsequent to
March 31, 1996, there were any changes, at a specified date
not more than five business days prior to the date of the
letter, in the long-term debt of the Company and its
subsidiaries or capital stock of the Company or decreases in
the stockholders' equity of the Company and its subsidiaries
as compared with the amounts shown on the March 31, 1996
consolidated balance sheet included in the Registration
Statement and the Prospectus, or for the period from April 1,
1996 to such specified date as compared with the corresponding
period in the preceding year, there were any decreases in
telecommunications revenue or increases in operating loss or
net loss of the Company and its subsidiaries, except in all
instances for such changes, decreases or increases set forth
in such letter, in which case the letter shall be accompanied
by an explanation by the Company as to the significance
thereof unless said explanation is not deemed necessary by the
Representatives; or
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and its subsidiaries) set forth in the Registration
Statement and the Prospectus agrees with the accounting
records of the Company and its subsidiaries, excluding any
questions of legal interpretation; and
(iv) the unaudited amounts of [describe the
financial information more recent than unaudited financials
and its location] do not agree with the amounts set forth in
the unaudited financial statements for the same periods or
were not determined on a basis substantially consistent with
that of the corresponding amounts in the audited financial
statements included in the Registration Statement and the
Prospectus.
<PAGE> 19
19
References to the Prospectus in this paragraph (f) includes
any supplement thereto at the date of the letter.
(g) Subsequent to the Execution Time or, if earlier, the
dates as of which information is given in the Registration Statement (exclusive
of any amendment thereof) and the Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any change, decrease or increase
specified in the letter or letters referred to in paragraph (f)(ii)(2) of this
Section 6 or (ii) any change, or any development involving a prospective
change, in or affecting the business, prospects or properties of the Company
and its subsidiaries the effect of which, in any case referred to in clause (i)
or (ii) above, is, in the judgment of the Representatives, so material and
adverse as to make it impractical or inadvisable to proceed with the offering
or delivery of the Securities as contemplated by the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of any
supplement thereto).
(h) At the Execution Time, the Company shall have furnished
to the Representatives a letter substantially in the form of Exhibit A hereto
from Clark E. McLeod, Mary E. McLeod, IES Investments Inc. and MWR Investments
Inc., addressed to the Representatives, in which each such person or entity
agrees not to offer, sell or contract to sell, or otherwise dispose of,
directly or indirectly, or announce an offering of, any shares of Common Stock
beneficially owned by such person or entity or any securities convertible into,
or exchangeable for, shares of Common Stock for a period of one year following
the Execution Time without the prior written consent of the Representatives,
except in the case of each of such persons and entities, shares of Common Stock
disposed of as bona fide gifts or pledges where the recipients of such gifts or
the pledgees, as the case may be, agree in writing with the Underwriters to be
bound by the terms of this paragraph (h).
(i) At the Execution Time, the Company shall have furnished
to the Representatives a letter substantially in the form of Exhibit B hereto
from Allsop Venture Partners III L.P. and each director and officer of the
Company (other than those covered by paragraph (h) above), addressed to the
Representatives, in which each such person or entity agrees not to offer, sell
or contract to sell or otherwise dispose of, directly or indirectly, or
announce an offering of, any shares of Common Stock beneficially owned by such
person or entity or any securities convertible into, or exchangeable for,
shares of Common Stock for a period of 180 days following the Execution
<PAGE> 20
20
Time without the prior written consent of the Representatives, except (1) in
the case of each of such persons and entities, shares of Common Stock disposed
of as bona fide gifts or pledges where the recipients of such gifts or the
pledgees, as the case may be, agree in writing with the Underwriters to be
bound by the terms of this paragraph (h) and (2) in the case of Allsop Venture
Partners III, registered shares of Common Stock acquired in the public market.
(j) Prior to the Closing Date, the Company shall have
furnished to the Representatives such further information, certificates and
documents as the Representatives may reasonably request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company in
writing or by telephone confirmed in writing.
7. Reimbursement of Underwriters' Expenses. If the sale
of the Securities provided for herein is not consummated because any condition
to the obligations of the Underwriters set forth in Section 6 hereof is not
satisfied, or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all reasonable
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the proposed purchase
and sale of the Securities.
8. Indemnification and Contribution. (a) The Company
agrees to indemnify and hold harmless each Underwriter, the directors,
officers, employees and agents of each Underwriter and each person who controls
any Underwriter within the meaning of either the Act or the Securities Exchange
Act of 1934 (the "Exchange Act") against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise,
<PAGE> 21
21
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement for the
registration of the Securities as originally filed or in any amendment thereof,
or in any Preliminary Prospectus or the Prospectus, or in any amendment thereof
or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and agrees to
reimburse each such indemnified party, as incurred, for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives specifically for inclusion therein; and provided, further, that
the foregoing indemnity agreement with respect to any Preliminary Prospectus or
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting or causing any such losses, claims, damages or liabilities
purchased Securities (or to the benefit of any person controlling such
Underwriter or any directors, officers, employees and agents of each
Underwriter), if a copy of the Prospectus or the Prospectus (as amended or
supplemented, if the Company shall have timely furnished the Underwriters with
sufficient copies thereof was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Securities to such person
and if the Prospectus or the Prospectus (as so amended or supplemented) would
have cured the defect giving rise to such loss, claim, damage or liability.
This indemnity agreement will be in addition to any liability which the Company
may otherwise have.
(b) Each Underwriter severally agrees to indemnify and
hold harmless the Company, each of its directors and each of its officers who
signs the Registration Statement, and each person who controls the Company
within the meaning of either the Act or the Exchange Act, to the same extent as
the foregoing indemnity from the Company to each Underwriter, but only with
reference to written information relating to such Underwriter furnished to the
Company by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the documents
<PAGE> 22
22
referred to in the foregoing indemnity. This indemnity agreement will be in
addition to any liability which any Underwriter may otherwise have. The
Company acknowledges that the statements set forth in the last paragraph of the
cover page and in the first through sixth paragraphs under the heading
"Underwriting" in any Preliminary Prospectus and the Prospectus constitute the
only information furnished in writing by or on behalf of the several
Underwriters for inclusion in any Preliminary Prospectus or the Prospectus, and
you, as the Representatives, confirm that such statements are correct.
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof; but the failure so to notify the
indemnifying party (i) will not relieve it from liability under paragraph (a)
or (b) above unless and to the extent it did not otherwise learn of such action
and such failure results in the forfeiture by the indemnifying party of
substantial rights and defenses and (ii) will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraph (a) or (b) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the indemnified
party in any action for which indemnification is sought (in which case the
indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided, however, that such counsel shall be
reasonably satisfactory to the indemnified party. Notwithstanding the
indemnifying party's election to appoint counsel to represent the indemnified
party in an action, the indemnified party shall have the right to employ
separate counsel (including local counsel), and the indemnifying party shall
bear the reasonable fees, costs and expenses of such separate counsel if (i)
the use of counsel chosen by the indemnifying party to represent the
indemnified party would present such counsel with a conflict of interest, (ii)
the actual or potential defendants in, or targets of, any such action include
both the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal defenses available to
it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, (iii) the indemnifying party shall
not have employed counsel satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of the
<PAGE> 23
23
institution of such action or (iv) the indemnifying party shall authorize the
indemnified party to employ separate counsel at the expense of the indemnifying
party. An indemnifying party will not, without the prior written consent of
the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph
(a) or (b) of this Section 8 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, the Company and the Underwriters agree to
contribute to the aggregate losses, claims, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating or
defending same) (collectively "Losses") to which the Company and one or more of
the Underwriters may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company and by the Underwriters from the
offering of the Securities; provided, however, that in no case shall any
Underwriter (except as may be provided in any agreement among underwriters
relating to the offering of the Securities) be responsible for any amount in
excess of the underwriting discount or commission applicable to the Securities
purchased by such Underwriter hereunder. If the allocation provided by the
immediately preceding sentence is unavailable for any reason, the Company and
the Underwriters shall contribute in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and of the Underwriters in connection with the statements or omissions
which resulted in such Losses as well as any other relevant equitable
considerations. Benefits received by the Company shall be deemed to be equal
to the total net proceeds from the offering (before deducting expenses), and
benefits received by the Underwriters shall be deemed to be equal to the total
underwriting discounts and commissions, in each case as set forth on the cover
page of the Prospectus. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information
provided by the Company or the Underwriters. The Company and the Underwriters
agree that it would not be just and equitable if contribution were determined
by pro rata allocation or any other method of allocation which does not take
account of the equitable considerations referred to above. Notwithstanding the
provisions of this paragraph (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f)
<PAGE> 24
24
of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 8,
each person who controls an Underwriter within the meaning of either the Act or
the Exchange Act and each director, officer, employee and agent of an
Underwriter shall have the same rights to contribution as such Underwriter, and
each person who controls the Company within the meaning of either the Act or
the Exchange Act, each director of the Company and each officer who shall have
signed the Registration Statement shall have the same rights to contribution as
the Company, subject in each case to the applicable terms and conditions of
this paragraph (d).
9. Default by an Underwriter. If any one or more
Underwriters shall fail to purchase and pay for any of the Securities agreed to
be purchased by such Underwriter or Underwriters hereunder and such failure to
purchase shall constitute a default in the performance of its or their
obligations under this Agreement, the remaining Underwriters shall be obligated
severally to take up and pay for (in the respective proportions which the
amount of Underwritten Securities set forth opposite their names in Schedule I
hereto bears to the aggregate amount of Underwritten Securities set forth
opposite the names of all the remaining Underwriters) the Securities which the
defaulting Underwriter or Underwriters agreed but failed to purchase; provided,
however, that in the event that the aggregate amount of Underwritten Securities
which the defaulting Underwriter or Underwriters agreed but failed to purchase
shall exceed 10% of the aggregate amount of Underwritten Securities set forth
in Schedule I hereto, the remaining Underwriters shall have the right to
purchase all, but shall not be under any obligation to purchase any, of such
Securities, and if such nondefaulting Underwriters do not purchase all such
Securities, this Agreement will terminate without liability to any
nondefaulting Underwriter or the Company. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding seven days, as the Representatives shall
determine in order that the required changes in the Registration Statement and
the Prospectus or in any other documents or arrangements may be effected.
Nothing contained in this Agreement shall relieve any defaulting Underwriter of
its liability, if any, to the Company and any nondefaulting Underwriter for
damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if prior to
such time (i) trading in the
<PAGE> 25
25
Company's Common Stock shall have been suspended by the Commission or the
Nasdaq National Market or trading in securities generally on the New York Stock
Exchange or the Nasdaq National Market shall have been suspended or limited or
minimum prices shall have been established on either of such Exchange or
Market, (ii) a banking moratorium shall have been declared either by Federal or
New York State authorities or (iii) there shall have occurred any outbreak or
escalation of hostilities, declaration by the United States of a national
emergency or war or other calamity or crisis the effect of which on financial
markets is such as to make it, in the judgment of the Representatives,
impracticable or inadvisable to proceed with the offering or delivery of the
Securities as contemplated by the Prospectus (exclusive of any supplement
thereto).
11. Representations and Indemnities to Survive. The
respective agreements, representations, warranties, indemnities and other
statements of the Company or its officers and of the Underwriters set forth in
or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter or the
Company or any of the officers, directors or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the Securities.
The provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. Notices. All communications hereunder will be in
writing and effective only on receipt, and, if sent to the Representatives,
will be mailed, delivered or sent by facsimile transmission and confirmed to
them, care of Salomon Brothers Inc, at Seven World Trade Center, New York, New
York, 10048; or, if sent to the Company, will be mailed, delivered or sent by
facsimile transmission and confirmed to it at McLeod, Inc., Town Centre, 221
Third Avenue, S.E., Suite 500, Cedar Rapids, Iowa 52401, attention of the legal
department.
13. Successors. This Agreement will inure to the benefit
of and be binding upon the parties hereto and their respective successors and
the officers and directors and controlling persons referred to in Section 8
hereof, and no other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by
and construed in accordance with the laws of the State of New York.
<PAGE> 26
26
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company and the several Underwriters.
Very truly yours,
MCLEOD, INC.
By:..........................
[Title]
<PAGE> 27
27
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Brothers Inc
Morgan Stanley & Co.
Bear, Stearns & Co. Inc.
By: Salomon Brothers Inc
By: ..........................
Vice President
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
<PAGE> 28
SCHEDULE I
<TABLE>
<CAPTION>
Number of Shares of
Underwritten Securities
Underwriters To Be Purchased
- ------------ -----------------------
<S> <C>
Salomon Brothers Inc . . . . . . . . . . . .
Morgan Stanley & Co. . . . . . . . . . . . .
Bear, Stearns & Co. Inc. . . . . . . . . . .
------------------------
Total . . . . . . . . . . .
========================
</TABLE>
<PAGE> 29
EXHIBIT B
[Letterhead of Stockholder]
McLeod, Inc.
Public Offering of Class A Common Stock
, 1996
Salomon Brothers Inc
Morgan Stanley & Co.
Bear, Stearns & Co. Inc.
As Representatives of the several Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Dear Sirs:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement"), between McLeod,
Inc., a Delaware corporation (the "Company"), and each of you as
representatives of a group of Underwriters named therein, relating to an
underwritten public offering of Class A Common Stock, $.01 par value (the
"Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter
into the Underwriting Agreement, the undersigned agrees not to offer, sell or
contract to sell, or otherwise dispose of, directly or indirectly, or announce
an offering of, any shares of Common Stock beneficially owned by the
undersigned or any securities convertible into, or exchangeable for, shares of
Common Stock for a period of 180 days or one year following the day on which
the Underwriting Agreement is executed without the prior written consent of
the Representatives, except in the case of each of such persons and entities,
shares of Common Stock disposed of as bona fide gifts or pledges where the
recipients of such gifts or the pledgees, as the case may be, agree in writing
with the Underwriters to be bound by the terms of this letter.
If for any reason the Underwriting Agreement shall be
terminated prior to the Closing Date (as defined in the Underwriting
Agreement), the agreement set forth above shall likewise be terminated.
Yours very truly,
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MCLEOD, INC.
McLeod, Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies as follows:
1. The Corporation was originally incorporated on July 29, 1993,
and its original Certificate of Incorporation was filed with the Secretary of
State of the State of Delaware on the same date.
2. The original Certificate of Incorporation was duly amended on
February 23, 1994 and April 28, 1995 (as corrected by a certificate of
correction filed on May 3, 1995), the dates on which such amendments were filed
with the Secretary of State of the State of Delaware.
3. The Board of Directors of the Corporation, at a meeting duly
called and held in accordance with the Bylaws of the Corporation and Section
141 of the General Corporation Law of the State of Delaware (the "Delaware
General Corporation Law"), duly adopted resolutions proposing and declaring
advisable the adoption of the Amended and Restated Certificate of Incorporation
of the Corporation in the form attached hereto.
4. Holders of at least a majority of (i) the voting rights of the
outstanding shares of stock of the Corporation, (ii) the outstanding shares of
Class A Common Stock of the Corporation and (iii) the outstanding shares of
Class B Common Stock of the Corporation, at an annual meeting duly called and
held in accordance with the Bylaws of the Corporation and Section 211 of the
Delaware General Corporation Law, duly approved the Amended and Restated
Certificate of Incorporation of the Corporation in the form attached hereto.
5. Having been duly adopted pursuant to Sections 242 and 245 of
the Delaware General Corporation Law, this Amended and Restated Certificate of
Incorporation restates and integrates and further amends the provisions
previously filed with the Secretary of State of the State of Delaware on July
29, 1993, February 23, 1994, April 28, 1995 and May 3, 1995.
6. The text of the Certificate of Incorporation of the
Corporation hereby is amended and restated to read in its entirety as follows:
<PAGE> 2
ARTICLE 1. NAME
The name of this corporation is MCLEOD, INC.
ARTICLE 2. REGISTERED OFFICE AND AGENT
The registered office of the Corporation shall be located at 1013
Centre Road, Wilmington, Delaware 19805 in the County of New Castle. The
registered agent of the Corporation at such address shall be The Prentice-Hall
Corporation System, Inc.
ARTICLE 3. PURPOSE AND POWERS
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law. The Corporation shall have all power necessary or convenient
to the conduct, promotion or attainment of such acts and activities.
ARTICLE 4. CAPITAL STOCK
4.1 AUTHORIZED SHARES
The total number of shares of stock that the Corporation shall be
authorized to issue is 100,150,000 shares, divided into four classes as
follows: (i) 75,000,000 shares of Class A common stock having a par value of
$.01 per share ("Class A Common Stock"); (ii) 22,000,000 shares of Class B
common stock having a par value of $.01 per share ("Class B Common Stock");
(iii) 1,150,000 shares of Class A preferred stock having a par value of $5.50
per share ("Class A Preferred Stock"); and (iv) 2,000,000 shares of serial
preferred stock, having a par value of $.01 per share (the "Preferred Stock").
4.2. CLASS A COMMON STOCK
4.2.1. RELATIVE RIGHTS
The Class A Common Stock shall be subject to all of the
rights, privileges, preferences and priorities of the Class A Preferred Stock
and the Preferred Stock, as set forth herein and in the certificate or
certificates of designations filed to establish the respective series of
Preferred Stock. Each share of Class A Common Stock shall have the same
relative rights as and be identical in all respects to all the other shares of
Class A Common Stock.
-2-
<PAGE> 3
4.2.2. DIVIDENDS
Whenever there shall have been paid, or declared and set aside
for payment, to the holders of shares of any class of stock having preference
over the Class A Common Stock and the Class B Common Stock as to the payment of
dividends, the full amount of dividends and of sinking fund or retirement
payments, if any, to which such holders are respectively entitled in preference
to the Class A Common Stock and the Class B Common Stock, then dividends may be
paid equally on each share of the Class A Common Stock, the Class B Common
Stock and any class or series of stock entitled to participate therewith as to
dividends, out of any assets legally available for the payment of dividends
thereon, but only when and as declared by the Board of Directors of the
Corporation.
4.2.3. DISSOLUTION, LIQUIDATION, WINDING UP
In the event of any dissolution, liquidation, or winding up of
the Corporation, whether voluntary or involuntary, the holders of the Class A
Common Stock, the holders of the Class B Common Stock and holders of any class
or series of stock entitled to participate therewith, in whole or in part, as
to the distribution of assets in such event, shall become entitled to
participate in the distribution of any assets of the Corporation remaining
after the Corporation shall have paid, or provided for payment of, all debts
and liabilities of the Corporation and after the Corporation shall have paid,
or set aside for payment, to the holders of any class of stock having
preference over the Class A Common Stock and the Class B Common Stock in the
event of dissolution, liquidation or winding up the full preferential amounts
(if any) to which they are entitled.
4.2.4. VOTING RIGHTS
Each holder of shares of Class A Common Stock shall be
entitled to attend all special and annual meetings of the stockholders of the
Corporation and, together with the holders of shares of Class B Common Stock
and the holders of all other classes of stock entitled to attend and to vote at
such meetings, to vote upon any matter or thing (including, without limitation,
the election of one or more directors) properly considered and acted upon by
the stockholders. Each holder of shares of Class A Common Stock shall be
entitled to cast one vote for each outstanding share of Class A Common Stock so
held.
4.3. CLASS B COMMON STOCK
4.3.1. RELATIVE RIGHTS
The Class B Common Stock shall be subject to all of the
rights, privileges, preferences and priorities of the Class A Preferred Stock
and the Preferred Stock, as set forth herein and in the certificate or
certificates of
-3-
<PAGE> 4
designations filed to establish the respective series of Preferred Stock. Each
share of Class B Common Stock shall have the same relative rights as and be
identical in all respects to all the other shares of Class B Common Stock.
4.3.2. DIVIDENDS
Whenever there shall have been paid, or declared and set aside
for payment, to the holders of shares of any class of stock having preference
over the Class B Common Stock and the Class A Common Stock as to the payment of
dividends, the full amount of dividends and of sinking fund or retirement
payments, if any, to which such holders are respectively entitled in preference
to the Class B Common Stock and the Class A Common Stock, then dividends may be
paid equally on each share of the Class B Common Stock, the Class A Common
Stock and any class or series of stock entitled to participate therewith as to
dividends, out of any assets legally available for the payment of dividends
thereon, but only when and as declared by the Board of Directors of the
Corporation.
4.3.3. DISSOLUTION, LIQUIDATION, WINDING UP
In the event of any dissolution, liquidation, or winding up of
the Corporation, whether voluntary or involuntary, the holders of the Class B
Common Stock, the holders of the Class A Common Stock and holders of any class
or series of stock entitled to participate therewith, in whole or in part, as
to the distribution of assets in such event, shall become entitled to
participate in the distribution of any assets of the Corporation remaining
after the Corporation shall have paid, or provided for payment of, all debts
and liabilities of the Corporation and after the Corporation shall have paid,
or set aside for payment, to the holders of any class of stock having
preference over the Class B Common Stock and the Class A Common Stock in the
event of dissolution, liquidation or winding up the full preferential amounts
(if any) to which they are entitled.
4.3.4. VOTING RIGHTS
Each holder of shares of Class B Common Stock shall be
entitled to attend all special and annual meetings of the stockholders of the
Corporation and, together with the holders of shares of Class A Common Stock
and the holders of all other classes of stock entitled to attend and to vote at
such meetings, to vote upon any matter or thing (including, without limitation,
the election of one or more directors) properly considered and acted upon by
the stockholders. Each holder of shares of Class B Common Stock shall be
entitled to cast .40 vote for each outstanding share of Class B Common Stock so
held.
-4-
<PAGE> 5
4.3.5. CONVERSION RIGHTS
The shares of Class B Common Stock may be converted into fully
paid and nonassessable shares of Class A Common Stock at any time at the option
of the holder thereof at the rate of one share of Class A Common Stock for each
share of Class B Common Stock, subject to adjustment as provided below. If, at
any time shares of Class B Common Stock are outstanding, the Corporation shall
issue Class A Common Stock in a Class A Common Stock split without a
corresponding Class B Common Stock split, the conversion rate shall be adjusted
so that each share of Class B Common Stock shall be convertible into the number
of shares of Class A Common Stock representing the same proportion of the total
number of shares of Class A Common Stock outstanding after such stock split as
the number of shares of Class A Common Stock into which such share of Class B
Common Stock would have been convertible into in the absence of such stock
split bears to the total number of shares of Class A Common Stock outstanding
immediately prior to such stock split.
Any holder of shares of Class B Common Stock desiring to
convert all or any part of such holder's shares of Class B Common Stock into
shares of Class A Common Stock shall give written notice thereof to the
Corporation, specifying the number of shares of Class B Common Stock such
holder desires to convert and the desired conversion date (the "Conversion
Date"), which shall be on a business day not less than five days after the date
of such notice. On and after the Conversion Date, such holder shall be
entitled to receive, upon surrender of a certificate or certificates
representing the shares of Class B Common Stock so converted, a certificate for
the corresponding number of shares of Class A Common Stock, determined in
accordance with the provisions hereof. All shares of Class B Common Stock to
be converted on the Conversion Date shall, whether or not the certificates for
such shares shall have been surrendered for cancellation, be deemed to be no
longer outstanding for any purpose and all rights with respect to such shares
(except the right of the holder of the certificates for such shares to receive
certificates for shares of Class A Common Stock) shall thereupon cease and
terminate. Shares of Class B Common Stock converted pursuant to this paragraph
shall be canceled and retired and shall not be reissued. Upon conversion, no
fractional shares shall be issued and any fractions of a share shall be rounded
up to the next highest number.
4.4. CLASS A PREFERRED STOCK
4.4.1 RELATIVE RIGHTS
No class of stock or debt senior to the Class A Preferred
Stock may be issued by the Corporation (unless the proceeds of such issuance
are used to redeem the Class A Preferred Stock) or any of the rights of the
holders of shares of Class A
-5-
<PAGE> 6
Preferred Stock shall be changed without majority approval of the holders of
the Class A Preferred Stock voting as a class.
4.4.2. DIVIDENDS
The holders of shares of Class A Preferred Stock shall be
entitled to receive, out of the assets of the Corporation legally available for
dividends, upon declaration of the Board of Directors, cash dividends per share
per annum equal to the amount of interest that would accrue on the par value of
the shares at an interest rate of New York Prime (as stated in the Wall Street
Journal, changing as and when said rate shall change) plus 2%, payable
semiannually on the last day of the months of March and September in each year.
Such dividends shall accrue and be cumulative (whether or not in any semiannual
dividend period there shall be funds of the Corporation legally available for
the payment of such dividends), from the date of the last semiannual dividend
date at which dividends were declared and paid on the Class A Preferred Stock
of the Corporation. Each such dividend shall be paid to the holders of record
of shares of Class A Preferred Stock as they appear on the stock register of
the Corporation on the last day of the month next preceding the payment date.
Dividends on account of arrearages for any past dividend periods may be
declared and paid at any time, without reference to any regular dividend
payment date, to the holders of record on such date, which shall not be more
than 45 days prior to the dividend payment date, as may be fixed by the Board
of Directors of the Corporation, or by a committee of the Board of Directors
duly authorized to fix such date. Accumulations of dividends shall not bear
interest.
4.4.3. RIGHTS ON LIQUIDATION
In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of shares of
Class A Preferred Stock shall be entitled to receive, subject to the rights of
any other class of stock which ranks senior to the Class A Preferred Stock as
to distribution of assets on liquidation, but before any distribution is made
on any class of stock ranking junior to the Class A Preferred Stock as to the
payment of dividends or the distribution of assets, the sum of $5.50 per share,
plus any arrearages on dividends thereon.
4.4.4. REDEMPTION
The shares of Class A Preferred Stock are redeemable by the
Corporation, in whole or in part after issuance, at $5.50 per share, plus in
each case accumulated but unpaid dividends thereon to the date fixed for
redemption (the "Redemption Price"). The mandatory redemption shall be
determined semiannually on the last day of the months of March and September
payable within 30 days thereafter and shall be equal to the number of shares
that can be redeemed from the amount of Free Cash Flow for that period. For
the purposes of this section, "Free Cash Flow" shall mean earnings before
interest, depreciation, amortization,
-6-
<PAGE> 7
and other non-cash items, less total debt service and reasonable working
capital needs.
In the event the Corporation shall have Free Cash Flow
available to redeem shares of Class A Preferred Stock, a redemption notice
shall be mailed, not less than 10 days prior to the redemption date, to each
holder of record of the shares to be redeemed, at such holder's address as the
same appears on the stock register of the Corporation. Each such notice shall
state: (1) the redemption date; (2) the aggregate number of shares of Class A
Preferred Stock to be redeemed and, if less than all the shares of Class A
Preferred Stock held by such holder are to be redeemed, the number of such
shares to be redeemed from such holder; (3) the Redemption Price; (4) the place
or places where certificates for such shares are to be surrendered for payment
of the redemption price; and (5) that dividends on the shares to be redeemed
will cease to accrue on such redemption date. Upon surrender of the
certificates for any shares to be redeemed (properly endorsed or assigned for
transfer if the Board of Directors shall so require and the notice shall so
state), such shares shall be redeemed by the Corporation at the Redemption
Price. Notice having been mailed, from and after the redemption date (unless
the Corporation shall default in providing money for the payment of the
Redemption Price for the shares so called for redemption) dividends on the
shares of the Class A Preferred Stock so redeemed shall cease to accrue and
said shares shall no longer be deemed to be outstanding, and all rights of the
holders thereof as stockholders of the Corporation (except the right to receive
from the Corporation the Redemption Price for such shares) shall cease. If
less than all the outstanding shares of Class A Preferred Stock are to be
redeemed, the redemption shall be pro rata (as nearly as may be). A new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof. No failure to mail such notice or any defect in the notice
or in the mailing, shall affect the validity of the proceedings for such
redemption, except as to the holder to whom the Corporation has failed to mail
such notice or whose notice was defective.
Notwithstanding the foregoing provisions of this Section, if
any dividends on the Class A Preferred Stock are in arrears, no shares of Class
A Preferred Stock shall be redeemed unless (a) the holders of two-thirds of the
outstanding shares of Class A Preferred Stock shall have consented thereto or
(b) all outstanding shares of the Class A Preferred Stock are simultaneously
redeemed.
A holder of shares of Class A Preferred Stock has no
preemptive right to acquire unissued shares of stock of the Corporation or
securities convertible into such shares or carrying a right to subscribe to or
acquire such shares and has no preemptive right to acquire treasury shares of
the Corporation.
As long as any shares of Class A Preferred Stock are issued
and outstanding, the Board of Directors shall cause the number of directors to
be increased by two. For so long as any shares of Class A Preferred Stock are
-7-
<PAGE> 8
outstanding, the holders of the shares of Class A Preferred Stock, voting as a
class, shall have the exclusive right to nominate and vote for the election of
the two additional directors to the Board of Directors. At such time as there
are no longer any shares of Class A Preferred Stock outstanding, the Board of
Directors shall cause the number of directors to be reduced by two.
4.5. PREFERRED STOCK
The Board of Directors is authorized, subject to limitations prescribed
by the Delaware General Corporation Law and the provisions of this Amended and
Restated Certificate of Incorporation, to provide, by resolution or resolutions
from time to time and filing a certificate pursuant to the applicable provision
of the Delaware General Corporation Law, for the issuance of the shares of
Preferred Stock in series, to establish from time to time the number of shares
to be included in each such series, to fix the powers, designation,
preferences, relative, participating, optional or other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof.
4.6. REDEMPTION
Notwithstanding any other provision of this Amended and Restated
Certificate of Incorporation to the contrary, outstanding shares of stock of
the Corporation shall always be subject to redemption by the Corporation, by
action of the Board of Directors, if in the judgment of the Board of Directors
such action should be taken, pursuant to Section 151(b) of the Delaware General
Corporation Law or any other applicable provision of law, to the extent
necessary to prevent the loss or secure the reinstatement of any license or
franchise from any governmental agency held by the Corporation or any of its
subsidiaries to conduct any portion of the business of the Corporation or any
of its subsidiaries, which license or franchise is conditioned upon some or all
of the holders of the Corporation's stock possessing prescribed qualifications.
The terms and conditions of such redemption shall be as follows:
(A) The redemption price of the shares to be redeemed
pursuant to this Section 4.6 shall be determined by the Board of Directors and
shall be equal to the Fair Market Value (as defined herein) of such shares or,
if such shares were purchased by a Disqualified Holder (as defined herein)
within one year of the Redemption Date (as defined herein), the lesser of (i)
the Fair Market Value of such shares and (ii) the purchase price paid by such
Disqualified Holder for such shares;
(B) At the election of the Corporation, the redemption
price of such shares may be paid in cash, Redemption Securities (as defined
herein) or any combination thereof;
-8-
<PAGE> 9
(C) If fewer than all shares held by Disqualified Holders
are to be redeemed, the shares to be redeemed shall be selected in such manner
as shall be determined by the Board of Directors, which may include selection
first of the most recently purchased shares thereof, selection by lot or
selection in any other manner determined by the Board of Directors;
(D) At least 30 days' prior written notice of the
Redemption Date shall be given to any Disqualified Holder of shares selected to
be redeemed (unless waived in writing by any such holder), provided that the
Redemption Date may be the date on which written notice shall be given to such
holder if the cash or Redemption Securities necessary to effect the redemption
shall have been deposited in trust for the benefit of such holder and subject
to immediate withdrawal by it upon surrender of the stock certificates for the
shares to be redeemed;
(E) From and after the Redemption Date, any and all
rights of whatever nature that any Disqualified Holder may have with respect to
any shares selected for redemption (including without limitation any rights to
vote or participate in dividends declared on stock of the same class or series
as such shares) shall cease and terminate, and such Disqualified Holder shall
thenceforth be entitled only to receive, with respect to such shares, the cash
or Redemption Securities payable upon redemption; and
(F) Such additional terms and conditions as the Board of
Directors shall determine.
For purposes of this Section 4.6:
(i) "Disqualified Holder" shall mean any holder of shares
of stock of the Corporation whose holding of such
stock, either individually or when taken together
with the holding of shares of stock of the
Corporation by any other holders, may result, in the
judgment of the Board of Directors, in the loss of,
or the failure to secure the reinstatement of, any
license or franchise from any governmental agency
held by the Corporation or any of its subsidiaries to
conduct any portion of the business of the
Corporation or any of its subsidiaries.
(ii) "Fair Market Value" of a share of the Corporation's
stock of any class or series shall mean the average
Closing Price (as defined herein) for such a share
for each of the 45 most recent days on which shares
of stock of such class or series shall have been
traded preceding the day on which notice of
redemption shall be given pursuant to paragraph (D)
of this Section 4.6; provided, however, that if
shares of stock of such class or series are not
traded on any securities exchange or in the
over-the-counter market, "Fair Market Value" shall be
determined by the Board
-9-
<PAGE> 10
of Directors in good faith. "Closing Price" on any
day means the reported closing sales price or, in
case no such sale takes place, the average of the
reported closing bid and asked prices on the
principal United States securities exchange
registered under the Securities Exchange Act of 1934
on which such stock is listed, or, if such stock is
not listed on any such exchange, the highest closing
sales price or bid quotation for such stock on the
National Association of Securities Dealers, Inc.
Automated Quotations System or any system then in
use, or if no such prices or quotations are
available, the fair market value on the day in
question as determined by the Board of Directors in
good faith.
(iii) "Redemption Date" shall mean the date fixed by the
Board of Directors for the redemption of any shares
of stock of the Corporation pursuant to this Section
4.6.
(iv) "Redemption Securities" shall mean any debt or equity
securities of the Corporation, any of its
subsidiaries or any other corporations, or any
combination thereof, having such terms and conditions
as shall be approved by the Board of Directors and
which, together with any cash to be paid as part of
the redemption price, in the opinion of any
investment banking firm selected by the Board of
Directors (which may be a firm which provides other
investment banking, brokerage or other services to
the Corporation), has a value, at the time notice of
redemption is given pursuant to paragraph (D) of this
Section 4.6, at least equal to the price required to
be paid pursuant to paragraph (A) of this Section 4.6
(assuming for purposes of such valuation, in the case
of Redemption Securities to be publicly traded, such
Redemption Securities were fully distributed and
trading under normal conditions).
ARTICLE 5. BOARD OF DIRECTORS
5.1. DIRECTORS; NUMBER; ELECTION
The number of directors of the Corporation shall be such number as
from time to time shall be fixed by, or in the manner provided in, the Bylaws
of the Corporation. Unless and except to the extent that the Bylaws of the
Corporation shall otherwise require, the election of directors of the
Corporation need not be by written ballot. Except as otherwise provided in
this Amended and Restated Certificate of Incorporation, each director of the
Corporation shall be entitled to one vote per director on all matters voted or
acted upon by the Board of Directors.
-10-
<PAGE> 11
The Board of Directors shall be divided into three classes (designated
as Class I, Class II, and Class III), as nearly equal in number as possible.
At each annual meeting of stockholders, the successors to the Class of
directors whose term shall then expire shall be elected to hold office for a
term expiring at the third succeeding annual meeting and until their successors
shall be elected and qualified. Except as set forth below with respect to
vacancies and newly created directorships, directors shall be elected by a
plurality of the voting rights represented by the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors.
If the number of directors is changed by resolution of the Board of
Directors pursuant to this Article 5 or pursuant to Section 4.4.4, any increase
or decrease shall be apportioned among the classes so as to maintain the number
of directors in each class as nearly equal as possible, but in no case shall a
decrease in the number of directors shorten the term of an incumbent director.
Vacancies and newly created directorships resulting from any increase
in the authorized number of directors elected by all of the holders of Class A
Common Stock, Class B Common Stock and any other stockholders having the right
to vote with the Class A Common Stock and the Class B Common Stock as a single
class may be filled by a majority of the directors then in office, although
fewer than a quorum, or by a sole remaining director. Whenever the holders of
any class or classes of stock or series thereof are entitled to elect one or
more directors by the provisions of this Amended and Restated Certificate of
Incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series thereof in office, or by a sole remaining director
so elected. Each director so chosen shall hold office until the next election
of directors, and until such director's successor is elected and qualified, or
until the director's earlier death, resignation or removal. In the event that
one or more directors resigns from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office until the next
election of directors, and until such director's successor is elected and
qualified, or until the director's earlier death, resignation or removal.
5.2. MANAGEMENT OF BUSINESS AND AFFAIRS OF THE CORPORATION
The business and affairs of the Corporation shall be managed by or
under the directors of the Board of Directors.
-11-
<PAGE> 12
5.3. LIMITATION OF LIABILITY
No director of the Corporation shall be liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this provision shall not eliminate or limit the
liability of a director (a) for any breach of the director's duty of loyalty to
the Corporation or its stockholders; (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(c) under Section 174 of the Delaware General Corporation Law; or (d) for any
transaction from which the director derived an improper personal benefit. Any
repeal or modification of this Section 5.3 shall be prospective only and shall
not adversely affect any right or protection of, or any limitation of the
liability of, a director of the Corporation existing at, or arising out of
facts or incidents occurring prior to, the effective date of such repeal or
modification.
ARTICLE 6. INDEMNIFICATION
Each person who was or is a party or is threatened to be made a party to
or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and
whether by or in the right of the Corporation or otherwise (a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee,
partner (limited or general) or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, including service with respect to an employee benefit plan, shall
be (and shall be deemed to have a contractual right to be) indemnified and held
harmless by the Corporation (and any successor to the Corporation by merger or
otherwise) to the fullest extent authorized by, and subject to the conditions
and (except as provided in the Corporation's Bylaws) procedures set forth in
the Delaware General Corporation Law, as the same exists or may hereinafter be
amended (but such amendment shall not be deemed to limit or prohibit the rights
of indemnification hereunder for past acts or omissions of any such person
insofar as such amendment limits or prohibits the indemnification rights that
said law permitted the corporation to provide prior to such amendment) against
all expenses, liabilities and losses (including attorney's fees, judgments,
fines, ERISA taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith.
ARTICLE 7. COMPROMISE OR ARRANGEMENTS
Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation
-12-
<PAGE> 13
or of any creditor or stockholder thereof or on the application of any receiver
or receivers appointed for the Corporation under the provisions of Section 291
of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all of the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
ARTICLE 8. AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right, at any time and from time to time,
to amend, alter, change, or repeal any provision contained in this Amended and
Restated Certificate of Incorporation, and other provisions authorized by the
laws for the State of Delaware at the time in force may be added or inserted,
in the manner now or hereafter prescribed by law, except that Sections 5.1
(Election of Directors) and 5.3 (Limitation of Liability), Article 6
(Indemnification) and this Article 8 may not be altered, amended or repealed
except by the affirmative vote of at least two-thirds of the voting rights
represented by the shares entitled to vote thereon and the affirmative vote of
a majority of the members of the entire Board of Directors; and all rights,
preferences, and privileges of any nature conferred upon stockholders,
directors, or any other persons whomsoever by and pursuant to this Amended and
Restated Certificate of Incorporation in its present form or as hereafter
amended are granted subject to the rights reserved in this Article 8.
ARTICLE 9. AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by the
Delaware General Corporation Law, the Board of Directors of the Corporation is
expressly authorized and empowered to adopt, amend and repeal the Bylaws of the
Corporation.
-13-
<PAGE> 14
IN WITNESS WHEREOF, McLeod, Inc. has caused this Amended and Restated
Certificate of Incorporation to be signed and attested by its duly authorized
officers, this 30th day of April, 1996.
McLeod, Inc.
By: /s/ Clark E. McLeod
--------------------------------
Name: Clark E. McLeod
--------------------------------
Title: Chairman and Chief Executive
-------------------------------
Officer
-------------------------------
ATTEST:
/s/ Casey D. Mahon
- ---------------------------
Name: Casey D. Mahon
----------------------
Title: Secretary
---------------------
-14-
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
MCLEOD, INC.
1. OFFICES
1.1. REGISTERED OFFICE
The initial registered office of the Corporation shall be in
Wilmington, Delaware, and the initial registered agent in charge thereof shall
be The Prentice-Hall Corporation System, Inc.
1.2. OTHER OFFICES
The Corporation may also have offices at such other places,
both within and without the State of Delaware, as the Board of Directors may
from time to time determine or as may be necessary or useful in connection with
the business of the Corporation.
2. MEETINGS OF STOCKHOLDERS
2.1. PLACE OF MEETINGS
All meetings of the stockholders shall be held at such place
as may be fixed from time to time by the Board of Directors, the Chairperson,
the Chief Executive Officer or the President.
2.2. ANNUAL MEETINGS
The Corporation shall hold annual meetings of stockholders,
commencing with the year 1997, on such date and at such time as shall be
designated from time to time by the Board of Directors, the Chairperson, the
Chief Executive Officer or the President, at which stockholders shall elect a
Board of Directors and transact such other business as may properly be brought
before the meeting.
<PAGE> 2
2.3. SPECIAL MEETINGS
Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute, may be called by the Board of
Directors, the Chairperson, the Chief Executive Officer or the President.
2.4. NOTICE OF MEETINGS
Notice of any meeting of stockholders, stating the place, date
and hour of the meeting, and (if it is a special meeting) the purpose or
purposes for which the meeting is called, shall be given to each stockholder
entitled to vote at such meeting not less than ten nor more than sixty days
before the date of the meeting (except to the extent that such notice is waived
or is not required as provided in the General Corporation Law of the State of
Delaware (the "Delaware General Corporation Law") or these Bylaws). Such
notice shall be given in accordance with, and shall be deemed effective as set
forth in, Section 222 (or any successor section) of the Delaware General
Corporation Law.
2.5. WAIVERS OF NOTICE
Whenever the giving of any notice is required by statute, the
Certificate of Incorporation or these Bylaws, a waiver thereof, in writing and
delivered to the Corporation, signed by the person or persons entitled to said
notice, whether before or after the event as to which such notice is required,
shall be deemed equivalent to notice. Attendance of a stockholder at a meeting
shall constitute a waiver of notice (1) of such meeting, except when the
stockholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting, and (2) (if it is a special meeting) of
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice, unless the stockholder
objects to considering the matter at the beginning of the meeting.
2.6. BUSINESS AT SPECIAL MEETINGS
Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice (except to the extent
that such notice is waived or is not required as provided in the Delaware
General Corporation Law or these Bylaws).
2.7. LIST OF STOCKHOLDERS
After the record date for a meeting of stockholders has been
fixed, at least ten days before such meeting, the officer who has charge of the
stock ledger of the Corporation shall make a list of all stockholders entitled
to vote at the meeting,
<PAGE> 3
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting, either at a place in the city where the meeting is to be
held, which place is to be specified in the notice of the meeting, or at the
place where the meeting is to be held. Such list shall also, for the duration
of the meeting, be produced and kept open to the examination of any stockholder
who is present at the time and place of the meeting.
2.8. QUORUM AT MEETINGS
Stockholders may take action on a matter at a meeting only if
a quorum exists with respect to that matter. Except as otherwise provided by
statute or by the Certificate of Incorporation, the holders of a majority of
the voting rights represented by the shares issued and outstanding and entitled
to vote at the meeting, and who are present in person or represented by proxy,
shall constitute a quorum at all meetings of the stockholders for the
transaction of business. Where a separate vote by a class or classes is
required, a majority of the outstanding shares of such class or classes,
present in person or represented by proxy, shall constitute a quorum entitled
to take action with respect to that vote on that matter. Once a share is
represented for any purpose at a meeting (other than solely to object (1) to
holding the meeting or transacting business at the meeting, or (2) (if it is a
special meeting) to consideration of a particular matter at the meeting that is
not within the purpose or purposes described in the meeting notice), it is
deemed present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for the
adjourned meeting. The holders of a majority of the voting rights represented
by the shares represented at a meeting, whether or not a quorum is present, may
adjourn such meeting from time to time.
2.9. VOTING AND PROXIES
Unless otherwise provided in the Delaware General Corporation
Law or in the Corporation's Certificate of Incorporation, and subject to the
other provisions of these Bylaws, each stockholder shall be entitled to one
vote on each matter, in person or by proxy, for each share of the Corporation's
Class A common stock that is held by such stockholder and .40 vote on each
matter, in person or by proxy, for each share of the Corporation's Class B
common stock that is held by such stockholder. No proxy shall be voted or
acted upon after three years from its date, unless the proxy provides for a
longer period. A duly executed appointment of proxy shall be irrevocable if
the appointment form states that it is irrevocable and if, and only as long as,
it is coupled with an interest sufficient in law to support an irrevocable
power.
<PAGE> 4
2.10. REQUIRED VOTE
When a quorum is present at any meeting of stockholders, all
matters shall be determined, adopted and approved by the affirmative vote
(which need not be by ballot) of the holders of a majority of the voting rights
represented by the shares present in person or represented by proxy at the
meeting and entitled to vote with respect to the matter, unless the proposed
action is one upon which, by express provision of any statute or of the
Certificate of Incorporation, a different vote is specified and required, in
which case such express provision shall govern and control with respect to that
vote on that matter. Where a separate vote by a class or classes is required,
the affirmative vote of the holders of a majority of the shares of such class
or classes present in person or represented by proxy at the meeting shall be
the act of such class. Notwithstanding the foregoing, directors shall be
elected in the manner specified by the Certificate of Incorporation or
applicable law.
2.11. ACTION WITHOUT A MEETING
Any action required or permitted to be taken at a
stockholders' meeting may be taken without a meeting, without prior notice and
without a vote, if the action is taken by a unanimous vote of persons who would
be entitled to vote with respect to the action at a meeting. The action must
be evidenced by one or more written consents describing the action taken,
signed by all of the stockholders who would be entitled to vote with respect to
the action at a meeting, and delivered to the Corporation for inclusion in the
minutes or filing with the corporate records. No consent shall be effective to
take the corporate action specified unless the consents are delivered to the
Corporation within sixty days of the delivery of the earliest-dated consent.
3. DIRECTORS
3.1. POWERS
The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors, which may exercise all
such powers of the Corporation and do all such lawful acts and things, subject
to any limitation set forth in the Certificate of Incorporation or as otherwise
may be provided in the Delaware General Corporation Law.
3.2. NUMBER AND ELECTION
The number of directors which shall constitute the whole Board
of Directors shall not be fewer than three nor more than fifteen. The
directors shall be divided into three classes and elected or appointed in such
manner as shall be specified by the Certificate of Incorporation or applicable
law. The first Board of
<PAGE> 5
Directors shall consist of seven directors. Thereafter, within the limits
above specified, the number of directors shall be determined by resolution of
the Board of Directors.
3.3. NOMINATION OF DIRECTORS
The Board of Directors shall nominate candidates to stand for
election as directors; and other candidates also may be nominated by any
stockholder, provided such other nomination(s) are submitted in writing to the
Secretary of the Corporation no later than 90 days prior to the meeting of
stockholders at which such directors are to be elected, together with the
identity of the nominator and the number of shares of the Corporation's stock
owned, directly or indirectly, by the nominator. The directors shall be
elected at the annual meeting of the stockholders, except as provided in
Section 3.4 hereof, and each director elected shall hold office until such
director's successor is elected and qualified or until the director's earlier
death, resignation or removal. Directors need not be stockholders.
3.4. VACANCIES
Vacancies and newly created directorships resulting from any
increase in the authorized number of directors shall be filled in such manner
as shall be fixed by, or in the manner specified in, the Certificate of
Incorporation.
3.5. MEETINGS
3.5.1. REGULAR MEETINGS
Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board of Directors.
3.5.2. SPECIAL MEETINGS
Special meetings of the Board of Directors may be called by
the Chairperson, Chief Executive Officer or President on one day's notice to
each director, either personally or by telephone, express delivery service (so
that the scheduled delivery date of the notice is at least one day in advance
of the meeting), telegram or facsimile transmission, and on five days' notice
by mail (effective upon deposit of such notice in the mail). The notice need
not describe the purpose of a special meeting.
3.5.3. TELEPHONE MEETINGS
Members of the Board of Directors may participate in a meeting
of the Board of Directors by any communication by means of which all
participating
<PAGE> 6
directors can simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
3.5.4. ACTION WITHOUT MEETING
Any action required or permitted to be taken at any meeting of
the Board of Directors may be taken without a meeting if the action is taken by
all members of the Board of Directors. The action must be evidenced by one or
more written consents describing the action taken, signed by each director, and
delivered to the Corporation for inclusion in the minute book.
3.5.5. WAIVER OF NOTICE OF MEETING
A director may waive any notice required by statute, the
Certificate of Incorporation or these Bylaws before or after the date and time
stated in the notice. Except as set forth below, the waiver must be in
writing, signed by the director entitled to the notice, and delivered to the
Corporation for inclusion in the minute book. Notwithstanding the foregoing, a
director's attendance at or participation in a meeting waives any required
notice to the director of the meeting unless the director at the beginning of
the meeting objects to holding the meeting or transacting business at the
meeting and does not thereafter vote for or assent to action taken at the
meeting.
3.6. QUORUM AND VOTE AT MEETINGS
At all meetings of the Board of Directors, a quorum of the
Board of Directors consists of a majority of the total number of directors
prescribed pursuant to Section 3.2 of these Bylaws. The vote of a majority of
the directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute or by the Certificate of Incorporation or by these Bylaws.
3.7. COMMITTEES OF DIRECTORS
The Board of Directors may by resolution create one or more
committees and appoint members of the Board of Directors to serve on the
committees at the pleasure of the Board of Directors. The Board of Directors
may designate one or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee.
If a member of a committee shall be absent from any meeting, or disqualified
from voting thereat, the remaining member or members present and not
disqualified from voting, whether or not such member or members constitute a
quorum, may, by unanimous vote, appoint another member of the Board of
Directors to act at the meeting in the place of such absent or disqualified
member. Any such committee, to
<PAGE> 7
the extent provided in the resolution of the Board of Directors, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation; but no such
committee shall have the power or authority to amend the Certificate of
Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors pursuant to Section 151(a) of the Delaware General
Corporation Law, fix the designations and any of the preferences or rights of
such shares relating to dividends, redemption, dissolution, any distribution of
assets of the Corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the
same or any other class or classes of stock of the Corporation or fix the
number of shares of stock or authorize the increase or decrease of the shares
of any series), adopt an agreement of merger or consolidation pursuant to
Sections 251 or 252 of the Delaware General Corporation Law, recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommend to the stockholders a dissolution
of the Corporation or a revocation of a dissolution, or amend the Bylaws; and
unless the resolutions, these Bylaws or the Certificate of Incorporation
expressly so provide, no such committee shall have the power or authority to
declare a dividend, to authorize the issuance of stock, or to adopt a
certificate of ownership and merger pursuant to Section 253 of the Delaware
General Corporation Law. Such committee or committees shall have such name or
names as may be determined from time to time by resolution adopted by the Board
of Directors. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors, when required. Unless otherwise
specified in the Board resolution appointing the Committee, all provisions of
the Delaware General Corporation Law and these Bylaws relating to meetings,
action without meetings, notice (and waiver thereof), and quorum and voting
requirements of the Board of Directors apply, as well, to such committees and
their members.
3.8. COMPENSATION OF DIRECTORS
The Board of Directors shall have the authority to fix the
compensation of directors. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
4. OFFICERS
4.1. POSITIONS
The officers of the Corporation shall be a President, a
Secretary and a Treasurer, and such other officers as the Board of Directors
(or an officer authorized by the Board of Directors) from time to time may
appoint, including a Chairperson, a Chief Executive Officer, and one or more
Vice Chairmen, Senior Vice Presidents,
<PAGE> 8
Vice Presidents, Assistant Secretaries and Assistant Treasurers. Each such
officer shall exercise such powers and perform such duties as shall be set
forth below and such other powers and duties as from time to time may be
specified by the Board of Directors or by any officer(s) authorized by the
Board of Directors to prescribe the duties of such other officers. Any number
of offices may be held by the same person, except that in no event shall the
President and the Secretary be the same person. Each of the Chairperson, Chief
Executive Officer, President, and/or any Senior Vice President or Vice
President may execute bonds, mortgages and other documents, except where
required or permitted by law to be otherwise executed and except where the
execution thereof shall be expressly delegated by the Board of Directors to
some other officer or agent of the Corporation.
4.2. CHAIRPERSON
The Chairperson shall (when present) preside at all meetings
of the Board of Directors and stockholders, and shall ensure that all orders
and resolutions of the Board of Directors and stockholders are carried into
effect. The Chairperson may execute bonds, mortgages and other contracts,
except where required or permitted by law to be otherwise signed and executed
and except where the signing and execution thereof shall be expressly delegated
by the Board of Directors to some other officer or agent of the Corporation.
4.3. CHIEF EXECUTIVE OFFICER
Subject to the authority of the Board of Directors, the Chief
Executive Officer shall direct and supervise the business, operations, and
affairs of the Corporation and perform such other duties as may be assigned him
from time to time by the Board of Directors. In the absence of the
Chairperson, or if no Chairperson shall have been appointed, the Chief
Executive Officer shall (when present) preside at all meetings of the Board of
Directors and stockholders, and shall ensure that all orders and resolutions of
the Board of Directors and stockholders are carried into effect. The Chief
Executive Officer may execute bonds, mortgages and other contracts, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the Board of Directors to some other officer or agent of the Corporation.
4.4. PRESIDENT
The President shall be the chief operating officer of the
Corporation and shall have responsibility and authority for management of the
day-to-day operations of the Corporation, subject to the authority of the Chief
Executive Officer and the Board of Directors. The President may execute bonds,
mortgages and other contracts, except where required or permitted by law to be
otherwise signed and
<PAGE> 9
executed and except where the signing and execution thereof shall be expressly
delegated by the Board of Directors to some other officer or agent of the
Corporation.
4.5. VICE PRESIDENT
In the absence of the President or in the event of the
President's inability or refusal to act, the Vice President (or in the event
there shall be more than one Vice President, the Vice Presidents in the order
designated, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting shall
have all the powers of, and be subject to all the restrictions upon, the
President.
4.6. SECRETARY
The Secretary shall have responsibility for preparation of
minutes of meetings of the Board of Directors and of the stockholders and for
authenticating records of the Corporation. The Secretary shall give, or cause
to be given, notice of all meetings of the stockholders and special meetings of
the Board of Directors. The Secretary or an Assistant Secretary may also
attest all instruments signed by any other officer of the Corporation.
4.7. ASSISTANT SECRETARY
The Assistant Secretary, or if there shall be more than one,
the Assistant Secretaries in the order determined by the Board of Directors (or
if there shall have been no such determination, then in the order of their
election), shall, in the absence of the Secretary or in the event of the
Secretary's inability or refusal to act, perform the duties and exercise the
powers of the Secretary.
4.8. TREASURER
The Treasurer shall be the chief financial officer of the
Corporation and shall have responsibility for the custody of the corporate
funds and securities and shall see to it that full and accurate accounts of
receipts and disbursements are kept in books belonging to the Corporation. The
Treasurer shall render to the Chairperson, the Chief Executive Officer, the
President, and the Board of Directors, upon request, an account of all
financial transactions and of the financial condition of the Corporation.
4.9. ASSISTANT TREASURER
The Assistant Treasurer, or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors (or
if there
<PAGE> 10
shall have been no such determination, then in the order of their election),
shall, in the absence of the Treasurer or in the event of the Treasurer's
inability or refusal to act, perform the duties and exercise the powers of the
Treasurer.
4.10. TERM OF OFFICE
The officers of the Corporation shall hold office until their
successors are chosen and qualify or until their earlier resignation or
removal. Any officer may resign at any time upon written notice to the
Corporation. Any officer elected or appointed by or at the direction of the
Board of Directors may be removed at any time, with or without cause, by the
affirmative vote of a majority of the Board of Directors.
4.11. COMPENSATION
The compensation of officers of the Corporation shall be fixed
by the Board of Directors or by any officer(s) authorized by the Board of
Directors to prescribe the compensation of such other officers.
4.12. FIDELITY BONDS
The Corporation may secure the fidelity of any or all of its
officers or agents by bond or otherwise.
5. CAPITAL STOCK
5.1. CERTIFICATES OF STOCK; UNCERTIFICATED SHARES
The shares of the Corporation shall be represented by
certificates, provided that the Board of Directors may provide by resolution
that some or all of any or all classes or series of the Corporation's stock
shall be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates, and upon request
every holder of uncertificated shares, shall be entitled to have a certificate
(representing the number of shares registered in certificate form) signed in
the name of the Corporation by the Chairperson, Chief Executive Officer,
President or any Vice President, and by the Treasurer, Secretary or any
Assistant Treasurer or Assistant Secretary of the Corporation. Any or all of
the signatures on the certificate may be by facsimile. In case any officer,
transfer agent or registrar whose signature or facsimile signature appears on a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
<PAGE> 11
5.2. LOST CERTIFICATES
The Board of Directors, Chairperson, Chief Executive Officer,
President or Secretary may direct a new certificate of stock to be issued in
place of any certificate theretofore issued by the Corporation and alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming that the certificate of stock has been lost, stolen
or destroyed. When authorizing such issuance of a new certificate, the Board
of Directors or any such officer may, as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or such owner's legal representative, to advertise the same in
such manner as the Board of Directors or such officer shall require and/or to
give the Corporation a bond or indemnity, in such sum or on such terms and
conditions as the Board of Directors or such officer may direct, as indemnity
against any claim that may be made against the Corporation on account of the
certificate alleged to have been lost, stolen or destroyed or on account of the
issuance of such new certificate or uncertificated shares.
5.3. RECORD DATE
5.3.1. ACTIONS BY STOCKHOLDERS
In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than sixty days nor less
than ten days before the date of such meeting. If no record date is fixed by
the Board of Directors, the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting, unless the Board of Directors fixes a new record
date for the adjourned meeting.
In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted by the Board
of Directors, and which record date shall not be more than ten days after the
date upon which the resolution fixing the record date is adopted by the Board
of Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by the Delaware General
<PAGE> 12
Corporation Law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation in the manner prescribed by Section 213(b) of the Delaware General
Corporation Law. If no record date has been fixed by the Board of Directors and
prior action by the Board of Directors is required by the Delaware General
Corporation Law, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the Board of Directors adopts the resolution
taking such prior action.
5.3.2. PAYMENTS
In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
5.4. STOCKHOLDERS OF RECORD
The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, to receive notifications, to vote as such owner, and to exercise all
the rights and powers of an owner. The Corporation shall not be bound to
recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise may be provided by the Delaware General
Corporation Law.
6. INDEMNIFICATION
6.1. AUTHORIZATION OF INDEMNIFICATION
Each person who was or is a party or is threatened to be made
a party to or is involved in any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative and
whether by or in the right of the Corporation or otherwise (a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee,
partner (limited or general) or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or
<PAGE> 13
other enterprise, including service with respect to an employee benefit plan,
shall be (and shall be deemed to have a contractual right to be) indemnified
and held harmless by the Corporation (and any successor to the Corporation by
merger or otherwise) to the fullest extent authorized by, and subject to the
conditions and (except as provided herein) procedures set forth in the Delaware
General Corporation Law, as the same exists or may hereafter be amended (but
any such amendment shall not be deemed to limit or prohibit the rights of
indemnification hereunder for past acts or omissions of any such person insofar
as such amendment limits or prohibits the indemnification rights that said law
permitted the Corporation to provide prior to such amendment), against all
expenses, liabilities and losses (including attorneys' fees, judgments, fines,
ERISA taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith;
provided, however, that the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person (except for a suit or action pursuant to Section 6.2 hereof) only
if such proceeding (or part thereof) was authorized by the Board of Directors
of the Corporation. Persons who are not directors or officers of the
Corporation may be similarly indemnified in respect of such service to the
extent authorized at any time by the Board of Directors of the Corporation. The
indemnification conferred in this Section 6.1 also shall include the right to
be paid by the Corporation (and such successor) the expenses (including
attorneys' fees) incurred in the defense of or other involvement in any such
proceeding in advance of its final disposition; provided, however, that, if and
to the extent the Delaware General Corporation Law requires, the payment of
such expenses (including attorneys' fees) incurred by a director or officer in
advance of the final disposition of a proceeding shall be made only upon
delivery to the Corporation of an undertaking by or on behalf of such director
or officer to repay all amounts so paid in advance if it shall ultimately be
determined that such director or officer is not entitled to be indemnified
under this Section 6.1 or otherwise; and provided further, that, such expenses
incurred by other employees and agents may be so paid in advance upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
6.2. RIGHT OF CLAIMANT TO BRING ACTION AGAINST THE CORPORATION
If a claim under Section 6.1 is not paid in full by the
Corporation within sixty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring an action against
the Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such action. It shall be a defense to any such action (other than
an action brought to enforce a claim for expenses incurred in connection with
any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the
<PAGE> 14
Corporation to indemnify the claimant for the amount claimed or is otherwise
not entitled to indemnification under Section 6.1, but the burden of proving
such defense shall be on the Corporation. The failure of the Corporation (in
the manner provided under the Delaware General Corporation Law) to have made a
determination prior to or after the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or
she has met the applicable standard of conduct set forth in the Delaware
General Corporation Law shall not be a defense to the action or create a
presumption that the claimant has not met the applicable standard of conduct.
Unless otherwise specified in an agreement with the claimant, an actual
determination by the Corporation (in the manner provided under the Delaware
General Corporation Law) after the commencement of such action that the
claimant has not met such applicable standard of conduct shall not be a defense
to the action, but shall create a presumption that the claimant has not met the
applicable standard of conduct.
6.3. NON-EXCLUSIVITY
The rights to indemnification and advance payment of expenses
provided by Section 6.1 hereof shall not be deemed exclusive of any other
rights to which those seeking indemnification and advance payment of expenses
may be entitled under any Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.
6.4. SURVIVAL OF INDEMNIFICATION
The indemnification and advance payment of expenses and rights
thereto provided by, or granted pursuant to, Section 6.1 hereof shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee, partner or agent and shall inure to
the benefit of the personal representatives, heirs, executors and
administrators of such person.
6.5. INSURANCE
The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee, partner (limited or general) or
agent of another corporation or of a partnership, joint venture, limited
liability company, trust or other enterprise, against any liability asserted
against such person
<PAGE> 15
or incurred by such person in any such capacity, or arising out of such
person's status as such, and related expenses, whether or not the Corporation
would have the power to indemnify such person against such liability under the
provisions of the Delaware General Corporation Law.
7. GENERAL PROVISIONS
7.1 INSPECTION OF BOOKS AND RECORDS
Any stockholder, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records, and to make copies or extracts therefrom. A proper purpose shall mean
a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent shall be the person who seeks
the right to inspection, the demand under oath shall be accompanied by a power
of attorney or such other writing which authorizes the attorney or other agent
to so act on behalf of the stockholder. The demand under oath shall be
directed to the Corporation at its registered office or at its principal place
of business.
7.2. DIVIDENDS
The Board of Directors may declare dividends upon the capital
stock of the Corporation, subject to the provisions of the Certificate of
Incorporation and the laws of the State of Delaware.
7.3. RESERVES
The Board of Directors of the Corporation may set apart, out
of the funds of the Corporation available for dividends, a reserve or reserves
for any proper purpose and may abolish any such reserve.
7.4. EXECUTION OF INSTRUMENTS
All checks, drafts or other orders for the payment of money,
and promissory notes of the Corporation shall be signed by such officer or
officers or such other person or persons as the Board of Directors may from
time to time designate.
7.5 FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of
the Board of Directors.
<PAGE> 16
7.6. SEAL
The Corporation shall not have a corporate seal. All
instruments that are executed on behalf of the Corporation which are
acknowledged and which affect an interest in real estate shall be executed by
the Chairperson, the Chief Executive Officer, the President or any Vice
President and by the Secretary, the Treasurer, any Assistant Secretary or any
Assistant Treasurer, except where required or permitted by law to be otherwise
executed and except where the execution thereof shall be expressly delegated by
the Board of Directors to some other officer or agent of the Corporation.
* * * * *
The foregoing Bylaws were adopted by the Board of Directors on
____________, 1996, and by the stockholders on _____________, 1996.
------------------
Casey D. Mahon
Secretary
<PAGE> 1
EXHIBIT 10.38
SETTLEMENT AGREEMENT
WHEREAS, U S WEST Communications, Inc. amended its Centrex Plus catalog
on February 5, 1996 to withdraw the service effective that date and to
grandparent Centrex Plus to existing customers subject to certain terms and
conditions; and,
WHEREAS, On February 7, 1996, McLeod Telemanagement, Inc., a Centrex
Plus customer as of February 5, 1996, filed a complaint with the Iowa Utilities
Board pursuant to Iowa Code Section 476.101(8); and,
WHEREAS, the Board docketed that complaint as Docket No. FCU-96-1, and
established a procedural schedule; and,
WHEREAS, U S WEST and McLeod filed direct and rebuttal testimony
pursuant to that procedural schedule; and,
WHEREAS, U S WEST and McLeod desire to avoid the time and expense of
hearing and briefing the McLeod Complaint case;
THEREFORE, U S WEST and McLeod do hereby agree and stipulate as
follows:
1. This Settlement Agreement shall only settle McLeod's pending complaint
before the Iowa Utilities Board. This Settlement Agreement will neither
settle McLeod's pending regulatory complaints in states other than Iowa nor
govern McLeod's purchase of Centrex Plus in states other than Iowa.
2. McLeod agrees to immediately withdraw its Complaint in Docket No. FCU-96-1.
3. U S WEST and McLeod will execute the U S WEST Master Agreement for Centrex
Plus Service Rate Stability Plan for the State of Iowa ("Master
Agreement"). That Master Agreement will cover all Centrex Plus service
ordered by McLeod in the State of Iowa as of the date of this Settlement
Agreement. The Master Agreement will run for five (5) years from the date
of this Settlement Agreement.
<PAGE> 2
4. The Master Agreement will include the alternative dispute resolution clause
contained in the Master Agreement tendered to U S WEST by McLeod in
correspondence to Timothy Fyke dated February 19, 1996.
5. U S WEST waives all claims for payment of Centrex Plus station line prices
other than those contained in the current U S WEST - McLeod Centrex
Plus Service Rate Stability contracts for station lines McLeod currently
purchases from U S WEST, but upon which contracts were pending as of
February 5, 1996. U S WEST expressly does not waive its claims for payment
of SMDR, tax and other charges with respect to the ongoing U S WEST -
McLeod billing disputes.
6. McLeod may add seven (7) main common blocks per year during the term of the
Master Agreement. McLeod may also add one adjunct common block for each
existing or new main common block it has in service or places in service.
7. McLeod may add Centrex Plus station lines and new locations without
limitation in Iowa during the term of the Master Agreement.
8. The Centrex Plus station line prices will be those contained in the U S
WEST Centrex Plus service catalog for Iowa on February 5, 1996. Those
prices will remain unchanged during the term of the Master Agreement,
except that the prices may be renegotiated if they do not pass an
imputation test incorporating the unbundled loop price approved by the
Board. McLeod and U S WEST will use any cost and imputation methodology
developed by the Board in Docket No. RMU-95-5 to test the Centrex Plus
station line prices. If the Board does not adopt an applicable cost or
imputation methodology, U S WEST and McLeod will apply a mutually agreeable
methodology to test the competitive fairness of the Centrex Plus station
line prices for resale purposes.
2
<PAGE> 3
9. U S WEST and McLeod will test whether the Centrex Plus station lines pass
an imputation test any time U S WEST changes its unbundled loop price.
10. At the conclusion of the Master Agreement, McLeod may execute an extension
of the Master Agreement until April 29, 2005, at which point U S WEST
will cease offering Centrex Plus in Iowa to Centrex Plus customers as of
February 5, 1996.
11. U S WEST and McLeod shall engage in negotiations pursuant to 47 U.S.C.
Section 252 to determine the prices, terms and any limitations on
McLeod's purchase of Centrex Plus that will apply to any extension of the
Master Agreement requested by McLeod.
12. McLeod may terminate its use of Centrex Plus at any time on sixty (60) days
notice without termination liability.
13. In consideration of this Settlement Agreement, McLeod agrees to waive any
antitrust or other civil claims against U S WEST with respect to the
withdrawal and grandparenting of Centrex Plus in Iowa.
14. U S WEST expressly states that it has entered into this Settlement
Agreement in order to avoid the time and expense of lititation. By
executing this Settlement Agreement, U S WEST makes no express or implied
admissions regarding the legality or appropriateness of its withdrawal and
grandparenting of Centrex Plus in Iowa or in any other state.
15. This Settlement Agreement shall not be used for any purpose, disclosed or
offered into evidence by U S WEST, McLeod or any other entity in any
regulatory or civil proceeding in Iowa or in any other state.
3
<PAGE> 4
16. U S WEST or McLeod may submit a copy of this Settlement Agreement to a
regulatory body or a court upon an order of the regulatory body or
court. Neither U S WEST nor McLeod can, either directly or indirectly,
request such an order by a regulatory body or a court.
17. This Settlement Agreement and the executed Master Agreement (including
reference to the Centrex Plus catalog in effect as of February 5, 1996)
shall constitute the entirety of U S WEST's and McLeod's agreement
regarding McLeod's continued use of Centrex Plus service in Iowa, except
that any applicable rules or decisions of the Federal Communications
Commission will govern the parties and this Settlement Agreement.
Date: March 18, 1996 McLeod Telemanagement, Inc.
/s/ David R. Conn
-----------------------------
David R. Conn
Associate General Counsel
McLeod, Inc.
Town Centre, Suite 500
221 Third Avenue SE
Cedar Rapids, IA 52401
(319)-298-7000
Date: March 18, 1996 U S WEST Communications, Inc.
/s/ William M. Ojile, Jr.
-----------------------------
William M. Ojile, Jr.
Senior Attorney
U S WEST, Inc.
1801 California St., Suite 5100
Denver, CO 80202
(303)-672-2812
4
<PAGE> 1
EXHIBIT 10.48
AMENDMENT TO CONTRACT ADDENDUM A
TO CONTRACT NO. 2102
This Amendment made this 31st day of March, 1993, between the
Iowa Department of General Services ("IDGS") and McLeod Telecommunications,
Inc. ("MTI"), WITNESSETH:
WHEREAS, IDGS and KIEWIT NETWORK TECHNOLOGIES ("KNT") entered into a
certain contract dated October 9, 1992, with respect to the maintenance of the
Iowa Communications Network; and
WHEREAS, KNT, with the consent of IDGS, assigned all rights and duties
with respect to such maintenance contract as described in Contract Addendum A
to Contract No. 2102 to MTI, who thereupon became "Maintenance Provider"; and
WHEREAS, IDGS has requested, and MTI has agreed to provide maintenance
services for the MSL-100 Local/Tandem and Iowa Communications Network Alternate
Routing Equipment as set forth in this Amendment, which maintenance will be in
addition to the services to be provided under the maintenance contract;
NOW, THEREFORE, in consideration of the mutual covenants expressed
herein, the parties agree that Contract Addendum A to Contract No. 2102 is
amended as follows:
1. Delete Section 1 and substitute in lieu and in place thereof
the following:
1. The Work.
a. The Work defined in the attached Statement of
Work dated October 7, 1992.
b. The Work defined in the attached Statement of
Work and pricing dated March 19, 1993, attached as
Exhibit 1 to the "Amendment to Contract Addendum A to
Contract No. 2102."
2. Add the following unnumbered paragraph to Section 3:
The charges for the Work performed under Section 1(b) above
shall be $26,000 per year for alternate route maintenance and
$105,000 per year for MSL-100 Local/Tandem Maintenance, and
shall be billed to IDGS on a monthly basis on the first of
each month. The alternate route maintenance charges will be
prorated on a per mile basis and begin the month following
test and acceptance. The
1
<PAGE> 2
MSL-100 Local Tandem charge, will begin 45 days prior to the
state's acceptance of the MSL-100. The annual Maintenance
Service price shall be adjusted each year by the percentage
increase or decrease in the United States Consumer Price
Index (CPI) average values, for the prior year compared to
the current year. The base month to compute such adjustments
shall be April of the prior year as compared with the April
CPI for the current year. The resulting percentage adjustment
shall be reflected in the twelve (12) monthly invoices
beginning in June each year. The first adjustment shall be
calculated in April 1993.
McLeod Telecommunications State of Iowa
Group Department of General
Services
By:/s/ KIRK KAALBERG /s/ ANTHONY CRANDELL
----------------------- --------------------------
Kirk Kaalberg Anthony Crandell
Date: 3/31/93
---------------------
/s/ Kenneth Paulsen
--------------------------
Date: 3/31/93
---------------------
2
<PAGE> 3
EXHIBIT 1
STATEMENT OF WORK
ICN ALTERNATE ROUTING
AND LOCAL/TANDEM SWITCH MAINTENANCE
MARCH 19, 1993
A. Definitions
Maintenance- Includes work necessary to service ICN Local/tandem
switch according to the manufacturer's recommendations, perform periodic tests
to assess performance levels and degradation, conduct remedial maintenance,
monitor alarms and dispatch technicians as appropriate, and maintain accurate
records on network performance. This includes translations to add/remove lines
and trunks, responding to IDGS requests for circuit status/availability,
verifying daily that AMA/SMDR (Automatic Message Accounting/Station Message
Detail Recording) are functioning correctly and providing 7 x 24 technician
availability.
1. Statement of Work
1.1 Performance Requirements
1.1.1 A minimum of 80 hours on site per normal business
week to perform manufacture's recommended
maintenance and switch translations.
1.12 Perform remedial maintenance as required;
1.1.2.1 Major Alarm
Definition-Alarms or notifications creating service
outages at the DS1 level or higher, specific and
limited high priority circuit problems/failures as
identified IDGS, or situations that create an
imminent danger to transmission rates at or above DS1
level.
Reaction, (24 hrs/day, 7 days/week)
1. Notify the State's designated contact within 15
minutes of the alarm/trouble report
2. Define and communicate resolution plan to State
contact within 30 minutes of the alarm.
3. Maintain contact with the State at no more than 30
minute intervals, or as the State dictates, or until
major alarm/trouble is resolved.
4. Dispatch within 1 hour to provide on site response
within the maximum of 2 hours.
<PAGE> 4
1.1.2.2 Minor Alarm
Definition-All other irregular conditions not
falling into the major alarm category.
Reaction; (8:00 am - 5:00 pm, Monday - Friday)
1. The State's contact will be notified of all Minor
Alarms not cleared during normal business hours.
2. Dispatch in sufficient time to provide on site
response in a maximum of 2 normal business hours, as
required to clear alarm.
1.1.3 Utilize an 800 number provided by IDGS for single point of contact on
all ICN maintenance-related issues.
1.1.4 Maintain records on local/tandem switch, including maintenance dates,
testing/results, MTBF on like equipment, and trouble/resolution
information.
1.1.5 Establish and implement procedures for the repair and return of
defective parts.
1.1.6 Maintain adequate inventory level of spare parts.
1.2 Training
Provide technicians with manufacturer's recommended training on the
local/tandem switch.
1.3 Test/Repair Equipment
Provide the technicians with necessary test equipment.
2.0 Job Descriptions
McLeod Telecommunications Inc. will provide 7 x 24 switch technician
availability with a minimum of 80 hours/normal business week on-site
support. This will be accomplished by the addition of 2 switch
technicians to the McLeod Telecommunications Inc. organization. These
individuals will be based at the NSC. MAP 0 position is located in
the ICN equipment room while MAP I position is located in the Network
Control room. Additionally a library and record keeping area are
being established within the ICN equipment room. Their
responsibilities will be as follows:
Respond to troubles and outages
Mobilize Appropriate resources to handle problems
Perform manufacturer's preventative maintenance
Maintain records on preventative maintenance and tests performed
<PAGE> 5
Add/remove translations as necessary to effect line and trunk
additions and removals
3.0 Maintenance Pricing
The organization and tasks difined will require a significant capital
investment and mobilization to properly perform the work to ICN standards.
These start-up costs, and subsequent demobilization expenses, have been
amortized through the expected contract term. The rates shown herein reflect
that 10-year contract term.
3.1 Base Cost
<TABLE>
<S> <C>
Total Segment Maintenance Cost $1,928,787.00
Total Operational Maintenance Cost 630,626.00
---------------------------------- ----------
Total Cost including Addendum A $2,559,313.00
Add alternate route maintenance Addendum B $26,000.00
Add Local/Tandem maintenance Addendum B $105,000.00
- --------------------------------------- -----------
Adjusted Total Cost including Addendum A & B $2,690,313.00
</TABLE>
<PAGE> 6
CONTRACT ADDENDUM A
TO CONTRACT NO. 2102
This document sets forth the manner in which the maintenance
provisions of Contract No. 2102, dated April 15, 1991, between the Iowa
Department of General Services (IDGS) and Kiewit Network Technologies
(Maintenance Provider) will be implemented.
1. THE WORK. The Work is defined in the attached Statement of
Work dated October 7, 1992.
2. TERM. The Warranty period on each segment will run for twelve
(12) months after the segment is accepted by IDGS. The Maintenance Service
Agreement will commence upon expiration of the Warranty Period for a particular
segment, and will conclude ten (10) years after the expiration of the Warranty
period on the last accepted segment of Parts 1 and 2. IDGS shall have the
option to renew the maintenance and service agreement for an additional
two-five (5) year terms upon the same terms as included herein. IDGS must
notify the maintenance provider at least one year in advance of the termination
of the then current agreement of its intent to renew the agreement.
3. PRICE. The price for the Maintenance Service is reflected in
the Billing Schedule provided in the attached Statement of Work, Section
7-Maintenance Pricing, dated October 7, 1992. The associated charges shall be
billed to IDGS on a monthly basis on the first of each month. The annual
Maintenance Service price shall be adjusted each year by the percentage
increase or decrease in the United States Consumer Price Index (CPI) average
values, for the prior year compared to the current year. The base month to
compute such adjustments shall be April of the prior year as compared with the
April CPI for the current year. The resulting percentage adjustment shall be
reflected in the twelve (12) monthly invoices beginning in June each year.
The first adjustment shall be calculated in April 1992.
4. TERMINATION FOR CAUSE. If there is a failure to maintain the
installed equipment at a level equal to the Acceptance Criteria requirements,
IDGS may issue a written notice of default, providing therein for a thirty-day
period in which Maintenance Provider shall have the opportunity to cure. Such
notice shall specify the manner in which IDGS believes Maintenance Provider is
to comply with such criteria and Maintenance Provider will have thirty (30)
days from and after receipt of said notice to correct such failure. If the
default is not corrected within such thirty-day period, IDGS may terminate the
Maintenance Service upon an additional thirty (30) days written notice to
Maintenance Provider. If any such defaults or failure to perform is
attributable to an excusable delay as defined in Contract No. 2102, Maintenance
Provider shall receive additional time on a day for day basis.
<PAGE> 7
5. NON-APPROPRIATION. Notwithstanding any other provisions of
this contract apparently to the contrary, this contract does not constitute, or
create a general obligation of the State of Iowa. If at any time funds are
unavailable from any available resource pursuant to the 1991 Iowa Code Sections
18.134, 18.136, and 18.137 to finance Maintenance Provider's performance of
this contract, and, in addition, funds necessary for the Maintenance Provider's
continued performance are not forthcoming through the failure of the State to
appropriate funds, this contract shall terminate on the last day of the fiscal
year in which such proceeds or appropriated funds were last available. For the
purpose of this contract, funds shall be deemed available to finance
Maintenance Provider's performance of this contract during any period in which
the State is operating the Statewide Communications Network ("ICN") procured
under Contract No. 2102. The State shall give written notice to Maintenance
Provider as soon as practicable documenting the unavailability of such
proceeds. However, the Maintenance Provider may, at its sole option, agree to
re-enter into a contract, under the same provisions, terms and conditions as
contained in this contract, in the event that funds sufficient to fund
Maintenance Provider's continued performance become available by the last day
of the regular session of the Iowa General Assembly which follows the
termination of this contract pursuant to the terms of this paragraph. During
the duration of this contract, IDGS shall have an obligation to seek in good
faith the necessary funds from all available sources to support the Maintenance
Provider's performance of this contract.
6. REMEDIES IN THE EVENT OF NON-APPROPRIATION. In the event of
termination of the contract pursuant to Paragraph 5, the exclusive, sole,and
complete remedy of Maintenance Provider and its assigns shall be to receive
payment but solely from, and to the extent of, the sources specified in
Paragraph 5 above for all work executed and any and all expenses and costs
sustained in such termination, but Maintenance Provider shall not be entitled
to lost profits for loss of contract for work not performed.
7. ASSIGNMENT/SUCCESSORS. In the event of an assignment of the
maintenance responsibilities is approved by the State, IDGS shall remit the
required payments directly to the assignee, and the State shall release Kiewit
Network Technologies (KNT) of all liability and responsibility associated with
this document, except that, in the event of the default or failure to perform
the agreement by the assignee, then KNT will, consistent with Contract No.
2102, negotiate with the State to obtain a maintenance agreement subject to
mutually acceptable terms. The responsibilities of the State included herein,
shall be binding upon the State's successors, or assigns in the event of the
sale, transfer or any other change in the State's interest in the system.
2
<PAGE> 8
KIEWIT NETWORK STATE OF IOWA
TECHNOLOGIES, INC. DEPARTMENT OF GENERAL SERVICES
By: [SIG] /s/ KATHLEEN WILLIAMS
----------------------- -----------------------
Kathleen Williams
Date: 10/09/92 /s/ KENNETH PAULSEN
--------------------- -----------------------
Kenneth Paulsen
Date: 10/09/92
-----------------
3
<PAGE> 9
ATTACHMENT 1
CONSENT AND RELEASE
The Department of General Services for the State of Iowa, hereby consents
to the assignment from Kiewit Network Technologies, Inc. (Contractor) to McLeod
Telecommunications, Inc. (Assignee), of all rights and duties with respect to
the "Maintenance" to be performed by Kiewit Network Technologies, Inc. with
reference to the Iowa Communications Network, hereby releasing and discharging
Kiewit Network Technologies, Inc. of and from any and all obligations or
liability of any kind or character in regard thereto and looking solely and
only to McLeod Telecommunications, Inc. for the performance of the
"Maintenance" requirements. In the event of default by McLeod
Telecommunications, Inc. in the performance of the Maintenance Agreement, the
State of Iowa may, under the original Request for Proposals Response Terms and
Iowa Communications Network Contract, engage in negotiations with Kiewit
Network Technologies, Inc. for a new Maintenance Agreement.
Dated this 9th day of October, 1992.
DEPARTMENT OF GENERAL SERVICES
FOR THE STATE OF IOWA
By: /s/ KATHLEEN WILLIAMS
--------------------------
<PAGE> 1
EXHIBIT 10.49
CONSTRUCTION SERVICES AGREEMENT
THIS AGREEMENT is entered into this 30th day of June, 1995, by and between MFS
NETWORK TECHNOLOGIES, INC., a Delaware corporation (hereafter "MFSNT") and MWR
TELECOM, INC., an Iowa corporation (hereafter "MWR"). This Agreement shall
become effective when, and only when, MWR (or its affiliate) enters into an
agreement with the State of Iowa for the construction of dark fiber optic cable
facilities relating to Part III of the Iowa Communications Network, RFP Number
15006S.
MWR and MFSNT agree as set forth below.
1. DEFINITIONS
"Additional Percentage" shall have the meaning ascribed to it in
paragraph 5.2 hereof.
"Contract Documents" shall mean and consist of this Agreement and all
attachments and exhibits hereto, the Plan Documents (as defined
herein), as well as any written change orders executed by both parties
as permitted by this Agreement.
"Force Majeure" shall have the meaning ascribed to it in paragraph 11
hereof.
"Interest Rate" shall have the meaning ascribed to it in paragraph 4.3
hereof.
"MWR Fiber Optic Cable" shall mean and describe the fiber optic cable
system to be designed, constructed and delivered to MWR under this
Agreement.
"Notice to Proceed" shall have the meaning ascribed to it in paragraph
2 hereof.
"Phase I Commitment" shall mean those Projects for which a Notice to
Proceed is issued by MWR within eighteen (18) months after the date of
execution hereof; the total price of all such Projects in the
aggregate shall be at least $10,000,000 (herein the "Minimum Contract
Commitment").
"Phase II Projects" shall mean those Projects for which a Notice to
Proceed is issued during the period of time subsequent to the date on
which MWR exceeds the Minimum Contract Commitment and ending four (4)
years from the date of execution hereof.
"Plan Documents" shall have the meaning ascribed to it in paragraph 2
hereof.
"Project" shall mean the individual segments of the MWR Fiber Optic
Cable to be constructed by MFSNT hereunder on either a fixed-price or
cost-plus basis.
"Project Initiation Notice" shall mean a notice from MWR to MFSNT
respecting a Project which notice details (a) the route for
installation of the relevant portion of the MWR Fiber Optic Cable, (b)
the rights-of-way and pole attachment rights to be used for the
completion thereof (which shall be secured by MWR at its sole cost and
expense), and
<PAGE> 2
(c) any operational requirements or standards required for the
Project. The Project Initiation Notice shall serve as MWR's request
that MFSNT commence the development of Plan Documents for the
completion of the Project.
"Substantial Completion" shall mean the earliest to occur of either
(a) that stage in the progress of the Work respecting a Project where
the relevant portion of the MWR Fiber Optic Cable has successfully
completed the acceptance testing in accordance with the Acceptance
Test Plan procedure specified paragraph 11 of this Agreement; or (b)
use of the relevant portion of the MWR Fiber Optic Cable by MWR or its
customer(s).
"Work" shall mean and describe all of the services, material and
equipment to be provided and furnished by MFSNT under this Agreement
regarding the MWR Fiber Optic Cable.
2. SCOPE OF WORK
MFSNT shall provide the services, material and equipment required to
complete a Project identified in the Project Initiation Notice in
accordance with the Contract Documents. Within two (2) weeks after
receipt by MFSNT of a Project Initiation Notice, MFSNT shall complete
the preliminary route engineering and development of a scope of work
(the "Plan Documents") for meeting any applicable criteria set forth
in the Project Initiation Notice for the relevant Project. If more
than one (1) Project Initiation Notice is submitted at substantially
the same time of delivery, the first Project's Plan Documents shall be
delivered within the specified two (2) week time frame and the
remaining Plan Documents shall be delivered no later than thirty (30)
days thereafter. The Plan Documents shall also include MFSNT's fixed
price for the completion of the Project as well as a schedule for
Substantial Completion of the Project. MFSNT shall not be
responsible for any delays in the completion of Plan Documents
caused by MWR's undue delay in performing its obligations hereunder.
MWR shall review the Plan Documents and shall, within two (2) weeks of
MFSNT's delivery of same, either issue a Notice to Proceed respecting
the Project or specify, in writing, any reasonable objections of MWR
respecting the Plan Documents for the Project. MFSNT shall work to
resolve any reasonable objections of MWR and, once resolved, MWR shall
issue a Notice to Proceed within five (5) days of said resolution.
When completed and approved, the Plan Documents shall be "Contract
Documents" as defined above.
3. TIME OF COMMENCEMENT AND SUBSTANTIAL COMPLETION
The Work on each Project shall be commenced upon MFSNT's receipt of a
Notice to Proceed from MWR and, subject to authorized adjustments of
time, Substantial Completion respecting each Project shall be achieved
within the time stated in the Plan Documents respecting the particular
Project. In the event that MFSNT fails to achieve Substantial
Completion for a Project within 30 days after the time specified in
the Plan Documents (after accounting for any delays caused by Force
Majeure as provided in this
-2-
<PAGE> 3
Agreement), then MFSNT shall pay to MWR a penalty equal to one-half of
one percent (1/2%) of the price for the Project.
4. PRICE AND PAYMENT
4.1 MWR agrees, subject to all of the terms set forth in this
paragraph 4, to pay MFSNT the price specified in the Plan
Documents for the completion of each Project ("Fixed Price").
4.2 In the alternative, MWR may elect to pay MFSNT a price
calculated on a cost-plus basis for any Project ("Cost-plus
Price") rather than the Fixed Price stated by MFSNT in the
Plan Documents, in which event the Cost-plus Price shall be
calculated as set forth in paragraph 5 hereof. MWR's election
to compensate MFSNT on a Cost-plus basis for each Project must
be exercised at the time MWR delivers its Notice to Proceed
respecting the Project.
4.3 MWR reserves the right on any Project, to reject the options
set forth in paragraphs 4.1 and 4.2, and proceed to select
another contractor for the Project, after first giving notice
to MFSNT that MFSNT has not been selected as the contractor on
that Project. However, this paragraph shall not relieve MWR
of its obligation to retain MFSNT for sufficient work
satisfying the Minimum Contract Commitment.
4.4 Payment of 95% of the entire price respecting a Project
(whether Fixed Price or Cost-plus) shall be due within thirty
(30) days from MWR's receipt of an invoice from MFSNT. MFSNT
shall prepare its invoice after Substantial Completion of the
Project. The 5% retainage shall be due within thirty (30)
days from the issuance of the Final Acceptance Certificate as
provided in paragraph 11. Any payment of amounts not subject
to reasonable dispute which are not received by MFSNT when due
shall thereafter bear interest at a floating rate, adjusted
daily, equal to two (2) percentage points above the Prime Rate
as then published in the Money Rates section of the Eastern
Edition of The Wall Street Journal as that rate which is the
base rate on corporate loans posted by a substantial
percentage of the nation's largest banks (the "Interest
Rate"). In the event The Wall Street Journal publishes more
than one Prime Rate, the higher or highest such Prime Rate
shall apply. Interest shall not accrue on amounts reasonably
disputed between the parties.
4.5 The price includes Federal manufacturer's and retailer's
excise taxes, state and local sales and/or use taxes, and any
federal, state or local taxes of a similar nature. All such
taxes, if applicable, shall be paid by MFSNT.
4.6 Provided MFSNT has made reasonable progress in the completion
of the Work, MFSNT shall not be obligated to proceed further
with the Work respecting any
-3-
<PAGE> 4
Project if MWR fails to make or cause to be made any payments
when due hereunder, excepting any payments which are
reasonably disputed. MFSNT may suspend performance of the
Work and all of its obligations hereunder until such time as
all delinquent, undisputed, payments have been made by MWR. In
the event that MFSNT elects to suspend the Work as a
consequence of MWR's failure to make payments of the price,
MFSNT shall provide MWR with five (5) days' written notice of
such election, and MFSNT may suspend performance on the sixth
day after the date on which such notice was sent by MFSNT to
MWR. The period during which performance of the Work is
suspended due to nonpayment by MWR shall result in an equal
extension of the date for Substantial Completion of any
Projects then being performed. MFSNT shall also receive an
equitable adjustment of the price respecting such Projects to
recover the costs of any delays due to MWR's nonpayment.
4.7 In the event that MWR is in default on any payment due under
this Agreement, MWR shall furnish to MFSNT reasonable evidence
that financial arrangements have been made to fulfill MWR's
obligations under this Agreement. In the event that MWR is
unable to provide MFSNT with such evidence, MFSNT may exercise
its right to suspend the Work under paragraph 4.6 of this
Agreement.
4.8 MWR, except as set forth herein, shall be obligated to pay
MFSNT fifteen percent (15%) of the remaining balance of the
Minimum Contract Commitment irrespective of the total price
for all Projects after the expiration of the Phase I time
period. MWR's obligation to pay such amount shall not apply
to the extent that the State of Iowa does not authorize future
funding, or de-authorizes current funding, for the Iowa
Communications Network, Part III, and the Minimum Contract
Commitment shall be reduced in an amount equal to the amounts
not authorized or de-authorized. Notwithstanding such actions
by the State of Iowa, MWR shall remain liable for the payment
of the price for all work actually performed on a Project
after MFSNT receives a Notice to Proceed on that Project.
4.9 MWR shall be entitled to a rebate in the amount of $150,000
once MWR has paid to MFSNT a total price for all Projects of
$20,000,000. MWR shall be entitled to an additional rebate in
the amount of $200,000 once MWR has paid to MFSNT a total
price for all Projects of $50,000,000.
4.10 MFSNT agrees that the prices for the Projects to be completed
by it pursuant to the provisions of this Agreement shall be no
less favorable to MWR than MFSNT's other contracts with
customers for projects of similar size, scope and character
within the State of Iowa. In the event that MFSNT enters into
agreements with other customers for projects of similar size,
scope and character containing prices more favorable than
those contained herein, then the price(s) for Project(s) in
this Agreement shall be amended to provide MWR with prices no
less favorable to MWR than such other MFSNT contracts.
-4-
<PAGE> 5
5. COST-PLUS PRICE OPTION
5.1 The provisions of this paragraph 5 shall be applicable only to
the extent that MWR elects to pay the Cost-plus Price for a
Project. In the event that MWR elects to pay the Cost-plus
Price for a Project as permitted in Paragraph 4.2 of this
Agreement, then MWR agrees to reimburse MFSNT for all costs,
subject to the Cost Cap, necessarily incurred and paid by
MFSNT in the proper prosecution of the Work respecting the
Project, plus an amount of money calculated by multiplying
certain costs by the appropriate "Additional Percentage" (as
defined herein).
5.2 The "Additional Percentage" shall be:
(a) 12.5% when the cumulative sum total of the price paid
to MFSNT hereunder for Work performed to the date of
payment is less than or equal to twenty million
dollars ($20,000,000);
(b) 12% when the cumulative sum total of the price paid
to MFSNT hereunder for Work performed prior to the
date of payment is greater than twenty million
dollars ($20,000,000), but not greater than thirty
million dollars ($30,000,000);
(c) 11% when the cumulative sum total of the price paid
to MFSNT hereunder for Work performed prior to the
date of payment is greater than thirty million
dollars ($30,000,000), but not greater than forty
million dollars ($40,000,000);
(d) 10% when the cumulative sum total of the price paid
to MFSNT hereunder for Work performed prior to the
date of payment is greater than forty million dollars
($40,000,000).
For purposes of calculating the sums to be included in the
Cost-plus Price as a result of the Additional Percentage, the
costs set forth in paragraphs 5.5 (f), (j) and (l), and
paragraphs 5.6 (f), (h) and (i) shall not be included. In the
event that an MFSNT invoice relates to Work above and below
any of the above thresholds. MFSNT shall prorate its invoice
to reflect to the appropriate Additional Percentages.
5.3 The "Cost Cap" shall be the percentage limitations set forth
below multiplied by the direct cumulative costs applicable to
a Project, which Cost Cap shall limit the indirect costs
recoverable by MFSNT in the event that MWR elects to pay the
Cost-plus Price:
-5-
<PAGE> 6
(a) 15% when the cumulative sum total of the price paid
to MFSNT hereunder for Work performed prior to the
date of payment is less than or equal to twenty
million dollars ($20,000,000);
(b) 12% when the cumulative sum total of the price paid
to MFSNT hereunder for Work performed prior to the
date of payment is greater than twenty million
dollars ($20,000,000), but not greater than thirty
million dollars ($30,000,000);
(c) 11% when the cumulative sum total of the price paid
to MFSNT hereunder for Work performed prior to the
date of payment is greater than thirty million
dollars ($30,000,000), but not greater than forty
million dollars ($40,000,000);
(d) 10% when the cumulative sum total of the price paid
to MFSNT hereunder for Work performed prior to the
date of payment is greater than forty million dollars
($40,000,000).
In the event that an MFSNT invoice relates to Work above and
below any of the above thresholds, MFSNT shall prorate its
invoice to reflect to the appropriate Cost Cap.
5.4 Reimbursable costs allowable for any Project shall be the
direct costs and, as limited by the Cost Cap, the indirect
costs and expenses which are actually incurred by MFSNT in the
performance of the Work respecting the Project and which are
necessary and incidental thereto. MWR shall identify a
representative of MWR for purposes of any consents for
expenditures required by this paragraph.
5.5 Direct costs shall include, but shall not be limited to, the
following:
(a) Travel expenses relating to trips to various
fabricating plants, subcontractor or material
supplier locations to inspect their facilities, the
progress of the Work and/or financial condition in
regard to the Work on the Project, provided prior
written approval for such expense is obtained from
MWR.
(b) Labor used in MFSNT's yard in connection with the
fabrication of items for use on a Project.
(c) The cost of all Work subcontracted and the cost of
all permanent materials, equipment and supplies
required. Credit shall be given MWR for all rebates
and trade or quantity discounts allowed by vendors
and received by MFSNT for the purchase of materials,
equipment, supplies or services.
-6-
<PAGE> 7
MFSNT shall evaluate competitive bids from suppliers
and subcontractors. MFSNT and MWR shall mutually
agree on the selection of subcontractors.
(d) The cost of all temporary and other expendable
services, materials and supplies, including fuel, oil
and grease, wire and manila rope, tarpaulin, cleaning
supplies, lumber and material used for temporary
structures, temporary wiring for electric power, and
such expendable supplies and services as are normally
consumed in performance of the Work. Any such
expendable materials and supplies for which MFSNT has
been reimbursed by MWR and which remain after
completion of the Work will be disposed of, for the
account of MWR, as directed by MWR.
(e) The cost of all necessary inspections, tests,
loading, handling, permits, transportation and
insurance of whatever character or description paid
by MFSNT or materials and supplies used by MFSNT.
(f) The cost of rental of all equipment required for the
Work. The cost of rental of equipment from third
parties shall be the actual rental rate charged. The
cost of rental of MFSNT's equipment shall be in
accordance with the rates taken from the Rental Rate
Blue Book for Construction Equipment, compiled by the
National Research & Appraisal Company ("Blue Book
Rates"). The rates charged for MFSNT's own equipment
or equipment owned by subsidiaries or Affiliates of
MFSNT under this Agreement shall be 100 percent of
the current rates, updated periodically to reflect
any adjustment in the Blue Book Rates. If Blue Book
Rates are not available for such equipment, the
rental rates applicable to MFSNT's own equipment or
equipment owned by the subsidiaries or affiliates of
MFSNT shall be based on the current market rates for
renting or leasing similar items from a third party
rental company. The cost of rental of any
miscellaneous MFSNT-owned equipment, shall be
established by MFSNT, subject to the approval of MWR.
Added to the above rental cost of MFSNT's own
equipment or equipment owned by subsidiaries or
Affiliates of MFSNT shall be repair material and
parts cost for minor repairs. Actual cost for fuel,
oil, grease, expendable supplies, services, and
repair Labor cost shall be reimbursed separately.
The cost of periodic overhauls of the major
components, such as engines, transmissions, etc., is
included in the rental rate.
(g) The cost of transportation, loading and unloading of
equipment and tools required for the Work.
(h) All sums paid for permits and inspection fees.
-7-
<PAGE> 8
(i) The fees of any consultants engaged in a
professional capacity having first obtained the prior
written approval of MWR.
(j) Losses and expenses, not compensated by insurance or
otherwise, including but not limited to the
deductible amount paid by MFSNT in connection with
the Work not covered by insurance, provided such has
resulted from causes other than the fault or neglect
of MFSNT, its subcontractors, agents or employees.
(k) Electric energy, fuel and other similar job site
items necessary to and entering into the cost of the
Work.
(l) All federal, state and local taxes and impositions,
except taxes on MFSNT's income, in connection with
the Work or materials to be performed or furnished
hereunder, including but not limited to, unemployment
and old age benefit taxes, sales taxes, use taxes,
property taxes and excise taxes.
(m) Such other items properly and reasonably chargeable
as direct costs of the Project.
5.6 Indirect costs (which are included in the Cost-plus Price
subject to the Cost Cap) shall include, but shall not be
limited to, the following:
(a) The cost of labor, including fringe benefits, payroll
insurance and taxes, and group medical, life and
disability coverage, as required for the Work. The
Project managers, construction superintendents,
engineers, office employees, CADD and surveying
personnel, purchasing agent and similar employees
stationed at the job site shall be considered as
labor and shall not exceed the number normally
employed on projects of this type, size and duration.
Salary levels for all MFSNT employees assigned to
the Project shall be established in accordance with
MFSNT's standard corporate policies.
(b) Vacation pay, sick leave pay, R&Rs and bonuses paid
to employees at the site, commensurate with MFSNT's
previous and existing policy. Vacation pay, sick
leave pay, and bonuses shall be prorated on a
calendar month basis for the period of time the
employee is assigned to the Project.
(c) The cost of moving supervisory and administrative
employees who are assigned to the Work from their
last place of employment in accordance with MFSNT's
previous and existing moving policy. Such moving
costs shall be subject to the prior written approval
of MWR.
-8-
<PAGE> 9
(d) Travel expense in connection with MFSNT's standard
R&R policy.
(e) In order to reduce the number of personnel assigned
to the Project or to expedite the performance of the
Work hereunder, it may become necessary to perform
off-job engineering, clerical and/or accounting Work
in which case the costs of such Work shall be charged
to the job, subject to the prior written approval of
MWR, on an hourly basis as supported by time cards.
(f) The cost of MFSNT's worker's compensation, general
liability, automobile liability and contingent
liability insurance for limits normally carried by
MFSNT. The cost of any builder's risk insurance.
(g) Stationery and supplies, postage and the actual cost
of all telephone, office/warehouse rent, telegraph
and other type of communications expense, all as used
at the job site.
(h) Employee training costs consistent with MFSNT's
current employee development program. Such costs
shall be subject to the prior written approval of
MWR.
(i) Any costs of employee training and/or certifications
necessary or required for the design and installation
of the equipment used in the construction of a
Project. Such costs must be approved in writing, in
advance, by MWR.
(j) Such other items properly and reasonably chargeable
as indirect costs of the Project
5.7 In the event the construction of any Project is terminated for
any reason prior to its completion, MWR shall pay and
reimburse MFSNT for all reimbursable expenses incurred through
the date of termination, plus the appropriate Additional
Percentage. Upon receipt of payment from McLeod MFSNT shall
provide documentation to McLeod's reasonable satisfaction
evidencing transfer of title to McLeod for all
work-in-progress at the time of termination.
5.8 MFSNT agrees to furnish efficient business administration and
superintendence, to use every reasonable effort to minimize
expense to MWR, and to keep upon the Work at all times an
adequate supply of qualified workers, machinery and materials
and to promote the progress of the Work in the most
expeditious and economical manner consistent with the
interests of MWR.
5.9 MFSNT shall keep accurate and detailed books of account open
to the inspection of MWR to verify quantities and costs which
are not based on negotiated or
-9-
<PAGE> 10
stipulated rates. MFSNT shall keep such full and detailed
accounts and job costs as may be necessary for proper
financial management by MFSNT under this Agreement in a
fashion reasonably satisfactory to MWR. MFSNT shall at all
times act in good faith and to the best advantage of MWR in
the purchase of materials, in the employment of labor, and in
all its conduct and activities relative thereto.
6. PHASE I AND PHASE II PROJECTS
6.1 MWR shall retain MFSNT as its sole and exclusive contractor,
subject to the provisions of paragraph 4.3, for the completion
of Work respecting the Phase I Projects and shall issue a
Project Initiation Notice to MFSNT respecting all of the Phase
I Projects within eighteen (18) months after the execution of
this Agreement.
6.2 MWR shall have the option, but not the obligation, to retain
MFSNT to complete Phase II Projects in accordance with the
terms and conditions stated herein.
7. RISK OF LOSS
MFSNT shall bear the risk of loss for all Work until such Work is
delivered to MWR and accepted by MWR as provided in this Agreement;
provided, however, that MFSNT shall not be responsible for any such
loss due to the actions or omissions of MWR. Title and ownership of
the MWR Fiber Optic Cable shall pass to MWR or MWR's nominee upon such
acceptance, subject, however, to receipt of final payment by MFSNT.
MFSNT warrants that MWR shall acquire good and clear title to the
materials and equipment supplied by MFSNT being purchased free and
clear of all liens.
8. PERFORMANCE OF WORK
8.1 MFSNT shall furnish all required design work, engineering
work, technical services, labor, supervision, tools, equipment
and materials necessary for the performance of the Work on the
MWR Fiber Optic Cable in a proper, efficient and workmanlike
manner. MFSNT shall perform the Work on the MWR Fiber Optic
Cable in a prompt and diligent manner, so as to promote the
general progress of the entire construction, and shall not, by
delay or otherwise, interfere with or hinder the work of any
other contractor. Any materials that are to be furnished by
MFSNT or MWR for the MWR Fiber Optic Cable shall be furnished
in sufficient time to enable MFSNT to perform and complete the
Work within the time or times provided for in this Agreement.
Upon written request by MWR, MFSNT shall furnish to MWR such
evidence as MWR may reasonably require relating to MFSNT's
ability to fully perform this Agreement in the manner and
within the time specified herein.
-10-
<PAGE> 11
8.2 All MFSNT employees shall have the skill and experience
required to perform the Work assigned to them. If any person
employed by MFSNT is performing the Work in an improper,
uncooperative or incompetent manner which affects the progress
of the Work, then at the written request of MWR, MFSNT shall
remove such person and such person shall not be re-employed on
the Project without the prior written approval of MWR. Any
costs associated with replacing an MFSNT employee removed
under this paragraph, and in retraining a replacement for such
employee, shall be borne by MFSNT and shall not be included in
the price, PROVIDED that MWR supplies a reasonable basis for
requesting removal of such employee.
8.3 MFSNT shall promptly remove, replace, repair, or otherwise
correct any portion of the Work that is defective in material
or workmanship or that otherwise is not in conformance with
the Contract Documents, PROVIDED that MFSNT is supplied with
notice of such defect or non-conformance within 1 year after
Substantial Completion. MFSNT shall bear all costs of
correcting any of its defects or non-conformances under this
paragraph. All supplier's warranties with regard to any
portion of the Work shall be assigned and transferred to MWR
upon Substantial Completion, and MFSNT shall undertake all
action as may be necessary to assure to MWR the benefit of
such warranties. No such warranty or other supplier's
obligation shall in any way relieve MFSNT from its primary
obligations to MWR with regard to any warranties and
liabilities hereunder. In the event that any such supplier's
warranty shall cover a portion of the MWR Fiber Optic Cable as
to which MFSNT may have liability hereunder, MWR may elect (i)
to pursue such supplier's warranty independently without
releasing MFSNT from any liability hereunder to the extent the
same is not discharged by such supplier, or (ii) to call upon
MFSNT to remedy such defect, in which event MWR shall assign
to MFSNT the benefit of any supplier's warranty incident to
such remedy.
8.4 MWR shall have the right to inspect the Work at all stages and
at all times.
8.5 All costs and expenses of labor, material, engineering, tools,
equipment, technical support and utility services required for
the Work shall be the sole responsibility of MFSNT (except to
the extent that MWR elects to compensate MFSNT on a cost-plus
basis as set forth in paragraph 5 hereof).
8.6 The parties agree that the Plan Documents will show the design
and engineering of the Projects on the MWR Fiber Optic Cable
and the material to be furnished for the construction of the
MWR Fiber Optic Cable. MFSNT shall be permitted to supplement
the Plan Documents where necessary upon the prior written
consent of MWR, which shall not be unreasonably withheld.
-11-
<PAGE> 12
8.7 MFSNT shall keep available during the progress of the Work a
competent manager who shall be the authorized representative
of MFSNT. Directions and communications to MFSNT's manager
from MWR in connection with the Work shall be treated as
directions and communications to MFSNT. During the
prosecution of the Work, MFSNT shall establish and maintain
Project management facilities in the Cedar Rapids, Iowa area.
8.8 In connection with the Work, MFSNT shall have the following
duties and obligations:
(a) MFSNT shall protect all property of MWR and any
adjacent property, and shall take all necessary
precautions for the safety of its employees on, in,
or about the site and shall comply with all safety
rules and regulations and with applicable federal,
state and municipal safety laws and building codes.
(b) During the course of the Work, MFSNT shall procure
any and all permits and licenses of a temporary
nature that are necessary for performance thereof and
shall observe and abide by all applicable
restrictions and all laws, regulations, ordinances,
and other rules of any governmental authority having
jurisdiction over the Work.
8.9 MFSNT shall defend and indemnify MWR against and hold MWR
harmless from any and all loss, costs, and expense including,
without limitation, attorney's fees and costs, associated with
all mechanic's or materialman's liens and claims and shall
keep MWR's property free and clear of all liens, claims, and
encumbrances arising from its performance of its obligations
under this paragraph 8.
9. CHANGES
MWR and MFSNT may by written agreement make changes in, additions to,
and omissions from, the MWR Fiber Optic Cable, and MFSNT shall
promptly proceed with the performance of the Work with respect thereto
as so changed. The price and time for performance shall be equitably
adjusted to compensate for increased or decreased costs of performance
or time for performance resulting from such changes, additions and
omissions.
10. EXTENSION OF TIME
10.1 MFSNT shall not be liable, in whole or in part, for
nonperformance or delay in performance of any of its
obligations set forth in this Agreement due to events,
contingencies or causes beyond the control and without the
fault of MFSNT, including, but not limited to, fire, flood,
earthquakes, lightning, unusually severe weather, acts of God,
acts of any governmental authority, war, riot, accidents,
-12-
<PAGE> 13
embargoes, strikes, labor disputes, or acts or omissions of
MWR or other parties (collectively referred to as "Force
Majeure"), or any event of Force Majeure which impacts the
performance of MFSNT's suppliers or subcontractors with
respect to this Agreement.
10.2 MFSNT shall be entitled to the issuance of a change order
extending the date for Substantial Completion for an equitable
period of time.
11. ACCEPTANCE
11.1 MFSNT shall, within sixty (60) days after the execution date
of this Agreement, draft and deliver to McLeod acceptable
testing procedures and an Acceptance Test Plan ("ATP") for
testing of the MWR Fiber Optic Cable. The testing procedures
and ATP are subject to MWR's approval, which shall not be
unreasonably withheld.
11.2 MFSNT shall perform all tests required by the ATP and shall
demonstrate to MWR that a Project meets the applicable
performance parameters set out in the Contract Documents.
Once MFSNT determines that a Project is substantially complete
and ready for use by MWR, MFSNT shall notify MWR, and
demonstrate the functioning of the Project. Within three (3)
business days thereafter, MWR must provide a Final Acceptance
Certificate or provide MFSNT in writing a listing of any
deficiencies. After MFSNT corrects such deficiencies, or
challenges such, MFSNT will provide a new notice of completion
and the three (3) notice process shall repeat until Final
Acceptance is given.
12. WARRANTIES
12.1 Cable Warranty
Notwithstanding MWR's acceptance of a Project under paragraph
11, MFSNT warrants each Project to be of good workmanship and
materials in accordance with the Contract Documents for a
period of one (1) year from the date of the Final Acceptance
Certificate.
12.2 Remedies for Breach of Warranty
MWR's sole and exclusive remedy and MFSNT's sole and exclusive
maximum liability under the warranty contained in paragraph
12.1 shall be, at the sole option of MFSNT, to repair (with
new or functionally operative parts) or replace any defective
portion of the Project of which MFSNT receives notice during
the warranty period provided in paragraph 12.1 provided that
MFSNT is promptly notified in writing upon discovery by MWR
that any portion of the Project has
-13-
<PAGE> 14
failed to conform with the Contract Documents, such writing to
include an explanation of any such alleged defects.
MFSNT's warranty does not extend to defects caused by acts of
God, accident, fire or other hazard, nor by any misuse,
neglect (except misuse or neglect by MFSNT), alterations,
storage, attempts to repair, or use by MWR, its agents,
customers or third parties, of other supplies not meeting
equipment specifications.
MFSNT shall use all reasonable efforts to promptly repair or
replace all such defective Work; provided, that MFSNT shall
repair or replace such defective Work within thirty (30) days
following its confirmation of the defect, unless reasonable
circumstances dictate a shorter or longer period, in which
event the parties shall in good faith mutually agree upon such
period. All replaced defective equipment or items shall
become the sole property of MFSNT.
12.3 Third Party Warranties
In addition to the foregoing warranty, MFSNT hereby assigns to
MWR, and MWR shall have the benefit of, any and all
subcontractors' and suppliers' warranties with respect to the
equipment in the MWR Fiber Optic Cable. MFSNT agrees that its
contracts with the subcontractors and suppliers shall require
that such parties (i) consent to the assignment of such
warranties (if any) to MWR, and (ii) agree that such
warranties (if any) shall be enforceable by MWR in its own
name.
12.4 THE FOREGOING WARRANTIES AND REMEDIES CONSTITUTE THE ONLY
WARRANTIES WITH RESPECT TO THE MWR Fiber Optic Cable AND ARE
MWR'S EXCLUSIVE REMEDIES IN THE EVENT OF BREACH OF SUCH
WARRANTIES. SUCH WARRANTIES ARE IN LIEU OF ALL OTHER
WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE. MFSNT SHALL IN NO EVENT
BE LIABLE FOR ANY INCIDENTAL, SPECIAL, OR CONSEQUENTIAL
DAMAGES OF ANY NATURE WHATSOEVER FOR ANY REASON.
13. PROPRIETARY INFORMATION/CONFIDENTIALITY
All technical and business information of a proprietary nature, in
whatever form recorded, furnished to a party under or in contemplation
of this Agreement and marked or otherwise specified by the party
delivering such information as proprietary shall remain the property
of the party so delivering. Unless otherwise consented to in writing
(which consent shall not be unreasonably withheld), such information:
(i) shall be treated in confidence and used only for purposes of this
Agreement, except as otherwise required by law, (ii) shall not be
reproduced or copied in whole or in part, except as necessary for use
as authorized
-14-
<PAGE> 15
herein, and (iii) shall, together with any copies thereof, be returned
or destroyed when no longer needed. The above conditions do not apply
to any part of the information which was previously known to a party
free of obligations of confidentiality or use, and shall expire five
(5) years after Substantial Completion. This Agreement imposes no
obligation upon a recipient of such information which was or becomes a
matter of public knowledge through disclosure by its owner; is
rightfully received by the recipient from a third party without a duty
of confidentiality; is disclosed by owner to a third party without a
duty of confidentiality on that third party; is independently
developed by the recipient; is disclosed under operation of law; or is
disclosed by the recipient with the owner's prior written approval
14. INDEMNIFICATION
14.1 (a) MFSNT shall indemnify, defend and save harmless MWR
and each of its directors, officers, agents,
representatives and employees (the "MWR Indemnitees")
from and against any and all loss, damage, injury,
liability (including any and all attorneys' fees and
disbursements and all other costs and expenses
incurred in the investigation, defense or settlement
of any claims covered by this indemnity), and claims
thereof (hereinafter, "Claims") for injury to or
death of a person, including an employee of MFSNT or
a MWR Indemnitee, or for loss of or damage to
property resulting from MFSNT's performance of this
Agreement, except to the extent that such indemnity
is void or otherwise unenforceable under applicable
law in effect on or validly retroactive to the date
of this Agreement and except where the Claim is the
result of negligence or willful misconduct of a MWR
Indemnitee.
(b) Notwithstanding the foregoing, if negligence or
willful misconduct of a MWR Indemnitee has
contributed to a loss, MFSNT shall not be obligated
to indemnify the MWR Indemnitees for the
proportionate share of such Claims caused by such
negligence or willful misconduct. MWR shall have the
right, at its own cost, to retain counsel to monitor
or participate in the defense of any Claim that is
covered by MFSNT's indemnity hereunder. MWR shall
reimburse MFSNT for that portion of a Claim
determined or agreed to be caused by MWR's negligence
or willful misconduct. Reimbursement shall be due to
MFSNT thirty (30) days after the determination or
agreement with respect thereto, and shall bear
interest at the Interest Rate from said date until
the date of payment by MWR.
14.2 MWR shall indemnify, defend and save harmless MFSNT and each
of its directors, officers, agents, representatives and
employees (the "MFSNT Indemnitees") from and against any and
all loss, damage, injury, liability, and claims thereof for
injury to or death of a person, including an employee of MWR
or an MFSNT Indemnitee, or for loss of or damage to property
resulting directly
-15-
<PAGE> 16
or indirectly from MFSNT's performance of this Agreement where
such loss, damage, injury, liability or claim is the result of
negligence or willful misconduct of a MWR Indemnitee.
15. INSURANCE
15.1 MFSNT shall not commence the Work until it has obtained
insurance specified in paragraph 15.5, nor shall MFSNT allow
any subcontractor to commence work until insurance as
typically required by MFSNT of its subcontractors has been
obtained and approved.
15.2 Prior to commencing Work on the first Project, MFSNT shall
provide MWR with a certificate of insurance ("Certificate of
Insurance") executed by an authorized representative of the
insurer(s) evidencing that MFSNT's insurance complies with
this paragraph 15. The Certificate of Insurance shall
reference this Agreement. In addition, a copy of all required
endorsements shall be attached to and form a part of the
Certificate of Insurance.
15.3 Policies shall be endorsed to provide MWR with 30 days' prior
written notice of any nonrenewal, cancellation, reduction or
material change in coverage.
15.4 Policies shall be issued by companies which hold a current
policyholders' alphabetic and financial size category rating
of not less than A:X according to Best's Insurance Reports.
15.5 MFSNT shall obtain the following insurance:
Commercial general liability insurance for bodily injury
(including death) and property damage which provides limits of
not less than one million dollars ($1,000,000) per occurrence
and four million dollars ($4,000,000) annual aggregate as
respects products/completed operations if applicable.
Coverages included shall be:
(1) Premises and operations;
(2) Broad form property damage;
(3) Products and completed operations;
(4) Blanket contractual liability;
(5) Personal injury liability; or
(6) Independent contractors' liability.
Automobile Liability Insurance for bodily injury (including
death) and property damage that provides total limits of not
less than one million dollars ($1,000,000) combined single
limit per occurrence to all owned, non-owned and hired
vehicles.
-16-
<PAGE> 17
Statutory Workers' Compensation/Employer's Liability Insurance
for not less than one million dollars ($1,000,000) per
occurrence applicable to employer's liability coverage for all
employees engaged in services or operations under this
Agreement. The policy shall include broad form
all-states/other states coverage.
Coverage shall be endorsed to include the insurer's waiver of
subrogation in favor of MWR, its directors, officers,
representatives, agents and employees, a copy of which shall
be provided to MWR.
MWR shall be listed as an additional insured on any policies
provided for hereunder.
15.6 MWR acknowledges that some insurance requirements contained in
this paragraph 15 may be fulfilled by a funded self-insurance
program of MFSNT. Any self-insurance program must be first
approved in writing by MWR.
16. LIENS AND CLAIMS
MFSNT shall, as and when requested, furnish evidence satisfactory to
MWR that all amounts due for labor and material furnished by MFSNT in
connection with performance of this Agreement have been paid,
including union, health, welfare and pension fund payments and payroll
taxes. Such evidence shall be furnished in such form and manner as
requested by MWR. MFSNT, when requested, shall furnish to MWR
releases of bond rights and lien rights by persons who have furnished
labor, material or other things in the performance of this Agreement.
MFSNT shall deliver its Work free from all claims, encumbrances and
liens, excepting only those that may arise out of failure of payment
on the part of MWR.
17. SITE CONDITIONS
17.1 MFSNT shall notify MWR in writing promptly after MFSNT learns
of, and before such conditions are disturbed, (1) subsurface
or latent physical conditions at the site differing materially
from those known to MFSNT at the initiation of Work on a
Project or (2) unknown physical conditions at the site, of an
unusual nature, differing materially from those ordinarily
encountered and generally recognized as inherent in work of
the character provided for in this Agreement. MWR shall
promptly investigate the conditions, and if it finds that such
conditions exist and that they are likely to cause a
significant increase or decrease in MFSNT's costs or the time
required for Substantial Completion, then MWR and MFSNT shall
negotiate in good faith toward an equitable adjustment of the
price and time required for Substantial Completion under this
Agreement. For any Project constructed under the Fixed Price
option, subsurface or latent conditions shall not include rock
presence.
-17-
<PAGE> 18
17.2 In the event MFSNT encounters toxic or hazardous materials in
the performance of the Work which were not introduced to the
site directly by MFSNT, any resulting delays shall be
considered to be an event of Force Majeure and MFSNT shall
have no obligation, responsibility or liability with respect
to any such materials.
18. DEFAULT
18.1 Subject to the expiration of all applicable care periods as
provided herein, and unless otherwise excused by reason of
Force Majeure, an "MFSNT Default" shall mean a material breach
of this Agreement by MFSNT as to any of the following: (i)
MFSNT has not completed the Projects required to be completed
in accordance with this Agreement; (ii) the MWR Fiber Optic
Cable does not meet the requirements set forth in the Contract
Documents; (iii) MFSNT has failed to perform any other
material obligation to be performed by MFSNT pursuant to this
Agreement; or (iv) MFSNT becomes insolvent, or institutes or
has instituted against it bankruptcy proceedings, or makes a
general assignment for the benefit of creditors, or if a
receiver is appointed for the benefit of its creditors, or if
a receiver is appointed on account of its insolvency.
18.2 If an MFSNT Default occurs, then MWR shall notify MFSNT in
writing (the "Default Notice"), specifying the alleged default
and advising MFSNT that unless such default is cured within
thirty (30) days following the receipt by MFSNT of such
Default Notice, MFSNT shall be in breach of this Agreement;
provided, however, that if such MFSNT Default cannot be cured
within thirty (30) days following receipt by MFSNT of such
Default Notice, MFSNT shall have an additional reasonable
period of time in which to cure such MFSNT Default so long as
MFSNT promptly commences and in good faith diligently
continues to pursue the cure of such MFSNT Default.
18.3 Unless otherwise mutually agreed upon by MWR and MFSNT in
writing and set forth in an amendment to this Agreement, if an
MFSNT Default occurs and is not excused or cured as provided
in this Agreement, then MFSNT shall be liable for all direct
damages resulting from such MFSNT Default; provided, however,
that MFSNT's liability for such direct damages shall not
exceed the price applicable to the particular Project(s)
wherein the MFSNT Default occurs, less the total price for any
items delivered to and accepted by MWR. Notwithstanding the
preceding sentence or any other provision to the contrary,
MFSNT's sole liability for failure to repair or replace
defective equipment in the MWR Fiber Optic Cable in accordance
with paragraph 12, is set forth in paragraph 12.2. MWR agrees
that the payment of direct damages shall be its sole and
exclusive remedy for an MFSNT Default and that upon such
payment, MFSNT shall be fully released from any and all
liability under this Agreement and this Agreement thereupon
shall terminate and be of no further force or effect. MFSNT
SHALL NOT BE LIABLE
-18-
<PAGE> 19
FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, EXEMPLARY, OR
PUNITIVE DAMAGES, OR LOSS OF PROFITS OR REVENUES, WHETHER SUCH
DAMAGES ARE ALLEGED AS A RESULT OF TORT (INCLUDING STRICT
LIABILITY), CONTRACT, WARRANTY, OR OTHERWISE.
18.4 Subject to the expiration of all applicable cure periods as
provided herein, and unless otherwise excused by Force
Majeure, a "MWR Default" shall mean (i) a material breach of
any of the provisions of this Agreement by MWR, or (ii) MWR
becomes insolvent, or institutes or has instituted against it
bankruptcy proceedings, or makes a general assignment for the
benefit of creditors, or if a receiver is appointed for the
benefit of its creditors, or if a receiver is appointed on
account of its insolvency. If a MWR Default occurs, except as
to payment defaults under Paragraph 4.5, MFSNT shall issue a
written notice of default providing therein for a thirty (30)
day period in which MWR shall have an opportunity to cure,
provided that cure is possible and feasible. If, after
opportunity to cure, the MWR Default remains, MFSNT may either
suspend performance or terminate this Agreement and may
exercise any and all rights and remedies provided herein or by
law, including but not limited to the right to seek specific
performance hereof or to seek recovery of damages from MWR
relating to or caused by a breach of this Agreement. The
provisions of this Paragraph 18.4 are in addition to, and not
exclusive of, MFSNT's right to suspend performance in the
event of a failure by MWR to make timely payments to MFSNT
under paragraph 4 of this Agreement. MWR SHALL NOT BE LIABLE
FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, EXEMPLARY, OR
PUNITIVE DAMAGES, OR LOSS OF PROFITS OR REVENUES BY THIRD
PARTIES, WHETHER SUCH DAMAGES ARE ALLEGED AS A RESULT OF TORT
(INCLUDING STRICT LIABILITY), CONTRACT, WARRANTY, OR
OTHERWISE.
18.5 If a party cannot reasonably cure a default within the time
frame set forth, the party is entitled such reasonable time as
is necessary to cure the default providing the party is acting
in good faith and using its continuous best efforts to cure
such default as quickly as is possible under the
circumstances.
19. INDEPENDENT CONTRACTOR
The performance by MFSNT and/or MWR of all duties and obligations
under this Agreement shall be as independent contractors and not as
agents of the other party, and no persons employed or utilized by a
performing party shall be considered the employees or agents of the
other. Neither party shall have the authority to enter into any
agreement purporting to bind the other without its specific written
authorization. The parties agree that this Agreement does not create
a partnership between, or a joint venture of, MFSNT and MWR.
-19-
<PAGE> 20
20. ARBITRATION
20.1 All claims, disputes and other matters in question arising out
of, or relating to, this contract or the breach thereof, shall
be decided by arbitration before an arbitration panel in
Omaha, Nebraska, in accordance with the Construction Industry
Arbitration Rules of the American Arbitration Association then
in effect unless the parties mutually agree otherwise. Such
"Arbitration Panel" shall be composed of three (3)
arbitrators, one selected by each party and the third selected
by the agreement of the other two arbitrators. This agreement
to arbitrate shall be specifically enforceable under the
prevailing arbitration law. The award rendered by the
Arbitration Panel shall be final, and judgment may be entered
upon it in accordance with applicable law in any court having
jurisdiction thereof.
20.2 Notice of demand for arbitration shall be filed in writing
with the other party to the contract and with the American
Arbitration Association. The demand for arbitration shall be
made within a reasonable time after the claim, dispute or
other matter in question has arisen, and in no event shall it
be made after the date when institution of legal or equitable
proceedings based on such claim, dispute or other matter in
question would be barred by the applicable statute of
limitations.
20.3 If the presence of other persons or entities is required for
relief to be accorded in the arbitration, MFSNT and MWR shall
attempt to include such persons or entities in the
arbitration.
20.4 MFSNT shall carry on the Work and maintain the progress
schedule during any arbitration proceedings, unless otherwise
agreed by MFSNT and MWR in writing, or unless MFSNT has
elected to suspend performance pursuant to paragraph 4 of this
Agreement.
21. PUBLICITY
Each party shall submit to the other a proposed copy of all
advertising, sales promotion, press releases, and any other publicity
matters relating to this Agreement (collectively "Advertising")
wherein the name, trademark, code, specifications or service mark of
the other party or its affiliates is mentioned; and each party further
shall not publish or use such Advertising without the other's prior
written approval. Such approval shall be granted as promptly as
possible (usually within ten (10) days) and shall not be unreasonably
withheld.
22. COMPLIANCE WITH LAW
Each party agrees to fully comply with all laws, ordinances and
regulations applicable to the performance of their respective
obligations hereunder.
-20-
<PAGE> 21
23. ASSIGNMENT
Neither party shall assign, transfer, convey or otherwise dispose of
(collectively, "Transfer") any rights, title, or interest in or to
this Agreement without the prior written consent of the other party,
such consent not to be unreasonably withheld. Either party may
Transfer this Agreement without the advance written consent of the
other to an entity controlled by, controlling or under common control
with a party hereto, or in connection with a corporate restructuring
of a party. Any Transfer by a party without required prior written
consent of the other party shall constitute a default hereunder.
24. GOVERNING LAW
The construction, interpretation and performance of this Agreement
shall be governed by the laws of the State of Iowa, except for its
rules with respect to the conflict of laws.
26. SEVERABILITY
If this Agreement contains any provision found to be unlawful, then
such provision shall be deemed to be of no effect and shall be deemed
stricken from this Agreement without affecting the binding force of
this Agreement as it shall remain after striking such provision.
27. WAIVER
A failure of either party to exercise any right provided for in this
Agreement shall not be deemed to be a waiver of the same or any other
right hereunder. Any waiver by either party of a breach of any
provision of this Agreement shall not be deemed to be a waiver of any
other or subsequent breach and shall not be construed to be a
modification of the terms of this Agreement unless and until agreed to
in writing by both parties.
28. CAPTIONS
Paragraph headings are inserted herein for convenience only and shall
not affect the meaning or interpretation of this Agreement or any
provision hereof.
29. NOTICES
All notices and other communications under this Agreement shall be
properly given only if made in writing and (i) mailed by certified
mail, return receipt required, postage prepaid, (ii) delivered by hand
(including messenger or recognized delivery, courier or air express
service) or (iii) delivered by facsimile transmission to the party at
the address or facsimile number set forth in this paragraph 29 or such
other address or facsimile number as such party may designate by
notice to the other party. Such notices and other communications shall
be effective on the date of receipt (evidenced by the certified mail
-21-
<PAGE> 22
receipt) if mailed or if delivered by facsimile transmission or on the
date of hand delivery if hand delivered. If any such notice or
communication is not received or cannot be delivered due to a change
in the address of the receiving party of which notice was not
previously given to the sending party or due to a refusal to accept by
the receiving party, such notice or other communication shall be
effective on the date delivery is attempted. Any notice or other
communication under this Agreement may be given on behalf of a party
by the attorney for such party.
If to MFSNT:
MFS Network Technologies, Inc.
1200 Landmark Center, Suite 1300
Omaha, Nebraska 68102
Attention: President and Legal Counsel
Facsimile: 402/233-7582
with a copy to:
MFS Communications Company, Inc.
200 Kiewit Plaza
3555 Farnam Street
Omaha, Nebraska 68131
Attention: Terrence J. Ferguson,
General Counsel
Facsimile: 402/977-5335
If to MWR:
McLeod, Inc.
Town Centre, Suite 500
221 Third Ave. Southeast
Cedar Rapids, Iowa 52401
Attention: Kirk Kaalberg
Facsimile: 319/398-7070
with a copy to:
McLeod, Inc.
Town Centre, Suite 500
221 Third Ave. Southeast
Cedar Rapids, Iowa 52401
Attention: Casey Mahon
General Counsel
Facsimile: 319/398-7070
-22-
<PAGE> 23
30. AUTHORIZATIONS
All authorizations or approvals required of a party under this
Agreement shall not be unreasonably withheld and shall be given in a
timely fashion and without unreasonable delay. Time is of the essence
hereunder.
31. ENTIRE AGREEMENT
This Agreement, including the Exhibits referenced and attached hereto,
comprise all the terms, conditions and agreements of the parties with
respect to the subject matter herein, and except as expressly provided
herein this Agreement may not be altered or amended except in writing,
signed by each party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives, as of the date first set
forth above.
<TABLE>
<S> <C> <C>
MFS NETWORK TECHNOLOGIES, INC. MWR TELECOM, INC.
By /s/ KEVIN P. MOERSCH By /s/ STEPHEN C. GRAY
---------------------- -------------------------------------
Kevin P. Moersch Stephen C. Gray
President President and Chief Operating Officer
</TABLE>
-23-
<PAGE> 1
EXHIBIT 10.52
MCLEOD, INC.
AMENDED AND RESTATED
DIRECTORS STOCK OPTION PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. STOCK SUBJECT TO THE PLAN . . . . . . . . . . . . . . . . . . . 3
5. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6. OPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7. NUMBER OF SHARES AND GRANT DATES . . . . . . . . . . . . . . . . 5
8. VESTING OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . 5
9. OPTION PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . 6
10. TIMING AND METHOD OF EXERCISE . . . . . . . . . . . . . . . . . 6
11. SERVICE TERMINATION . . . . . . . . . . . . . . . . . . . . . . 7
12. RIGHTS IN THE EVENT OF DEATH OR DISABILITY . . . . . . . . . . 7
13. NO STOCKHOLDER RIGHTS UNDER OPTION . . . . . . . . . . . . . . 8
14. CONTINUATION OF SERVICE . . . . . . . . . . . . . . . . . . . . 8
15. STOCK OPTION AGREEMENT . . . . . . . . . . . . . . . . . . . . 8
16. WITHHOLDING . . . . . . . . . . . . . . . . . . . . . . . . . . 8
17. NON-TRANSFERABILITY OF OPTIONS . . . . . . . . . . . . . . . . 8
18. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . 9
19. ADOPTION, AMENDMENT, SUSPENSION AND TERMINATION . . . . . . . . 9
20. SECURITIES LAWS . . . . . . . . . . . . . . . . . . . . . . . . 9
21. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . 10
23. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
<PAGE> 3
MCLEOD, INC.
AMENDED AND RESTATED
DIRECTORS STOCK OPTION PLAN
McLEOD, INC., a Delaware corporation (the "Corporation"), sets forth
herein the terms of the Amended and Restated Directors Stock Option Plan (the
"Plan") as follows:
1. PURPOSE
1.1 The Plan is an amendment and restatement of the McLeod, Inc.
Director Stock Option Plan and is intended to attract and retain the best
possible members of the Board and to provide additional incentives to those
directors to promote the success of the Corporation. The Plan provides
Eligible Directors an opportunity to purchase shares of the Stock pursuant to
Options. Options granted under the Plan shall not constitute "incentive stock
options" within the meaning of Section 422 of the Code.
1.2 This amendment and restatement of the Plan is intended to
constitute a "formula plan," and Eligible Directors are intended to qualify as
"disinterested administrators" of other plans maintained by the Corporation,
for purposes of Rule 16b-3 under the Exchange Act.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents (including
Stock Option Agreements), the following definitions shall apply:
2.1. "Additional Option" means any Option other than an Initial
Option.
2.2. "Administrator" means the Chief Financial Officer of the
Corporation or such other person as is appointed by the Board to serve as
Administrator.
2.3. "Board" means the board of directors of the Corporation.
2.4. "Code" means the Internal Revenue Code of 1986, as amended.
2.5. "Commencement of Service" means the date of election of the
Eligible Director to his or her first term as a Director.
2.6. "Corporation" means McLeod, Inc., a Delaware corporation.
<PAGE> 4
2.7. "Effective Date" means the date of adoption of the amendment
and restatement of the Plan by the Board.
2.8. "Eligible Director" means a member of the Board who is not an
officer or employee of the Corporation or any of its subsidiaries.
2.9. "Exchange Act" means the Securities Exchange Act of 1934, as
now in effect or hereafter amended.
2.10. "Exercise Price" means the Option Price multiplied by the
number of shares of Stock purchased pursuant to exercise of an Option.
2.11. "Expiration Date" means the tenth anniversary of the Grant
Date or, if earlier, the termination of the Option pursuant to Section 4.2(c)
hereof.
2.12. "Fair Market Value" means the value of each share of Stock
subject to the Plan determined as follows: If on the Grant Date or other
determination date the Stock is listed on an established national or regional
stock exchange, is admitted to quotation on the National Association of
Securities Dealers Automated Quotation System, or otherwise is publicly traded
on an established securities market, the Fair Market Value of the Stock shall
be the closing price of the Stock on such exchange or in such market (the
highest such closing price if there is more than one such exchange or market)
on the trading day immediately preceding the Grant Date or other determination
date (or, if there is no such reported closing price, the Fair Market Value
shall be the mean between the highest bid and lowest asked prices or between
the high and low sale prices on such trading day), or, if no sale of the Stock
is reported for such trading day, on the next preceding day on which any sale
shall have been reported. If the Stock is not listed on such an exchange,
quoted on such system or traded on such a market, Fair Market Value shall be
determined by the Administrator in good faith.
2.13. "Grant Date" means the date on which an Option grant takes
effect pursuant to Section 7 hereof.
2.14. "Initial Option" means an Option received by an Eligible
Director as of such Eligible Director's Commencement of Service.
2.15. "Option" means any option to purchase one or more shares of
Stock pursuant to the Plan, including both Initial Options and Additional
Options.
2.16. "Optionee" means an Eligible Director who holds an Option.
2.17. "Option Period" means the period during which Options may be
exercised as defined in Section 9 hereof.
-2-
<PAGE> 5
2.18. "Option Price" means the purchase price for each share of
Stock subject to an Option.
2.19. "Securities Act" means the Securities Act of 1933, as now in
effect or as hereafter amended.
2.20. "Stock" means the Class A common stock, par value $0.01 per
share, of the Corporation.
2.21. "Stock Option Agreement" means the written agreement
evidencing the grant of an Option hereunder.
3. ADMINISTRATION
The Plan shall be administered by the Administrator. The
Administrator's responsibilities under the Plan shall be limited to taking all
legal actions necessary to document the Options provided herein, to maintain
appropriate records and reports regarding those Options, and to take all acts
authorized or required by the Plan.
4. STOCK SUBJECT TO THE PLAN
4.1. Options to purchase not more than 550,000 shares of the Stock
may be granted under the Plan. If any Option expires, terminates or is
terminated or canceled for any reason before it is exercised in full, the
shares of Stock that were subject to the unexercised portion of the Option
shall be available for future Options granted under the Plan.
4.2(a). If the outstanding shares of Stock are increased or decreased
or changed into or exchanged for a different number or kind of shares or other
securities of the Corporation by reason of any recapitalization,
reclassification, stock split-up, combination of shares, exchange of shares,
stock dividend or other distribution payable on capital stock, or other
increase or decrease in such shares effected without receipt of consideration
by the Corporation, occurring after the Effective Date, the number and kinds of
shares for the purchase of which Options may be granted under the Plan shall be
adjusted proportionately and accordingly by the Corporation. In addition, the
number and kind of shares for which Options are outstanding shall be adjusted
proportionately and accordingly so that the proportionate interest of the
holder of the Option immediately following such event shall, to the extent
practicable, be the same as immediately prior to such event. Any such
adjustment in outstanding Options shall not change the aggregate Option Price
payable with respect to shares subject to the unexercised portion of the Option
outstanding but shall include a corresponding proportionate adjustment in the
Option Price per share.
-3-
<PAGE> 6
4.2(b). Subject to Section 4.2(c) hereof, if the Corporation shall be
the surviving corporation in any reorganization, merger or consolidation of the
Corporation with one or more other corporations, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger or consolidation,
with a corresponding proportionate adjustment of the Option Price per share so
that the aggregate Option Price thereafter shall be the same as the aggregate
Option Price of the shares remaining subject to the Option immediately prior to
such reorganization, merger or consolidation.
4.2(c). Upon the dissolution or liquidation of the Corporation, or
upon a merger, consolidation or reorganization of the Corporation with one or
more other corporations in which the Corporation is not the surviving
corporation, or upon a sale of substantially all of the assets of the
Corporation to another corporation, or upon any transaction (including, without
limitation, a merger or reorganization in which the Corporation is the
surviving corporation) approved by the Board which results in any person or
entity owning 80 percent or more of the combined voting power of all classes of
stock of the Corporation, the Plan and all Options outstanding hereunder shall
terminate, except to the extent provision is made in writing in connection with
such transaction for the continuation of the Plan, the assumption of the
Options theretofore granted, or for the substitution for such Options of new
options covering the stock of a successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares and exercise prices, in which event the Plan (if applicable) and Options
theretofore granted shall continue in the manner and under the terms so
provided. In the event of any such termination of the Plan and Options, each
individual holding an Option shall have the right immediately prior to the
occurrence of such termination and during such period occurring prior to such
termination as the Board in its sole discretion shall determine and designate,
to exercise such Option to the extent that such Option was otherwise
exercisable at the time such termination occurs. The Administrator shall send
written notice of an event that will result in such a termination to all
individuals who hold Options not later than the time at which the Corporation
gives notice thereof to its stockholders.
4.2(d). Adjustments under this Section 4.2 related to stock or
securities of the Corporation shall be made by the Administrator, whose
determination in that respect shall be final and conclusive. No fractional
shares of Stock or units of other securities shall be issued pursuant to any
such adjustment, and any fractions resulting from any such adjustment shall be
eliminated in each case by rounding downward to the nearest whole share or
unit.
4.2(e). The grant of an Option pursuant to the Plan shall not affect
or limit in any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to
-4-
<PAGE> 7
merge, consolidate, dissolve or liquidate, or to sell or transfer all or any
part of its business or assets.
5. ELIGIBILITY
Eligibility under the Plan is limited to Eligible Directors.
6. OPTION PRICE
The Option Price of the Stock covered by each Option granted under the
Plan shall be the greater of the Fair Market Value or the par value of such
Stock on the Grant Date. The Option Price shall be subject to adjustment as
provided in Section 4.2 hereof.
7. NUMBER OF SHARES AND GRANT DATES
Each Eligible Director whose Commencement of Service is after the
Effective Date shall be granted an Initial Option to purchase 10,000 shares of
Stock as of the date of the Eligible Director's Commencement of Service. Each
Eligible Director also shall be granted an Additional Option to purchase 5,000
shares of Stock immediately after each of the next two annual meetings of the
Corporation's stockholders if the Eligible Director continues to be an Eligible
Director at such time.
8. VESTING OF OPTIONS
8.1 The Optionee may exercise the Option (subject to the
limitations on exercise set forth in this Plan or in the Option Agreement
relating to such Option), in installments as follows: on the first anniversary
of the Grant Date of the Option, as set forth in Section 7 above, the Option
shall be exercisable in respect of 25 percent of the number of shares specified
in Section 7 above, and the Option shall be exercisable in respect of an
additional 25 percent of the number of shares specified in Section 7 above on
each of the next three anniversaries of the Grant Date, as set forth in Section
7 above. The foregoing installments, to the extent not exercised, shall
accumulate and be exercisable, in whole or in part, at any time and from time
to time, after becoming exercisable and prior to the termination of the Option;
provided, that no single exercise of the Option shall be for less than 100
shares, unless the number of shares purchased is the total number at the time
available for purchase under this Option.
8.2 In the event of a "Change of Control", all non-vested Options
outstanding under the Plan shall become immediately exercisable. For purposes
of this Plan, "Change of Control" means:
-5-
<PAGE> 8
(a) execution by the Corporation of an agreement for the merger of
the Corporation into or with another corporation, the result of which would be
that the stockholders of the Corporation at the time of execution of such
agreement would own less than 50% of the total equity of the corporation
surviving the merger; or
(b) the sale of assets of the Corporation having an aggregate book
value of 40% or more of the total book value of all assets of the Corporation
as shown on the then most recent annual audited financial statement of the
Corporation; or
(c) a change of control of a nature that would be required to be
reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated
under the Exchange Act, provided that, without limitation, such a change of
control shall be deemed to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Corporation representing 50% of the
Corporation's then outstanding securities; and provided further that no such
change of control shall be deemed to have occurred as a result of the execution
in March 1996 of an Investor Agreement among the Corporation, IES Investments
Inc., Midwest Capital Group, Inc., MWR Investments, Inc., Clark and Mary
McLeod, and certain other stockholders.
9. OPTION PERIOD
An Option shall be exercisable only during the Option Period. The
Option Period shall commence twelve months after the Grant Date, or earlier, if
subject to Sections 4.2(c), 8.2 or 12, and shall end at the close of business
on the Expiration Date.
10. TIMING AND METHOD OF EXERCISE
Subject to Sections 8 and 9 hereof, an Option that is exercisable
hereunder may be exercised by delivery to the Corporation on any business day,
at its principal office addressed to the attention of the Committee, of written
notice of exercise, which notice shall specify the number of shares for which
the Option is being exercised, and shall be accompanied by payment in full of
the Option Price of the shares for which the Option is being exercised.
Payment of the Option Price for the shares of Stock purchased pursuant to the
exercise of an Option shall be made (a) in cash or by certified check payable
to the order of the Corporation; (b) through the tender to the Corporation of
shares of Stock, which shares shall be valued, for purposes of determining the
extent to which the Option Price has been paid thereby, at their Fair Market
Value on the date of exercise; or (c) by a combination of the methods described
in (a) and (b) hereof. Payment in full of the Option Price
-6-
<PAGE> 9
need not accompany the written notice of exercise provided the notice directs
that the Stock certificate or certificates for the shares for which the Option
is exercised be delivered to a licensed broker acceptable to the Corporation as
the agent for the individual exercising the Option and, at the time such Stock
certificate or certificates are delivered, the broker tenders to the
Corporation cash (or cash equivalents acceptable to the Corporation) equal to
the Option Price plus the amount (if any) of federal and/or other taxes which
the Corporation may, in its judgment, be required to withhold with respect to
the exercise of the Option. An attempt to exercise any Option granted
hereunder other than as set forth above shall be invalid and of no force and
effect. Promptly after the exercise of an Option and the payment in full of
the Option Price of the shares of Stock covered thereby, the individual
exercising the Option shall be entitled to the issuance of a Stock certificate
or certificates evidencing such individual's ownership of such shares.
11. SERVICE TERMINATION
Upon the termination of service (a "Service Termination") of the
Optionee in all capacities as an employee and/or director of the Corporation
and all of its affiliated companies, other than by reason of the death or
permanent and total disability of such Optionee, any Option granted to an
Optionee pursuant to the Plan shall terminate, and such Optionee shall have no
further right to purchase shares of Stock pursuant to such Option.
12. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
12.1. If an Optionee dies while in service as a director of the
Corporation, the executors or administrators or legatees or distributees of
such Optionee's estate shall have the right (subject to the general limitations
on exercise set forth in Section 9 above), at any time within three months
after the date of such Optionee's death and prior to termination of the Option
pursuant to Section 9 above, to exercise any Option held by such Optionee at
the date of such Optionee's death, whether or not such Option was exercisable
immediately prior to such Optionee's death.
12.2. If there is a Service Termination by reason of the permanent
and total disability of the Optionee, then such Optionee shall have the right
(subject to the general limitations on exercise set forth in Section 9 above),
at any time within three months after such Service Termination and prior to
termination of the Option pursuant to Section 9 above, to exercise, in whole or
in part, any Option held by such Optionee at the date of such Service
Termination, whether or not such Option was exercisable immediately prior to
such Service Termination. Whether a Service Termination is to be considered by
reason of permanent and total disability for purposes of this Plan shall be
determined by the Board, which determination shall be final and conclusive.
-7-
<PAGE> 10
13. NO STOCKHOLDER RIGHTS UNDER OPTION
Neither an Optionee nor any person entitled to exercise an Optionee's
rights in the event of an Optionee's death shall have any of the rights of a
stockholder with respect to the shares of Stock subject to an Option except to
the extent the certificates for such shares shall have been issued upon the
exercise of the Option.
14. CONTINUATION OF SERVICE
Nothing in the Plan shall confer upon any person any right to continue
as a member of the Board or interfere in any way with the right of the
Corporation to terminate such relationship.
15. STOCK OPTION AGREEMENT
Each Option granted pursuant to the Plan shall be evidenced by a
written Stock Option Agreement notifying the Optionee of the grant and
incorporating the terms of the Plan. The Stock Option Agreement shall be
executed by the Corporation and the Optionee.
16. WITHHOLDING
The Corporation shall have the right to withhold, or require an
Optionee to remit to the Corporation, an amount sufficient to satisfy any
applicable federal, state or local withholding tax requirements imposed with
respect to exercise of Options. To the extent permissible under applicable
tax, securities and other laws, the Optionee may satisfy a tax withholding
requirement by directing the Corporation to apply shares of Stock to which the
Optionee is entitled as a result of the exercise of an Option to satisfy
withholding requirements under this Section 16.
17. NON-TRANSFERABILITY OF OPTIONS
Each Option granted pursuant to the Plan shall, during Optionee's
lifetime, be exercisable only by Optionee, and neither the Option nor any right
thereunder shall be transferable by the Optionee by operation of law or
otherwise other than by will or the laws of descent and distribution, and shall
not be pledged or hypothecated (by operation of law or otherwise) or subject to
execution, attachment or similar processes.
-8-
<PAGE> 11
18. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of Stock
pursuant to Options granted under the Plan shall constitute general funds of
the Corporation.
19. ADOPTION, AMENDMENT, SUSPENSION AND TERMINATION
19.1. The Plan shall be effective as of the date of adoption by the
Board, subject to stockholder approval of the Plan within one year of the
Effective Date by a majority of the votes cast at a duly held meeting of the
stockholders of the Corporation at which a quorum representing a majority of
all outstanding stock is present, either in person or by proxy, and voting on
the matter, or by written consent in accordance with applicable state law and
the Certificate of Incorporation and Bylaws of the Corporation and in a manner
that satisfies the requirements of Rule 16b-3(b) of the Exchange Act; provided,
however, that upon approval of the Plan by the stockholders of the Corporation,
all Options granted under the Plan on or after the Effective Date shall be
fully effective as if the stockholders of the Corporation had approved the Plan
on the Effective Date. If the stockholders fail to approve the Plan within one
year of the Effective Date, any Options granted hereunder shall be null, void
and of no effect.
19.2. Subject to the limitation of Section 19.4 hereof, the Board
may at any time suspend or terminate the Plan, and may amend it from time to
time in such respects as the Board may deem advisable, which approval may be
made subject to approval by the Corporation's stockholders.
19.3. No Option may be granted during any suspension or after the
termination of the Plan, and no amendment, suspension or termination of the
Plan shall, without the Optionee's consent, alter or impair any rights or
obligations under any Stock Option Agreement previously entered into under the
Plan. The Plan shall terminate ten years after the Effective Date unless
previously terminated pursuant to Section 4.2 hereof or by the Board pursuant
to this Section 19.
19.4. Notwithstanding the provisions of Section 19.2 hereof, the
Plan shall not be amended more than once in any six-month period other than to
comport with changes in the Code, the Employee Retirement Income Security Act
of 1974, or the rules promulgated thereunder.
20. SECURITIES LAWS
20.1. The Corporation shall not be required to sell or issue any
shares of Stock under any Option if the sale or issuance of such shares would
constitute a
-9-
<PAGE> 12
violation by the individual exercising the Option or the Corporation of any
provisions of any law or regulation of any governmental authority, including
without limitation any federal or state securities laws or regulations.
Specifically in connection with the Securities Act, upon exercise of any
Option, unless a registration statement under the Securities Act is in effect
with respect to the shares of Stock covered by such Option, the Corporation
shall not be required to sell or issue such shares unless the Administrator has
received evidence satisfactory to the Administrator that the holder of such
Option may acquire such shares pursuant to an exemption from registration under
the Securities Act. Any determination in this connection by the Administrator
shall be final and conclusive. The Corporation may, but shall in no event be
obligated to, register any securities covered hereby pursuant to the Securities
Act. The Corporation shall not be obligated to take any affirmative action in
order to cause the exercise of an Option or the issuance of shares pursuant
thereto to comply with any law or regulation of any governmental authority. As
to any jurisdiction that expressly imposes the requirement that an Option shall
not be exercisable unless and until the shares of Stock covered by such Option
are registered or are subject to an available exemption from registration, the
exercise of such Option (under circumstances in which the laws of such
jurisdiction apply) shall be deemed conditioned upon the effectiveness of such
registration or the availability of such an exemption.
20.2. The intent of the Plan is to qualify for the exemption
provided by Rule 16b-3 under the Exchange Act. To the extent any provision of
the Plan does not comply with the requirements of Rule 16b-3, it shall be
deemed inoperative and shall not affect the validity of the Plan. In the event
Rule 16b-3 is revised or replaced, the Board of Directors may exercise
discretion to modify the Plan in any respect necessary to satisfy the
requirements of the revised exemption or its replacement.
21. INDEMNIFICATION
21.1. To the extent permitted by applicable law, the Administrator
shall be indemnified and held harmless by the Corporation against and from any
and all loss, cost, liability or expense that may be imposed upon or reasonably
incurred by the Administrator in connection with or resulting from any claim,
action, suit or proceeding to which the Administrator may be a party or in
which the Administrator may be involved by reason of any action taken or
failure to act under the Plan, and against and from any and all amounts paid by
the Administrator (with the Corporation's written approval) in the settlement
thereof, or paid by the Administrator in satisfaction of a judgment in any such
action, suit or proceeding except a judgment in favor of the Corporation;
subject, however, to the condition that upon the institution of any claim,
action, suit or proceeding against the Administrator, the Administrator shall
give the Corporation an opportunity in writing, at its own expense, to handle
and defend the same before
-10-
<PAGE> 13
the Administrator undertakes to handle and defend it on the Administrator's own
behalf. The foregoing right of indemnification shall not be exclusive of any
other right to which such person may be entitled as a matter of law or
otherwise, or any power the Corporation may have to indemnify the Administrator
or hold the Administrator harmless.
21.2. The Administrator and each officer and employee of the
Corporation shall be fully justified in reasonably relying or acting upon any
information furnished in connection with the administration of the Plan by the
Corporation or any employee of the Corporation. In no event shall any person
who is or shall have been the Administrator, or an officer or employee of the
Corporation, be liable for any determination made or other action taken or any
omission to act in reliance upon any such information, or for any action
(including furnishing of information) taken or any failure to act, if in good
faith.
23. GOVERNING LAW
The validity, interpretation and effect of the Plan, and the rights of
all persons hereunder, shall be governed by and determined in accordance with
the laws of Delaware, other than the choice of law rules thereof.
The amendment and restatement of the Plan was duly adopted and
approved by the Board on March 28, 1996 and was duly approved by the
stockholders of the Corporation on April 30, 1996.
/s/ CASEY D. MAHON, ESQ.
-----------------------
Casey D. Mahon, Esq.
Secretary
-11-
<PAGE> 1
EXHIBIT 11.1
MCLEOD, INC.
COMPUTATION OF LOSS PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
------------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Computation of weighted average
number of common shares
outstanding and common
equivalent shares:(A)
Common shares, Class A,
outstanding at the beginning
of the period................. 18,750 11,993,760 14,455,980 14,455,980 16,387,081
Common shares, Class B,
outstanding at the beginning
of the period................. -- 5,625,000 7,670,457 7,670,457 15,625,929
Weighted average number of
shares issued during the
period (C).................... 14,730,198 3,859,959 -- -- --
Weighted average number of
shares purchased for the
treasury during the period.... -- (14,918) -- -- --
Weighted average number of
shares reissued from the
treasury during the period.... -- -- 22,192 21,250 --
Common equivalent shares
attributable to stock options
granted(B).................... 5,018,605 5,018,605 5,018,605 5,018,605 5,018,605
Common stock issued(C).......... 9,887,510 9,887,510 9,887,510 9,887,510 23,438
----------- ----------- ------------ ------------ ------------
Weighted average number of
common and common equivalent
shares........................ 29,655,063 36,369,916 37,054,744 37,053,802 37,055,053
=========== =========== ============ ============ ============
Net loss........................ $(2,439,617) $(11,415,962) $(11,328,939) $(2,956,720) $(4,340,304)
=========== =========== ============ ============ ============
Loss per common and common
equivalent share.............. $ (0.08) $ (0.31) $ (0.31) $ (0.08) $ (0.12)
=========== =========== ============ ============ ============
</TABLE>
- ---------------
(A) All shares have been adjusted to give effect to the 3.75 for 1 stock split
effected in the form of a stock dividend effective March 28, 1996.
(B) All stock options are anti-dilutive, however, pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83 (SAB 83), stock options
granted with exercise prices below the assumed initial offering price during
the twelve-month period preceding the date of the initial filing of the
Registration Statement have been included in the calculation of common stock
equivalent shares as if they were outstanding for all periods presented.
(C) All stock issued during the year ended December 31, 1995 was within the
twelve-month period discussed in (B) above. As a result, the shares issued
at prices below the assumed initial public offering price during this period
have been included in the calculation as if they were outstanding for all
periods presented. For the three months ended March 31, 1996, the shares of
Class A and B common stock issued during the year ended December 31, 1995
are shown as shares outstanding at the beginning of the period.
<PAGE> 1
EXHIBIT 23.1
[MCGLADREY & PULLEN, LLP LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
McLeod, Inc.
Cedar Rapids, Iowa
We hereby consent to the use in this Registration Statement of our report, dated
March 28, 1996, except for Note 11, as to which the date is April 30, 1996,
relating to the consolidated financial statements of McLeod, Inc. and
subsidiaries, and to the reference to our Firm under the caption "Experts" and
"Selected Consolidated Financial Data" in the Prospectus.
/s/ MCGLADREY & PULLEN, LLP
MCGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
May 15, 1996
<PAGE> 2
EXHIBIT 23.1
[MCGLADREY & PULLEN, LLP LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
MWR Telecom Inc.
Cedar Rapids, Iowa
We hereby consent to the use in this Registation Statement of our report, dated
March 15, 1996, relating to the financial statements of MWR Telecom Inc., and
to the reference to our Firm under the caption "Experts" in the Prospectus.
/s/ MCGLADREY & PULLEN, LLP
MCGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
May 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of McLeod, Inc. and subsidiaries for
the three years ended December 31, 1995 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 6,908,069 11,893,150
<ALLOWANCES> 219,000 272,000
<INVENTORY> 2,638,829 2,842,882
<CURRENT-ASSETS> 9,623,587 14,862,379
<PP&E> 17,222,849 21,608,508
<DEPRECIATION> 2,144,615 2,652,528
<TOTAL-ASSETS> 28,986,452 32,275,289
<CURRENT-LIABILITIES> 9,715,337 13,266,789
<BONDS> 3,600,000 11,300,000
0 0
0 0
<COMMON> 320,130 320,364
<OTHER-SE> 14,637,812 10,822,399
<TOTAL-LIABILITY-AND-EQUITY> 28,986,452 38,275,289
<SALES> 28,997,880 12,487,519
<TOTAL-REVENUES> 28,997,880 12,487,519
<CGS> 19,667,138 9,249,981
<TOTAL-COSTS> 19,667,138 9,249,981
<OTHER-EXPENSES> 19,779,895 7,122,413
<LOSS-PROVISION> 108,663 191,108
<INTEREST-EXPENSE> 909,814 265,370
<INCOME-PRETAX> (11,328,939) (4,340,304)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (11,328,939) (4,340,304)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,328,939) (4,340,304)
<EPS-PRIMARY> (0.31) (0.12)
<EPS-DILUTED> (0.31) (0.12)
</TABLE>
