<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 1996
REGISTRATION NO. 333-3112
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT
NO. 2 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>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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) 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 30, 1996
PROSPECTUS
10,000,000 SHARES
MCLEOD, INC.
CLASS A COMMON STOCK
($.01 PAR VALUE)
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 for
investment purposes shares of Class A Common Stock having an aggregate value of
$37 million at the Price to Public. No Underwriting Discount will 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 pricing plans of AT&T Corp.
("AT&T"), MCI Communications Corporation ("MCI") and Sprint Corporation
("Sprint") that currently are most popular with the Company's customers, and, in
certain cases, rates specifically identified by a customer and agreed to by the
Company. 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%
1
<PAGE> 7
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 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
2
<PAGE> 8
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. 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
(the "IES-backed Facilities"). 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) 6,943,804 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)
======== ========= =========== ============ ============
<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............. $ (.30) $ (.08) $ (.12)
============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
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
-----------------------------
ACTUAL AS ADJUSTED(7)
------------ --------------
<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>
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1991 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------------------------
1991(1) 1992 1993 1994 1995(2)(3)
--------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures, including
acquisition of business...... -- $ 137,618 $ 2,052,475 $ 3,392,663 $ 14,697,402
EBITDA (8)..................... $ (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
------------ -------------- --------------
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures, including
acquisition of business...... $ 15,063,941 $ 188,360 $ 4,389,638
EBITDA (8)..................... $ (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>
(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) Includes MWR, which was acquired by the Company on April 28, 1995.
(7) 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.
(8) 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.
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.
The Telecommunications Act provides that rates charged by incumbent local
exchange carriers for interconnection to the incumbent carrier's network are to
be nondiscriminatory and based upon the cost of providing such interconnection,
and may include a "reasonable profit," which terms are subject to interpretation
by regulatory authorities. If the incumbent local exchange carriers,
particularly the Regional Bell Operating Companies, charge alternative providers
such as the Company unreasonably high fees for interconnection to the local
exchange carriers' networks, significantly lower their rates for access and
private line services or offer significant volume and term discount pricing
options to their customers, the Company could be at a significant competitive
disadvantage.
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<PAGE> 13
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.
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 various state and federal laws, regulations and regulatory
policies, including Sections 251(b)(1) and 251(c)(4)(B) of the
Telecommunications Act, which impose upon the Regional Bell Operating Companies
the duty not to prohibit, and not to impose unreasonable or discriminatory
conditions or limitations on, the resale of their telecommunications services,
and Section 251(c)(4)(A) of the Telecommunications Act, which obligates the
Regional Bell Operating Companies to offer for resale at wholesale rates any
telephone communications services that are provided at retail to subscribers who
are not telecommunications carriers. Additional statutes cited in the Company's
challenges include provisions of the laws of Iowa, Minnesota and Colorado, which
prohibit restrictions on the resale of local exchange services, functions or
capabilities; prohibit local exchange carriers from refusing access by other
carriers to essential facilities on the same terms and conditions as the local
exchange carrier provides to itself; and prohibit the provision of carrier
services pursuant to rates, terms and conditions that are unreasonably
discriminatory.
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
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<PAGE> 14
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 April
30, 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. The Company opposed this filing in a letter to the Minnesota
Public Utilities Commission on May 20, 1996. On May 21, 1996, the Minnesota
Public Utilities Commission voted to suspend the new U S WEST filing and
schedule a contested-case proceeding to consider it. No procedural schedule has
yet been set in the case.
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 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.
These call detail omissions typically occur in connection with new
customers of the Company. The telephone numbers of such customers, on the date
they begin service with the Company, are transferred to the portion of the U S
WEST central office switch partitioned for use by the Company. This transfer is
effected by a U S WEST technician, who makes certain keystroke entries in the
software database controlling the switch in order to transfer the telephone
number to the Company's portion of the switch. At that time, an additional
keystroke entry is required in order to activate the software (or "set the
flag") that records and stores both the telephone number originating a long
distance call and the beginning time and duration of the call. Occasionally,
this additional keystroke entry is not made and, therefore, the call detail
records are not captured, and cannot be recovered, for the period during which
the flag is not set.
The Company receives a weekly report from U S WEST listing all telephone
numbers assigned to the Company's portion of the switch, which the Company
compares to its own list of customers. When the telephone number of a customer
of the Company does not appear on the weekly U S WEST list, the Company contacts
U S WEST to ascertain whether the flag has been set for such customer and, if
the flag has not been set, the Company requests that U S WEST make the necessary
keystroke entry.
On a monthly basis, the Company receives a report from its wholesale long
distance supplier listing all long distance calls originating from the Company's
portion of the U S WEST switch and the telephone number to which the call was
terminated, as well as the time and the duration of the call.
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<PAGE> 15
The long distance supplier's records do not, however, provide the telephone
number from which the call was originated. Therefore, if there has been an
omission by U S WEST in setting the flag in connection with a particular
customer of the Company, the Company is unable to verify with complete certainty
the long distance calls originating from such customer until the flag has been
set. 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. During the year
ended December 31, 1995, the Company estimates that it was unable to bill
approximately $126,000 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 paying its invoices
from U S WEST, the Company withholds amounts representing the cost of the lines
with respect to which call detail records were not provided, together with a pro
rata amount of the central office and related costs associated therewith. During
the year ended December 31, 1995, the Company withheld approximately $216,000
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 historical financial condition or results of operations.
However, if U S WEST prevails in the dispute and continues to fail to provide
call detail records for a significant percentage of calls, there could be a
material adverse effect on the Company's future financial condition and results
of operations.
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 each of 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.
Principal cellular providers in the Company's current and target markets include
Ameritech Mobile Communications, Inc., AT&T Wireless Services, Inc.,
Southwestern Bell Mobile Systems, Inc., Western Wireless
10
<PAGE> 16
Corporation, CommNet Cellular Incorporated, GTE Mobilnet Service Corporation,
360() Communications Company, Airtouch Cellular, United States Cellular
Corporation and BellSouth Corporation. Principal PCS licensees in the Company's
current and target markets include AT&T Wireless PCS, Inc., PRIMECO Personal
Communications, L.P., Sprint Telecommunications Venture, American Portable
Telecommunications, Inc., Western PCS Corp., Cox Communications, Inc., AerForce
Communications, L.P., BRK WIRELESS CO., INC., DCR PCS, Inc. and Wireless PCS,
Inc.
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 and a retail basis. On a wholesale basis, these opportunities may
include leasing tower sites to wireless providers or switching wireless traffic
through the Company's switching platform. 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 acquire
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, the Company has entered
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
11
<PAGE> 17
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, 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 would 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 settlement agreement
with U S WEST regarding Centrex service in Iowa is reviewed and not approved by
the Iowa Utilities Board, or if the Company's challenges to the U S WEST Centrex
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Action in other states 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."
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 the IES-backed
Facilities. 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
13
<PAGE> 19
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 the IES-backed Facilities, IES would receive a number of
shares of Class A Preferred Stock equal to the payment made by IES divided by
$5.50 and would be entitled to elect two directors to the Board. See
"-- Obligations 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 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."
14
<PAGE> 20
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.
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, offer, 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." In addition, certain directors,
executive officers and stockholders have agreed that, for a period of two years
commencing on the date of this Prospectus, they will not sell or otherwise
dispose of any equity securities of the Company without the consent of the
Board. See "Management -- Stockholders' Agreements."
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. No shares have been issued under the Company's employee stock purchase
plan and options to purchase 6,943,804 shares of Class A Common Stock are
currently 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 the IES-backed Facilities, 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 purchase plan and stock option plans 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."
15
<PAGE> 21
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 the
IES-backed Facilities, 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."
16
<PAGE> 22
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 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 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 6,943,804 shares of Class A Common Stock at exercise prices ranging
from $.27 to the initial public offering price per share, with a weighted
average exercise price of approximately $2.87 per share (assuming an initial
public offering price of $17.00 per share, the mid-point of the estimated range
of the initial public offering price), 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 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 the Offering would be $3.70, representing an increase in pro forma
net tangible book value of $2.87 per share and dilution to new investors of
$13.30 per share.
17
<PAGE> 23
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) 6,943,804 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 the IES-backed
Facilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and
"Management -- Stock Option Plans."
18
<PAGE> 24
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.
19
<PAGE> 25
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
=========== =========== =========== ============ ============
<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
============ ============
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------------
1991 1992 1993 1994 1995(2)(5)
------------ ------------ ------------ ------------- -------------
<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>
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1991
TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------------------------------
1991(1) 1992 1993 1994 1995(2)(3)
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
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,
-------------------------------
1995 1996
------------- -------------
<S> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures, including
acquisition of business......... $ 188,360 $ 4,389,638
EBITDA(6)......................... $ (2,484,099) $ (3,107,369)
</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) Includes MWR, which was acquired by the Company on April 28, 1995.
(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.
20
<PAGE> 26
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.
21
<PAGE> 27
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 ENDED
DECEMBER 31, MARCH 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
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<PAGE> 28
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 the IES-backed
Facilities, 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 directors,
officers and other employees, 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
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<PAGE> 29
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 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
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<PAGE> 30
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.
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.
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<PAGE> 31
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
Since the inception of the Company in June 1991, the Company's total assets
have grown to $38.3 million at March 31, 1996. Property and equipment, net of
depreciation, comprised $19 million of the total assets at March 31, 1996. The
growth of the Company has been funded through private sales of equity securities
of $41 million and drawings under the Credit Facility. At March 31, 1996, the
Company's current assets of $14.9 million exceeded its current liabilities of
$13.3 million, providing working capital of $1.6 million, which represents an
improvement of $1.7 million compared to December 31, 1995 as a result of the
Company's use of the Credit Facility. At December 31, 1995, 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 net cash used in operating activities totaled $3.9 million for the
three months ended March 31, 1996 and $9.5 million for the year ended December
31, 1995. During the three months ended March 31, 1996, cash for operating
activities was used primarily to fund the Company's net loss of $4.3 million for
such period. The Company also required cash to fund the growth in trade
receivables of $4.9 million and other assets of $434,000 as a result of the
growth in local and long distance telecommunications services and special access
and private line services. These uses of cash were partially offset by an
increase in accounts payable and accrued expenses of $2.7 million due to the
costs associated with the increase in telecommunications revenue, an increase in
deferred revenue of $2.1 million resulting primarily from amounts received in
advance from completed segments under long-term leases of fiber optic
telecommunication networks and an increase in depreciation and amortization
expense. During the year ended December 31, 1995, cash for operating activities
was used primarily to fund the Company's net loss of $11.3 million for such
26
<PAGE> 32
period. The Company also required cash to fund the growth in trade receivables
of $3.6 million and deferred line installation costs of $800,000 as a result of
the growth in local and long distance telecommunications services and entry into
special access and private line services. The use of cash during the year ended
December 31, 1995 was partially offset by an increase in accounts payable and
accrued expenses of $4.1 million due to the costs associated with the increase
in telecommunications revenue and an increase in depreciation and amortization
expense.
The Company's investing activities used cash of $3.9 million during the
three months ended March 31, 1996 and $5.5 million during the year ended
December 31, 1995 primarily as a result of its continued development and
expansion of its fiber optic telecommunications network. During 1994, the
Company started building its telemanagement business by offering local and long
distance services to business customers through the purchase of Centrex services
from two Regional Bell Operating Companies and interexchange carrier services
for termination of long distance calls. The equipment required for the growth of
the telemanagement business and the Company's development and construction of
its fiber optic telecommunications network resulted in purchases of equipment
and telecommunications network totaling $3.9 million and $5.3 million during the
three months ended March 31, 1996 and the year ended December 31, 1995,
respectively.
Cash received from financing activities was $7.8 million during the three
months ended March 31, 1996 and was obtained from drawings under the Credit
Facility. Cash received from financing activities during 1995 was $15 million
and was primarily obtained through the issuance of Common Stock for an aggregate
purchase price of $14 million in a private placement transaction. In addition,
in April 1995 the Company issued Class B Common Stock valued at $8.3 million to
acquire MWR, a competitive access provider in Des Moines, Iowa.
The Company's cash management practices result in a short-term float
position at the end of most months, which is reflected on the Company's balance
sheet as checks issued not yet presented for payment. This position is due
primarily to the timing of payments on telecommunications line capacity
purchased from U S WEST and Ameritech. The Company generally writes checks every
Friday for outstanding bills due within the next seven days. The Company
releases the checks on the appropriate due dates.
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.
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<PAGE> 33
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 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.
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<PAGE> 34
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
pricing plans of AT&T, MCI and Sprint that currently are most popular with the
Company's customers, and, in certain cases, rates specifically identified by a
customer and agreed to by the Company.
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' Agree-
29
<PAGE> 35
ments." It was also granted an option to purchase an additional 3,529,414 shares
of Class B 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.
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- 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
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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.
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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
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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. See "Risk Factors -- Failure of U S WEST
to Furnish Call Detail Records."
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
specifically identified by a customer and agreed to by the
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Company. The customer is then billed an amount equal to such "lowest cost"
monthly charges calculated using this software, minus any 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.
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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.
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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
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other providers of wireline services. In May 1996, the Company entered into an
agreement with a paging company to provide access to several of 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. As a result
of this strategic acquisition, the Company believes that it is 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
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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.
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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. 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. The Telecommunications
Act provides that rates charged by incumbent local exchange carriers for
interconnection to the incumbent carrier's network are to be nondiscriminatory
and based upon the cost of providing such interconnection, and may include a
"reasonable profit," which terms are subject to interpretation by regulatory
authorities. If the incumbent local exchange carriers, particularly the Regional
Bell Operating Companies, charge alternative providers such as the Company
unreasonably high fees for interconnection to the local exchange carriers'
networks, significantly lower their rates for access and private line services
or offer significant volume and term discount pricing options to their
customers, the Company could be at a significant 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.
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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 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 would 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.
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Interconnection Requires incumbent local exchange carriers to
permit their competitors to interconnect with their
facilities at any technically 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
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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 nondiscriminatory 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.
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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 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.
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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 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
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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 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,
instituted in the Iowa District Court for Linn County on September 19, 1994,
seeking actual and punitive damages, and alleging that the defendants, Iowa
Network Services, Inc. ("INS") and William P. Bagley, the general manager of
INS, 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 regarding, among other things, the Company's business
dealings with the State of Iowa. 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.
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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 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 various state and
federal laws, regulations and regulatory policies, including Sections 251(b)(1)
and 251(c)(4)(B) of the Telecommunications Act, which impose upon the Regional
Bell Operating Companies the duty not to prohibit, and not to impose
unreasonable or discriminatory conditions or limitations on, the resale of their
telecommunications services, and Section 251(c)(4)(A) of the Telecommunications
Act, which obligates the Regional Bell Operating Companies to offer for resale
at wholesale rates any telephone communications services that are provided at
retail to subscribers who are not telecommunications carriers. Additional
statutes cited in the Company's challenges include provisions of the laws of
Iowa, Minnesota and Colorado, which prohibit restrictions on the resale of local
exchange services, functions or capabilities; prohibit local exchange carriers
from refusing access by other carriers to essential facilities on the same terms
and conditions as the local exchange carrier provides to itself; and prohibit
the provision of carrier services pursuant to rates, terms and conditions that
are unreasonably discriminatory.
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
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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 April 30, 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. The
Company opposed this filing in a letter to the Minnesota Public Utilities
Commission on May 20, 1996. On May 21, 1996, the Minnesota Public Utilities
Commission voted to suspend the new U S WEST filing and schedule a
contested-case proceeding to consider it. No procedural schedule has yet been
set in the case.
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."
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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 SouthernNet, 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.
49
<PAGE> 55
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
50
<PAGE> 56
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
51
<PAGE> 57
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
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<PAGE> 58
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
53
<PAGE> 59
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
54
<PAGE> 60
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." The
Company has been advised that any such shares purchased by the Investors will be
purchased for investment purposes. 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
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<PAGE> 61
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.
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.
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<PAGE> 62
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.
57
<PAGE> 63
MANAGEMENT AGREEMENTS
Employment, Confidentiality and Non-Competition Agreements. The Company
has entered into employment, confidentiality and non-competition agreements with
37 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. As partial consideration for the execution of the employment,
confidentiality and non-competition agreements, the Company has granted to the
employees signing such agreements options to purchase an aggregate of 540,500
shares of Class A Common Stock, effective upon consummation on or before
December 31, 1996 of an initial public offering of the Class A Common Stock, at
an exercise price equal to the initial public offering price per share. Such
options were granted pursuant to the Company's 1996 Employee Stock Option Plan,
with vesting to occur with respect to one-third of the shares subject to such
options 54 months after the date of grant, and with an additional one-third of
the shares subject to such options vesting in each of the two subsequent
seven-month periods. See "Management -- Stock Option Plans -- The 1996 Employee
Stock Option Plan."
Change-of-Control Agreements. The Company has entered 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
58
<PAGE> 64
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").
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
59
<PAGE> 65
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 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
60
<PAGE> 66
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 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.
61
<PAGE> 67
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."
62
<PAGE> 68
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% 24.3%
Clark E. McLeod(5)............................ 8,871,586 27.7 21.8
MWR Investments Inc.(6)....................... 7,205,472 22.5 19.9
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 588,235
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)
63
<PAGE> 69
(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 1,176,471 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%.
64
<PAGE> 70
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 March 31, 1996, 16,410,519 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 IES-backed Facilities 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
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<PAGE> 71
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
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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
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<PAGE> 73
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
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<PAGE> 74
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." In addition, certain directors, executive officers and
stockholders have agreed that, for a period of two years commencing on the
effective date of this Prospectus, they will not sell or otherwise dispose of
any equity securities of the Company without the consent of the Board. See
"Management -- Stockholders' Agreements."
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. No shares have been issued under the Company's employee stock purchase
plan and options to purchase 6,943,804 shares of Class A Common Stock are
currently 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.
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<PAGE> 75
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),
Allsop and Theodore G. Schwartz 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) grants of options
and issuances and sales of Common Stock issued pursuant to any employee
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or director stock option plan, stock ownership plan or stock purchase plan in
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." The Company has been advised that any such shares
purchased by the Investors will be purchased for investment purposes. 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.
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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.
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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.
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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.
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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> 81
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
May 29, 1996
F-2
<PAGE> 82
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> 83
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> 84
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> 85
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> 86
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> 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 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> 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 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> 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 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> 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 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> 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 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> 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 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> 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 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> 94
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> 95
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> 96
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> 97
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.
Employment, Confidentiality and Non-Competition Agreements: On May 29,
1996, the Company entered into employment, confidentiality and non-competition
agreements with 37 members of senior management. The agreements with the ten
senior management executive employees and 27 other senior management employees
provide that during their term of employment and for a two-year and one-year
period, respectively, following termination, the employees will not compete with
the Company. In addition, the ten executives and 27 senior managers have each
been granted options to purchase 23,000 and 11,500 shares of Class A common
stock, respectively, at the initial public offering price per share, effective
upon an initial public offering prior to December 31, 1996. The agreements
provide that employees may not disclose any confidential information during or
after employment.
Change-of-Control Agreements: On May 29, 1996, the Company also entered
into change-of-control agreements with the ten senior management executive
employees discussed above, which provide for certain payments in connection with
termination of employment after a change of control (as defined within the
agreements) of the Company. The change-of-control agreements terminate on
December 31, 2006 unless a change of control occurs during the six-month period
prior to December 31, 2006, in which case the agreements terminate on December
31, 2007. The agreements provide that if an executive terminates his or her
employment within six months after a change of control or if the executive's
employment is terminated within 24 months after a change of control in
accordance with the terms and conditions set forth in the agreements, the
executive will be entitled to certain benefits. The benefits include cash
compensation, immediate vesting of outstanding stock options and coverage under
the Company's group health plan.
F-18
<PAGE> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
[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> 106
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...................... 16
Dividend Policy...................... 16
Dilution............................. 17
Capitalization....................... 19
Selected Consolidated Financial
Data............................... 20
Pro Forma Statement of Operations.... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................. 29
Management........................... 49
Certain Transactions................. 62
Principal Stockholders............... 63
Description of Capital Stock......... 65
Shares Eligible for Future Sale...... 68
Underwriting......................... 70
Validity of Securities............... 71
Experts.............................. 71
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 LOGO]
SALOMON BROTHERS INC
BEAR, STEARNS & CO. INC.
MORGAN STANLEY & CO.
INCORPORATED
PROSPECTUS
DATED , 1996
<PAGE> 107
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses payable by the Company 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...................................... 50,000
Accounting fees and expenses............................................ 200,000
Legal fees and expenses................................................. 750,000
Printing and engraving expenses......................................... 250,000
Blue Sky fees and expenses.............................................. 25,000
Transfer Agent fees and expenses........................................ 3,000
Miscellaneous expenses.................................................. 29,421
-------
Total......................................................... $1,400,000
=======
</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> 108
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 April 30, 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> 109
(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> 110
(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> 111
(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.
(38) In April 1996, as partial consideration for the execution of
employment, confidentiality and non-competition agreements, the Company
granted to the 37 employees signing such agreements options to purchase an
aggregate of 540,500 shares of Class A Common Stock, effective upon
consummation on or before December 31, 1996 of an initial public offering
of the Class A Common Stock, at an exercise price equal to the initial
public offering price per share.
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> 112
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> 113
<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> 114
<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> 115
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ------------------------------------------------------------------------------
<C> <C> <S>
**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.
10.53 -- Forms of Employment, Confidentiality and Non-Competition Agreement between
McLeod, Inc. and certain employees of McLeod, Inc.
10.54 -- Form of Change-of-Control Agreement between McLeod, Inc. and certain employees
of McLeod, Inc.
10.55 -- McLeod, Inc. 1996 Employee Stock Option Plan.
10.56 -- McLeod, Inc. Employee Stock Purchase Plan
10.57 -- Form of Indemnity Agreement between McLeod, Inc. and certain officers and
directors of McLeod, Inc.
10.58 -- License Agreement dated April 24, 1996 between PageMart, Inc. and MWR Telecom,
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. (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 granted. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
(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.
II-9
<PAGE> 116
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 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> 117
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 30th 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 30th 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> 118
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> 119
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> 120
EXHIBIT INDEX
<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> 121
<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> 122
<TABLE>
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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> 123
<TABLE>
<CAPTION>
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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. ..............................................................
10.53 -- Forms of Employment, Confidentiality and Non-Competition Agreement
between McLeod, Inc. and certain employees of McLeod, Inc. ........
10.54 -- Form of Change-of-Control Agreement between McLeod, Inc. and
certain employees of McLeod, Inc. .................................
</TABLE>
<PAGE> 124
<TABLE>
<CAPTION>
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EXHIBIT NUMBERING
NUMBER EXHIBIT DESCRIPTION SYSTEM
- --------- ------------------------------------------------------------------- ----------
<C> <C> <S> <C>
10.55 -- McLeod, Inc. 1996 Employee Stock Option Plan.......................
10.56 -- McLeod, Inc. Employee Stock Purchase Plan..........................
10.57 -- Form of Indemnity Agreement between McLeod, Inc. and certain
officers and directors of McLeod, Inc. ............................
10.58 -- License Agreement dated April 24, 1996 between PageMart, Inc. and
MWR Telecom, 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. (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 granted. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
<PAGE> 1
EXHIBIT 4.1
CLASS A COMMON STOCK CLASS A COMMON STOCK
NUMBER SHARES
------------------- -------------------
A
------------------- -------------------
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR
THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 582266 10 2
[MCLEOD, INC. LOGO]
------------------------------------------
------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS A COMMON STOCK,
PAR VALUE OF $.01
PER SHARE OF
- ---------------------------------MCLEOD, INC.-----------------------------------
(HEREINAFTER THE "CORPORATION") TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY
THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF
THIS CERTIFICATE PROPERTY ENDORSED.
THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE ISSUED AND SHALL
BE HELD SUBJECT TO ALL OF THE PROVISIONS OF THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE CORPORATION AND ALL AMENDMENTS
THERETO, COPIES OF WHICH ARE ON FILE WITH THE TRANSFER AGENT TO ALL OF WHICH
THE HOLDER OF THIS CERTIFICATE BY ACCEPTANCE HEREOF ASSENTS. THIS CERTIFICATE
IS NOT VALID UNLESS COUNTERSIGNED AND REGISTERED BY THE TRANSFER AGENT AND
REGISTRAR.
WITNESS THE FACSIMILE SIGNATURES OF THE DULY AUTHORIZED OFFICERS OF THE
CORPORATION.
DATED:
/s/ CASEY D. MAHON /s/ CLARK E. McLEOD
SECRETARY CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Countersigned and Registered:
NORWEST BANK OF MINNESOTA, N.A.
(St. Paul, Minnesota) Transfer Agent
and Registrar
BY
Authorized Signature
<PAGE> 2
MCLEOD, INC.
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OR SERIES OF
STOCK. IN ADDITION, THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
REDEMPTION BY THE CORPORATION IN CERTAIN LIMITED CIRCUMSTANCES. THE CORPORATION
WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A STATEMENT OF
THE TERMS AND CONDITIONS OF SUCH REDEMPTION PROVISIONS AND THE POWER,
DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER
SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. ANY SUCH
REQUEST SHOULD BE ADDRESSED TO THE SECRETARY OF THE CORPORATION.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM- as tenants in common UNIF GIFT MIN ACT._________Custodian_______
TEN ENT- as tenants by the entireties (Cust) (Minor)
JT TEN- as joint tenants with
right of survivorship and
not as tenants in common under Uniform Gifts to Minors
Act__________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
of the capital stock represented by this Certificate, and does hereby
irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the Corporation with full
power of substitution in the premises.
Dated_________________________
X
------------------------------------------------
X
------------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THIS CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
SIGNATURE(S) GUARANTEED:
By
- -------------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 5.1
May 30, 1996
Board of Directors
McLeod, Inc.
221 Third Avenue SE, Suite 500
Cedar Rapids, IA 52401
Ladies and Gentlemen:
We are acting as counsel to McLeod, Inc., a Delaware corporation (the
"Company"), in connection with its registration statement on Form S-1, as
amended (the "Registration Statement") filed with the Securities and Exchange
Commission relating to the proposed public offering of up to 11,500,000
shares of the Company's Class A Common Stock, par value $0.01 per share (the
"Shares"). This opinion letter is furnished to you at your request to enable
you to fulfill the requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R.
Section 229.601(b)(5), in connection with the Registration Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. The Amended and Restated Certificate of Incorporation of the
Company, as certified by the Secretary of State of the State of
Delaware on May 3, 1996 and by the Secretary of the Company on
the date hereof as then being complete, accurate and in effect.
3. The Amended and Restated By-laws of the Company, as certified
by the Secretary of the Company on the date hereof as then
being complete, accurate and in effect.
4. The proposed form of the Underwriting Agreement among the
Company, Salomon Brothers Inc, Bear, Stearns & Co. Inc.
and Morgan Stanley & Co., as representatives of the
Underwriters thereunder, filed as Exhibit 1 to the Registration
Statement (the "Underwriting Agreement").
<PAGE> 2
Board of Directors
McLeod, Inc.
May 30, 1996
Page 2
5. Resolutions of the Board of Directors of the Company adopted on
March 28, 1996 as certified by the Secretary of the
Company on the date hereof as then being complete, accurate and
in effect, relating to the issuance and sale of the Shares to
be sold by the Company and arrangements in connection
therewith.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity, accuracy and completeness of all documents submitted to us, and
the conformity with the original documents of all documents submitted to us as
certified, telecopied, photostatic, or reproduced copies. This opinion letter
is given, and all statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on the General
Corporation Law of the State of Delaware. We express no opinion herein as to
any other laws, statutes, regulations, or ordinances.
Based upon, subject to and limited by the foregoing, we are of the
opinion that following (i) final action of the Board of Directors of the
Company (or a duly appointed pricing committee thereof) approving the price of
the Shares, (ii) execution and delivery by the Company of the Underwriting
Agreement, (iii) effectiveness of the Registration Statement, (iv) issuance of
the Shares pursuant to the terms of the Underwriting Agreement and (v) receipt
by the Company of the consideration for the Shares to be sold by the Company
specified in the resolutions of the Board of Directors, the Shares to be sold
by the Company will be validly issued, fully paid and nonassessable under the
General Corporation Law of the State of Delaware.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter has
been prepared solely for your use in connection with the filing of the
Registration Statement on the date of this opinion letter and should not be
quoted in whole or in part or otherwise be referred to, nor filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of this firm.
We hereby consent to the filing of this opinion letter as Exhibit 5 to
the Registration Statement and to the reference to this firm under the caption
"Legal
<PAGE> 3
Board of Directors
McLeod, Inc.
May 30, 1996
Page 3
Matters" in the prospectus constituting a part of the Registration
Statement. In giving this consent, we do not thereby admit that we are an
"expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
HOGAN & HARTSON L.L.P.
<PAGE> 1
PORTIONS OF THIS EXHIBIT FOR WHICH
CONFIDENTIAL TREATMENT HAS BEEN
GRANTED ARE MARKED BY BRACKETS [ ].
EXHIBIT 10.47
WILMAX TSA#MCL-940211
TELECOMMUNICATIONS SERVICES AGREEMENT
This Telecommunications Services Agreement (hereinafter referred to as
the "Agreement" or the "TSA") is entered into this 14th day of March, 1994, by
and between WILTEL, INC., a Delaware corporation, with its principal office at
One Williams Center, Tulsa, Oklahoma, 74172 ("WilTel") and MCLEOD TELEMANAGEMENT
INC., a Iowa corporation, with its principal office at 221 3rd Avenue SE, Cedar
Rapids, Iowa 52401 ("Customer").
WITNESSETH:
WilTel agrees to provide and Customer agrees to accept switched
telecommunications services ("Switched Services") and other associated services
(collectively the "Services"), (i) as described in the Service Schedules
identified herewith, (ii) subject to the terms and conditions contained in this
Agreement, including without limitation those and conditions contained in the
Program Enrollment Terms ("PET") which are attached hereto and incorporated
herein by reference, and (iii) in conformity with each Service Request
(described below) which is accepted hereunder.
In the event of a conflict between the terms of this Agreement, the
PET, the Service Schedule/Pricing Exhibit and the Service Request(s), the
following order of precedence will prevail: (1) PET, (2) Service
Schedule/Pricing Exhibit, (3) the Agreement, and (4) Service Request(s).
NOW, THEREFORE, in consideration of the above premises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. TERM.
(A) Effective Date. This Agreement shall be effective between the
parties as of the date first written above (the "Effective Date") and
shall continue for the period of time set forth in the PET (the
"Term"). Upon the expiration of the Term, the Service in question
will continue to be provided subject to termination by either party
upon thirty (30) days prior written notice to the other party.
Customer shall be liable for all charges associated with actual usage
of the Service in question during the Term and any extension thereof.
(B) PET. The PET, as subscribed to by the parties, shall set forth
the Discount Schedule applicable to Switched Service charges due under
this Agreement, Customer's Minimum Monthly Commitment, if any, and
other information necessary to provide the Service under this
Agreement.
(C) Start of Service. WilTel's obligation to provide and
Customer's obligation to accept and pay for non-usage sensitive
charges for Service shall be binding to the extent provided for in
this Agreement upon the submission of an acceptable Service Request to
WilTel by Customer. Customer's obligation to pay for usage sensitive
charges for Switched Services shall commence with respect to any
Service as of the earlier of (i) the "Requested Service Date" set
forth in each Service Request, or (ii) the date the Service in
question is made available to Customer and used ("Start of Service").
Start of Service for particular Services shall be further described in
the Service Schedule relevant to the Switched Service in question.
(D) Service Schedules. Services to be provided under this
Agreement shall be described in the WilTel Service Schedule which is
subscribed to by authorized representatives of WilTel and
1/14/94 Page 1 of 10 CONFIDENTIAL
<PAGE> 2
Customer (collectively referred to as the "Service Schedules"). Each
Service Schedule shall become a part of this Agreement to the extent
that it describes the particular Services therefor, specific terms and
other information necessary or appropriate for WilTel to provide such
Service(s) to Customer.
(E) Service Requests. Customer's requests to initiate or cancel
Services shall be described in an appropriate WilTel Service Request
("Service Requests"). Service Requests may consist of machine
readable tapes, facsimiles or other means approved by WilTel.
Further, Service Requests shall specify all reasonable information, as
determined by WilTel, necessary or appropriate for WilTel to provide
the Service(s) in question, which shall include without limitation,
the type, quantity and end point(s) (when necessary) of circuits
comprising a Service Interconnection as described in the applicable
Service Schedules, or automatic number identification ("ANI")
information relevant to the Service(s), the Requested Service Date,
and charges, if any, relevant to the Services described in the Service
Request. After WilTel's receipt and verification of a valid Service
Request for SWITCHED Service (as defined in the Service Schedule)
requiring a change in the primary interexchange carrier ("PIC"),
WilTel agrees to (i) submit the ANI(s) relevant to such Service
Requests to the following local exchange carriers ("LECs") (with which
WilTel currently has electronic interface capabilities) within ten
(10) days: Ameritech, Bell Atlantic, BellSouth, Nynex, Pacific Bell,
Southwestern Bell, US West, GTE and United, and (ii) submit the ANI(s)
relevant to such Service Requests to those LECs with which WilTel does
not have electronic interface capabilities within a reasonable time.
2. Cancellation.
(A) Cancellation Charge. At any time after the Effective Date,
Customer may cancel this Agreement if Customer provides written
notification thereof to WilTel not less than thirty (30) days prior to
the effective date of cancellation. In such case (or in the event
WilTel terminates this Agreement as provided in Section 8), Customer
shall pay to WilTel all charges for Service provided through the
effective date of such cancellation plus a cancellation charge (the
"Cancellation Charge") equal to one hundred percent (100%) of the
Minimum Monthly Commitment, if any, (as described in the PET) that
would have become due for the unexpired portion of the Term.
(B) Liquidated Damages. It is agreed that WilTel's damages in the
event Customer cancels Service shall be difficult or impossible to
ascertain. The provision for a cancellation charge in Subsection 2(A)
above is intended, therefore, to establish liquidated damages in the
event of a cancellation and is not intended as a penalty.
(C) Cancellation Without Charge. Notwithstanding anything to the
contrary contained in Subsection 2(A) above, Customer may cancel this
Agreement without incurring any cancellation charge if (i) WilTel
fails to provide a network as warranted in Section 9 below; (ii)
WilTel fails to deliver call detail records promptly based on the
frequency selected by Customer (i.e., monthly, weekly or daily); or
(iii) WilTel fails to submit ANI(s) relevant to such Service Requests
to the LECs within the time period described in Subsection 1(E) above.
Provided, however, Customer must give WilTel written notice of any
such default and an opportunity to cure such default within five (5)
days of the notice. In the event WilTel fails to cure any such
default within the five-day period on more than three (3) occasions
within any six (6) month period, Customer may cancel this Agreement
without incurring any cancellation charge.
1/14/94 Page 2 of 10 CONFIDENTIAL
<PAGE> 3
3. Customer's End Users.
(A) End Users. Customer will obtain and upon WilTel's request
provide WilTel (within two (2) business days of the date of the
request) a written Letter of Agency ("LOA") acceptable to WilTel [or
with any other means approved by the Federal Communications Commission
("FCC")], for each ANI indicating the consent of the end users of
Customer ("End Users") to be served by Customer and transferred (by
way of change of such End User's designated PIC) to the WilTel network
prior to order processing. Each LOA will provide, among other things,
that the End Users have consented to the transfer being performed by
Customer or Customer's designee. When applicable, Customer will be
responsible for notifying End Users, in writing (or by any other means
approved by the FCC) that (i) a transfer charge will be reflected on
their LEC bill for effecting a change in their primary interexchange
carrier ("PIC"), (ii) the entity name under which their interstate,
intrastate and/or operator services will be billed (if different from
Customer), and (iii) the "primary" telephone number(s) to be used for
maintenance and questions concerning their long distance service
and/or billing. Customer agrees to send WilTel a copy of the
documentation Customer uses to satisfy the above requirements promptly
upon request of WilTel. WilTel may change the foregoing requirements
for Customer's confirming orders and/or for notifying End Users
regarding the transfer charge at any time in order to conform with
applicable FCC and state regulations. Provided, however, Customer
will be solely responsible for ensuring that the transfer of End Users
to the WilTel network conforms with applicable FCC and state
regulations, including without limitation, the regulations established
by the FCC with respect to verification of orders for long distance
service generated by telemarketing as promulgated in 47 C.F.R., Part
64, Subpart K, Section 64.1100 or any successor regulation(s).
(B) Transfer Charges/Disputed Transfers. Customer agrees that it
is responsible for (i) all charges incurred by WilTel to change the
PIC of End Users to the WilTel network, (ii) all charges incurred by
WilTel to change End Users back to their previous PIC arising from
disputed transfers to the WilTel network plus an administrative charge
equal to twenty percent (20%) of such charges, and (iii) any other
damages suffered by or awards against WilTel resulting from disputed
transfers.
(C) Excluded ANIs. WilTel has the right to reject any ANI supplied
by Customer for any of the following reasons: (i) WilTel is not
authorized to provide or does not provide long distance services in
the particular jurisdiction in which the ANI is located, (ii) a
particular ANI submitted by Customer is not in proper form, (iii)
Customer is not certified to provide long distance services in the
jurisdiction in which the ANI is located, (iv) Customer is in default
of this Agreement, (v) Customer fails to cooperate with WilTel in
implementing reasonable verification processes determined by WilTel to
be necessary or appropriate in the conduct of business, or (vi) any
other circumstance reasonably determined by WilTel which could
adversely affect WilTel's performance under this Agreement or WilTel's
general ability to transfer its other customers or other end users to
the WilTel network, including without limitation, WilTel's ability to
electronically effect PIC changes with the LECs. In the event WilTel
rejects an ANI, WilTel will notify Customer as soon as possible of its
decision specifically describing the rejected ANI and the reason(s)
for rejecting that ANI, and will not incur any further liability under
this Agreement with regard to that ANI. Further, any ANI requested by
Customer for Switched Service may be deactivated by WilTel if no
Switched Service billings relevant thereto are generated in any three
(3) consecutive calendar month/billing periods. WilTel will be under
no obligation to accept ANIs within the three (3) full calendar month
period preceding the scheduled expiration of the Term.
1/14/94 Page 3 of 10 CONFIDENTIAL
<PAGE> 4
(D) Records. Customer will maintain documents and records
("Records") supporting Customer's re-sale of Switched Service,
including, but not limited to, appropriate and valid LOAs from End
Users for a period of not less than 12 months or such other longer
period as may be required by applicable law, rule or regulation.
Customer shall indemnify WilTel for any costs, charges or expenses
incurred by WilTel arising from disputed PIC selections involving
Switched Service to be provided to Customer for which Customer cannot
produce an appropriate LOA relevant to the ANI and PIC charge in
question, or when WilTel is not reasonably satisfied that the validity
of a disputed LOA has been resolved.
(E) Customer Service. Customer will be solely responsible for
billing the End Users and providing the End Users with customer
service. Customer agrees to immediately notify WilTel in the event an
End User notifies Customer of problems associated with the Service,
including without limitation, excess noise, echo, or loss of Service.
4. CUSTOMER'S RESPONSIBILITIES.
(A) Expedite Charges. In the event Customer requests expeditious
Service and/or changes to Service Orders and WilTel agrees to such
request, WilTel will pass through the charges assessed by any
supplying parties (e.g., local access providers) involved at the same
rate to Customer. WilTel may further condition its performance of
such request upon Customer's payment of additional charges to WilTel.
(B) Fraudulent Calls. Customer shall indemnify and hold WilTel
harmless from all costs, expenses, claims or actions arising from
fraudulent calls of any nature which may comprise a portion of the
Service to the extent that the party claiming the call(s) in question
to be fraudulent is (or had been at the time of the call) an End User
of the Service through Customer or an end user of the Service through
Customer's distribution channels. Customer shall not be excused from
paying WilTel for Service provided to Customer or any portion thereof
on the basis that fraudulent calls comprised a corresponding portion
of the Service. In the event WilTel discovers fraudulent calls being
made (or reasonably believes fraudulent calls are being made), nothing
contained herein shall prohibit WilTel from taking immediate action
(without notice to Customer) that is reasonably necessary to prevent
such fraudulent calls from taking place, including without limitation,
denying Service to particular ANIs or terminating Service to or from
specific locations.
5. CHARGES AND PAYMENT TERMS.
(A) Payment. WilTel billings for Service are made on a monthly
basis (or such other basis as may be mutually agreed to by the
parties) following Start of Service. Subject to Subsection 5(D)
below, Service shall be billed at the rates set forth on the Pricing
Exhibit executed by the parties and attached hereto and incorporated
herewith, and Service Requests, as the case may be. Discounts, if
any, applicable to the rates for certain Switched Services are set
forth in the PET. Customer will pay each WilTel invoice in full for
Switched Service within thirty (30) days of the invoice date set forth
on each WilTel invoice to Customer ("DUE DATE"). If payment is not
received by WilTel on or before the Due Date, Customer shall also pay
a late fee in the amount of the lesser of one and one-half percent (1
1/2%) of the unpaid balance of the Service charges per month or the
maximum lawful rate under applicable state law.
(B) Definitions. Time of day rate periods (including WilTel
Recognized National Holidays) will be as described in WilTel's F.C.C.
Tariff No. 5.
1/14/94 Page 4 of 10 CONFIDENTIAL
<PAGE> 5
(C) Taxes. Customer acknowledges and understands that WilTel
computes all charges herein exclusive of any applicable federal, state
or local use, excise, gross receipts, sales and privilege taxes,
duties, fees or similar liabilities (other than general income or
property taxes), whether charged to or against WilTel or Customer
because of the Service furnished to Customer ("ADDITIONAL CHARGES").
Customer shall pay such Additional Charges in addition to all other
charges provided for herein.
(D) Modification of Charges. WilTel reserves the right to
eliminate Service offerings and/or modify charges for Service
offerings (which charge modifications shall not exceed then-current
generally available WilTel charges for comparable services), upon not
less than sixty (60) days prior notice to Customer, which notice will
state the effective date for the charge modification. In the event
WilTel notifies Customer of an increase in the charges, Customer may
terminate this Agreement, without incurring a cancellation charge only
with respect to the Service offering affected by the increase in
charges. In order to cancel that offering, Customer must notify
WilTel, in writing, at least thirty (30) days prior to the effective
date of the increase in charges. Further, in the event Customer
cancels its subscription to a Switched Service offering as described
in this Subsection 5(D), WilTel and Customer agree to negotiate in
good faith concerning Customer's Minimum Monthly Commitment, if any,
described in the PET.
(E) Billing Disputes. Notwithstanding the foregoing, late fees
shall apply (but shall not be due and payable for a period of sixty
(60) days following the Due Date therefor) for amounts reasonably
disputed by Customer, provided Customer: (i) pays all undisputed
charges on or before the Due Date, (ii) presents a written statement
of any billing discrepancies to WilTel in reasonable detail on or
before the Due Date of the invoice in question, and (iii) negotiates
in good faith with WilTel for the purpose of resolving such dispute
within said sixty (60) day period. In the event such dispute is
resolved in favor of WilTel, Customer agrees to pay WilTel the
disputed amounts together with any applicable late fees within ten
(10) days of the resolution. In the event such dispute is resolved in
favor of Customer, Customer will receive a credit for the disputed
charges in question and the applicable late fees. In the event the
dispute can not be resolved within such sixty (60) day period (unless
WilTel has agreed in writing to extend such period) all disputed
amounts together with late fees shall become due and payable, and this
provision shall not be construed to prevent Customer from pursuing any
available legal remedies. WilTel shall not be obligated to consider
any Customer notice of billing discrepancies which are received by
WilTel more than sixty (60) days following the Due Date of the invoice
in question.
(F) Suspension of Service. In the event charges due pursuant to
WilTel's invoice are not paid in full by the Due Date, WilTel shall
have the right, after giving Customer ten (10) days prior notice (in
which case suspension may be effective as of the day following the Due
Date), to suspend all or any portion of the Service to Customer
("SUSPENSION NOTICE") until such time (designated by WilTel in its
Suspension Notice) as Customer has paid in full all charges then due
to WilTel, including any late fees. Following such payment, WilTel
shall reinstitute Service to Customer only when Customer provides
WilTel with satisfactory assurance of Customer's ability to pay for
Service (i.e., a deposit, letter of credit or other means acceptable
to WilTel) and Customer's advance payment of the cost of reinstituting
Service. If Customer fails to make the required payment by the date
set forth in the Suspension Notice, Customer will be deemed to have
canceled the Service suspended effective as of the date of suspension.
Such cancellation shall not relieve Customer for payment of applicable
cancellation charges as described in Section 2.
6. CREDIT: Customer's execution of this Agreement signifies Customer's
acceptance of WilTel's initial and continuing credit approval procedures and
policies. WilTel reserves the right to withhold
1/14/94 Page 5 of 10 CONFIDENTIAL
<PAGE> 6
initiation or full implementation of Service under this Agreement pending
WilTel's initial satisfactory credit review and approval thereof which may be
conditioned upon terms specified by WilTel, including, but not limited to,
security for payments due hereunder in the form of a cash deposit or other
means. WilTel reserves the right to modify its requirements, if any, with
respect to any security or other assurance provided by Customer for payments
due hereunder in light of Customer's actual usage when compared to projected
usage levels upon which any security or assurance requirement was based.
7. CREDITWORTHINESS: If at anytime there is a material adverse change in
Customer's creditworthiness, then in addition to any other remedies available
to WilTel, WilTel may elect, in its sole discretion, to exercise one or more of
the following remedies: (i) cause Start of Service for Service described in a
previously executed Service Request to be withheld; (ii) cease providing
Service pursuant to a Suspension Notice; (iii) decline to accept a Service
Request or other requests from Customer to provide Service which WilTel may
otherwise be obligated to accept and/or (iv) condition its provision of Service
or acceptance of a Service Request on Customer's assurance of payment which
shall be a deposit or such other means to establish reasonable assurance of
payment. An adverse material change in Customer's creditworthiness shall
include, but not be limited to: (i) Customer's default of its obligations to
WilTel under this or any other agreement with WilTel; (ii) failure of Customer
to make full payment of charges due hereunder on or before the Due Date on
three (3) or more occasions during any period of twelve (12) or fewer months or
Customer's failure to make such payment on or before the Due Date in any two
(2) consecutive months; (iii) acquisition of Customer (whether in whole or by
majority or controlling interest) by an entity which is insolvent, which is
subject to bankruptcy or insolvency proceedings, which owes past due amounts to
WilTel or any entity affiliated with WilTel or which is a materially greater
credit risk than Customer; or, (iv) Customer's being subject to or having filed
for bankruptcy or insolvency proceedings or the legal insolvency of Customer.
8. REMEDIES FOR BREACH. In the event Customer is in breach of this
Agreement, including without limitation, failure to pay charges due hereunder
by the date stated in the Suspension Notice described in Subsection 5(F),
WilTel shall have the right, after giving Customer five (5) days prior notice,
and in addition to foreclosing any security interest WilTel may have, to (i)
terminate this Agreement; (ii) withhold billing information from Customer;
and/or (iii) contact the End Users (for whom calls are originated and
terminated solely over facilities comprising the WilTel network) directly and
bill such End Users directly until such time as WilTel has been paid in full
for the amount owed by Customer. If Customer fails to make payment by the date
stated in the Suspension Notice and WilTel, after giving Customer five (5) days
prior notice, terminates this Agreement as provided in this Section 8, such
termination shall not relieve Customer for payment of applicable cancellation
charges as described in Section 2 above.
9. WARRANTY. WilTel will use reasonable efforts under the circumstances
to maintain its overall network quality. The quality of Service provided
hereunder shall be consistent with telecommunications common carrier industry
standards, government regulations and sound business practices. WILTEL MAKES
NO OTHER WARRANTIES ABOUT THE SERVICE PROVIDED HEREUNDER, EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE,
10. LIABILITY; GENERAL INDEMNITY; REIMBURSEMENT.
(A) Limited Liability. IN NO EVENT WILL EITHER PARTY HERETO BE
LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR
CONSEQUENTIAL LOSSES OR DAMAGES, INCLUDING WITHOUT LIMITATION, LOSS
OF REVENUE, LOSS OF CUSTOMERS OR CLIENTS, LOSS OF GOODWILL OR
1/14/94 Page 6 of 10 CONFIDENTIAL
<PAGE> 7
LOSS OF PROFITS ARISING IN ANY MANNER FROM THIS AGREEMENT AND THE
PERFORMANCE OR NONPERFORMANCE OF OBLIGATIONS HEREUNDER.
(B) General Indemnity. In the event parties other than Customer
(e.g., Customer's End Users) shall have use of the Service through
Customer, then Customer agrees to forever indemnify and hold WilTel,
its affiliated companies and any third-party provider or operator of
facilities employed in provision of the Service harmless from and
against any and all claims, demands, suits, actions, losses, damages,
assessments or payments which those parties may assert arising out of
or relating to any defect in the Service.
(C) Reimbursement. Customer agrees to reimburse WilTel for all
reasonable costs and expenses incurred by WilTel due to WilTel's
direct participation (either as a party or witness) in any
administrative, regulatory or criminal proceeding concerning Customer
if WilTel's involvement in said proceeding is based solely on WilTel's
provision of Services to Customer.
11. FORCE MAJEURE. If WilTel's performance of this Agreement or any
obligation hereunder is prevented, restricted or interfered with by causes
beyond its reasonable control including, but not limited to, acts of God, fire,
explosion, vandalism, cable cut, storm or other similar occurrence, any law,
order, regulation, direction, action or request of the United States
government, or state or local governments, or of any department, agency,
commission, court, bureau, corporation or other instrumentality of any one or
more such governments, or of any civil or military authority, or by national
emergency, insurrection, riot, war, strike, lockout or work stoppage or other
labor difficulties, or supplier failure, shortage, breach or delay, then WilTel
shall be excused from such performance on a day-to-day basis to the extent of
such restriction or interference. WilTel shall use reasonable efforts under
the circumstances to avoid or remove such causes or nonperformance and shall
proceed to perform with reasonable dispatch whenever such causes are removed or
cease.
12. STATE CERTIFICATION. Customer warrants that in all jurisdictions in
which it provides long distance services that require certification, it has
obtained the necessary certification from the appropriate governmental
authority. Further, if required by WilTel, Customer agrees to provide proof of
such certification acceptable to WilTel. In the event Customer is prohibited,
either on a temporary or permanent basis, from conducting its
telecommunications operations in a given state, Customer shall (i) immediately
notify WilTel by facsimile, and (ii) send written notice to WilTel within
twenty-four (24) hours of such prohibition.
13. INTERSTATE/INTRASTATE SERVICE. Except with respect to Switched
Service specifically designated as intrastate Service or international Service,
the rates provided to Customer in a Service Schedule are applicable only to
Switched Service if such Service is used for carrying interstate
telecommunications (i.e., Service subject to FCC jurisdiction). WilTel shall
not be obligated to provide Switched Service with end points within a single
state or Switched Service which originates/terminates at points both of which
are situated within a single state. In those states where WilTel is authorized
to provide intrastate service (i.e., telecommunications transmission services
subject to the jurisdiction of state regulatory authorities), WilTel will, at
its option, provide intrastate Service pursuant to applicable state laws,
regulations and applicable tariff, if any, filed by WilTel with state
regulatory authorities as required by applicable law.
14. AUTHORIZED USE OF WILTEL NAME. Without WilTel's prior written
consent, Customer shall not (i) refer to itself as an authorized representative
of WilTel whenever it refers to the Services in promotional, advertising or
other materials, or (ii) use WilTel's logos, trade marks, service marks, or any
variations thereof in any of its promotional, advertising or other materials.
Additionally, Customer shall provide to WilTel for its prior review and written
approval, all promotions, advertising or other
1/14/94 Page 7 of 10 CONFIDENTIAL
<PAGE> 8
materials or activity using or displaying WilTel's name or the Services to be
provided by WilTel. Customer agrees to change or correct, at Customer's
expense, any such material or activity which WilTel, in its sole judgment,
determines to be inaccurate, misleading or otherwise objectionable. Customer is
explicitly authorized to only use the following statements in its sales
literature: (i) "Customer utilizes the WilTel network", (ii) "Customer utilizes
WilTel's facilities" (iii) "WilTel provides only the network facilities", and
(iv) "WilTel is our network services provider".
15. NOTICES. Notices under this Agreement shall be in writing and
delivered to the person identified below at the offices of the parties as they
appear below or as otherwise provided for by proper notice hereunder. Customer
shall notify WilTel in writing if Customer's billing address is different than
the address shown below. The effective date for any notice under this
Agreement shall be the date of actual receipt of such notice by the appropriate
party, notwithstanding the date of mailing.
<TABLE>
<S> <C> <C> <C>
IF TO WILTEL: WilTel, Inc. IF TO CUSTOMER: McLeod Telemanagement, Inc.
One Williams Center, 28th Flr 221 3rd Ave. S.E.
Tulsa, OK 74172 Cedar Rapids, IA 52401
Attn: Carrier Sales Dept. Attn: Kirk E. Kaalberg
</TABLE>
16. NO-WAIVER. No term or provision of this Agreement shall be deemed
waived and no breach or default shall be deemed excused unless such waiver or
consent shall be in writing and signed by the party claimed to have waived or
consented. A consent to waiver of or excuse for a breach or default by either
party, whether express or implied, shall not constitute a consent to, waiver
of, or excuse for any different or subsequent breach or default.
17. PARTIAL INVALIDITY; GOVERNMENT ACTION.
(A) Partial Invalidity. If any part of any provision of this
Agreement or any other agreement, document or writing given pursuant
to or in connection with this Agreement shall be invalid or
unenforceable under applicable law, rule or regulation, that part
shall be ineffective to the extent of such invalidity only, without in
any way affecting the remaining parts of that provision or the
remaining provisions of this Agreement. In such event, Customer and
WilTel will negotiate in good faith with respect to any such invalid
or unenforceable part to the extent necessary to render such part
valid and enforceable.
(B) Goverment Action. Upon thirty (30) days prior notice, either
party shall have the right, without liability to the other, to cancel
an affected portion of the Service if any material rate or term
contained herein and relevant to the affected Service is substantially
changed (to the detriment of the terminating party) or found to be
unlawful or the relationship between the parties hereunder is found to
be unlawful by order of the highest court of competent jurisdiction to
which the matter is appealed, the FCC, or other local, state or
federal government authority of competent jurisdiction.
18. EXCLUSIVE REMEDIES. Except is otherwise specifically provided for
herein, the remedies set forth in this Agreement comprise the exclusive
remedies available to either party at law or in equity.
19. USE OF SERVICE. Upon WilTel's acceptance of a Service Request
hereunder, WilTel will provide the Service specified therein to Customer upon
condition that the Service shall not be used for any unlawful purpose. The
provision of Service will not create a partnership or joint venture between the
parties or result in a joint communications service offering to any third
parties, and WilTel and Customer agree that this Agreement, to the extent it is
subject to FCC regulation, is an inter-carrier agreement
1/14/94 Page 8 of 10 CONFIDENTIAL
<PAGE> 9
which is not subject to the filing requirements of Section 211(a) of the
Communications Act of 1934 (47 U.S.C. Section 211(a)) as implemented in
47 C.F.R. Section 43-51.
20. CHOICE OF LAWS; FORUM.
(A) Law. This Agreement shall be construed under the laws of the
State of Oklahoma without regard to choice of law principles.
(B) Forum. Any legal action or proceeding with respect to this
Agreement may be brought in the Courts of the State of Oklahoma in and
for the County of Tulsa or the United States of America for the
Northern District of Oklahoma. By execution of this Agreement, both
Customer and WilTel hereby submit to such jurisdiction, hereby
expressly waiving whatever rights may correspond to either of them by
reason of their present or future domicile. In furtherance of the
foregoing, Customer and WilTel hereby agree to service by U.S. Mail at
the notice addresses referenced in Section 15. Such service shall be
deemed effective upon the earlier of actual receipt or seven (7) days
following the date of posting.
21. PROPRIETARY INFORMATION.
(A) Confidential Information. The parties understand and
agree that the terms and conditions of this Agreement, all documents
referenced (including invoices to Customer for Service provided
hereunder) herein, communications between the parties regarding this
Agreement or the Service to be provided hereunder (including price
quotes to Customer for any Service proposed to be provided or actually
provided hereunder), as well as such information relevant to any other
agreement between the parties (COLLECTIVELY "CONFIDENTIAL
INFORMATION"), are confidential as between Customer and WilTel.
(B) Limited Disclosure. A party shall not disclose Confidential
Information unless subject to discovery or disclosure pursuant to
legal process, or to any other party other than the directors,
officers, and employees of a party or a party's agents including their
respective brokers, lenders, insurance carriers or bona fide
prospective purchasers who have specifically agreed in writing to
nondisclosure of the terms and conditions hereof. Any disclosure
hereof required by legal process shall only be made after providing
the non-disclosing party with notice thereof in order to permit the
non-disclosing party to seek an appropriate protective order or
exemption. Violation by a party or its agents of the foregoing
provisions shall entitle the non-disclosing party, at its option, to
obtain injunctive relief without a showing of irreparable harm or
injury and without bond.
(C) Press Releases. The parties further agree that any press
release, advertisement or publication generated by a party regarding
this Agreement, the Service provided hereunder or in which a party
desires to mention the name of the other party or the other party's
parent or affiliated company(ies), will be submitted to the
non-publishing party for its written approval prior to publication.
(D) Survival of Confidentiality. The provisions of this Section 21
will be effective as of the date of this Agreement and remain in full
force and effect for a period which will be the longer of (i) one (1)
year following the date of this Agreement, or (ii) one (1) year from
the termination of all Service hereunder.
22. SUCCESSORS AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors or
assigns, provided, however, that Customer shall not
1/14/94 Page 9 of 10 CONFIDENTIAL
<PAGE> 10
assign or transfer its rights or obligations under this Agreement without the
prior written consent of WilTel, which consent shall not be unreasonably
withheld, and further provided that any assignment or transfer without such
consent shall be void.
23. GENERAL.
(A) Survival of Terms. The terms and provisions contained in this
Agreement that by their sense and context are intended to survive the
performance thereof by the parties hereto shall so survive the
completion of performance and termination of this Agreement,
including, without limitation, provisions for indemnification and the
making of any and all payments due hereunder.
(B) Headings. Descriptive headings in this Agreement are for
convenience only and shall not affect the construction of this
Agreement.
(C) Industry Terms. Words having well-known technical or trade
meanings shall be so construed, and all listings of items shall not be
taken to be exclusive, but shall include other items, whether similar
or dissimilar to those listed, as the context reasonably requires.
(D) Rule of Construction. No rule of construction requiring
interpretation against the drafting party hereof shall apply in the
interpretation of this Agreement.
24. ENTIRE AGREEMENT. This Agreement consists of (i) all the terms and
conditions contained herein, and, (ii) all documents incorporated herein
specifically by reference. This Agreement constitutes the complete and
exclusive statement of the understandings between the parties and supersedes
all proposals and prior agreements (oral or written) between the parties
relating to Service provided hereunder. No subsequent agreement between the
parties concerning the Service shall be effective or binding unless it is made
in writing and subscribed to by authorized representatives of Customer and
WilTel.
IN WITNESS WHEREOF, the parties have executed this Telecommunications
Services Agreement on the date first written above.
WILTEL INC. MCLEOD TELEMANAGEMENT, INC.
BY: [SIG] [SIG]
-------------------------------- ------------------------------------
(SIGNATURE) (SIGNATURE)
Robert Brejcha Kirk E. Kaalberg
-------------------------------- ------------------------------------
(PRINT NAME) (PRINT NAME)
Director Carrier Sales Senior Vice President
-------------------------------- ------------------------------------
(TITLE) (TITLE)
1/14/94 Page 10 of 10 CONFIDENTIAL
<PAGE> 11
PORTIONS OF THIS EXHIBIT FOR WHICH
CONFIDENTIAL TREATMENT HAS BEEN
GRANTED ARE MARKED BY BRACKETS [ ].
WILMAX
PRICING EXHIBIT
[CARRIER]
This Pricing Exhibit is made as of the 14th day of March, 1994, by and
between WilTel, Inc. ("WilTel") and McLeod Telemanagement, Inc. ("Customer")
and is part of their agreement for switched services, identified as
TSA#MCL-940211 (the "Agreement").
A. TERMINATION SERVICE
INTERSTATE RATES PER MINUTE
[ ] Day, [ ] Nonday within the 48 contiguous United States except
with respect to termination in the Supersaver LATAs listed below.
INTERSTATE EXTENDED RATES PER MINUTE
[ ] Day, [ ] Nonday from the 48 contiguous United States to Hawaii,
Alaska, Puerto Rico and the United States Virgin Islands.
INTERSTATE SUPERSAVER RATES PER MINUTE
[ ] Day, [ ] Nonday. These rates are only available and only apply
to Interstate TERMINATION Service calls to the following Supersaver
LATAs set forth below (i.e., Intrastate TERMINATION Service calls will
not be subject to Supersaver Rates):
Atlanta, GA (LATA 438)
Boston, MA (LATA 128)
Chicago, IL (LATA 358)
Dallas, TX (LATA 552)
Denver, CO (LATA 656)
Houston, TX (LATA 560)
Kansas City, MO (LATA 524)
Las Vegas, NV (LATA 721)
Los Angeles, CA (LATA 730)
Miami, FL (LATA 460)
Minneapolis, MN (LATA 628)
New York, NY (LATA 132)
Newark, NJ (LATA 224)
Philadelphia, PA (LATA 228)
St. Louis, MO (LATA 520)
San Francisco, CA (LATA 722)
Seattle, WA (LATA 674)
Washington, DC (LATA 236)
INTRASTATE RATES PER MINUTE [NOT SUBJECT TO DISCOUNT]
Intrastate charges for calls and directory assistance shall be
accordance with WilTel's tariffed rates for WilMAX Extended Network
Termination Service.
1/14/94 Page 1 of 8 CONFIDENTIAL
<PAGE> 12
CANADA RATES (1+) [NOT SUBJECT TO DISCOUNT]
<TABLE>
<CAPTION>
================================================================================================
Metro Area or NPA Rate Period 1st 30 Sec. Add'l 6 Sec.
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Montreal Day [ ] [ ]
Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
Ottawa Day [ ] [ ]
Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
Toronto Day [ ] [ ]
Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
Vancouver Day [ ] [ ]
Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
Guelph, Hamilton, London, Day [ ] [ ]
Kitchner Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
NPA 416, 514, 519, 613, Day [ ] [ ]
819 Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
All other areas Day [ ] [ ]
Nonday [ ] [ ]
================================================================================================
</TABLE>
MEXICO RATES (1+) [NOT SUBJECT TO DISCOUNT]
<TABLE>
<CAPTION>
=================================================
Band* Rate Period Rate
-------------------------------------------------
<S> <C> <C>
Band 1 Day [ ]
Nonday [ ]
-------------------------------------------------
Band 2 Day [ ]
Nonday [ ]
-------------------------------------------------
Band 3 Day [ ]
Nonday [ ]
-------------------------------------------------
Band 4 Day [ ]
Nonday [ ]
-------------------------------------------------
Band 5 Day [ ]
Nonday [ ]
-------------------------------------------------
Band 6 Day [ ]
Nonday [ ]
-------------------------------------------------
Band 7 Day [ ]
nonday [ ]
-------------------------------------------------
Band 8 Day [ ]
Nonday [ ]
=================================================
</TABLE>
* As defined in WilTel's F.C.C. Tariff No. 2.
1/14/94 Page 2 of 8 CONFIDENTIAL
<PAGE> 13
B. 800 ORIGINATION SERVICE
INTERSTATE RATES PER MINUTE
[ ] Day, [ ] Nonday within the 48 contiguous United States.
INTERSTATE EXTENDED RATES PER MINUTE
[ ] Day, [ ] Nonday from Alaska to the 48 contiguous United States.
[ ] Day, [ ] Nonday from Hawaii to the 48 contiguous United States.
[ ] Day, [ ] Nonday from Puerto Rico and the United States Virgin
Islands to the 48 contiguous United States.
CANADA RATES [NOT SUBJECT TO DISCOUNT]
[ ] Day, [ ] Nonday from all locations in Canada to the 48
contiguous United States.
INTRASTATE SERVICE RATES PER MINUTE [NOT SUBJECT TO DISCOUNT]
Intrastate charges for calls shall be in accordance with WilTel's
tariffed rates for WilMAX Extended Network 800 Service.
C. SWITCHED SERVICE
INTERSTATE (1+ AND 800) RATES PER MINUTE
[ ] Day, [ ] Nonday within the 48 contiguous United States.
INTERSTATE (1+) EXTENDED RATES PER MINUTE
[ ] Day, [ ] Nonday from the 48 contiguous United States to Alaska,
Hawaii, Puerto Rico and the United States Virgin Islands.
INTERSTATE (800) EXTENDED RATES PER MINUTE [NOT SUBJECT TO DISCOUNT]
[ ] Day, [ ] Nonday from Alaska to the 48 contiguous United States.
[ ] Day, [ ] Nonday from Hawaii to the 48 contiguous United States.
[ ] Day, [ ] Nonday from Puerto Rico to the 48 contiguous United
States.
[ ] Day, [ ] Nonday from the United States Virgin Islands to the 48
contiguous United States.
CANADA RATES (800) [NOT SUBJECT TO DISCOUNT]
[ ] Day, [ ] Nonday from all locations in Canada to the 48
contiguous United States.
1/14/94 Page 3 of 8 CONFIDENTIAL
<PAGE> 14
CANADA RATES (1+) [NOT SUBJECT TO DISCOUNT]
<TABLE>
<CAPTION>
==================================================================================================
Metro Area or NPA Rate Period 1st 30 Sec. Add'l 6 Sec.
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Montreal Day [ ] [ ]
Nonday [ ] [ ]
- --------------------------------------------------------------------------------------------------
Ottawa Day [ ] [ ]
Nonday [ ] [ ]
- --------------------------------------------------------------------------------------------------
Toronto Day [ ] [ ]
Nonday [ ] [ ]
- --------------------------------------------------------------------------------------------------
Vancouver Day [ ] [ ]
Nonday [ ] [ ]
- --------------------------------------------------------------------------------------------------
Guelph, Hamilton, London, Day [ ] [ ]
Kitchner Nonday [ ] [ ]
- --------------------------------------------------------------------------------------------------
NPA 416, 514, 519, 613, Day [ ] [ ]
819 Nonday [ ] [ ]
- --------------------------------------------------------------------------------------------------
All other areas Day [ ] [ ]
Nonday [ ] [ ]
==================================================================================================
</TABLE>
MEXICO RATES (1+) [NOT SUBJECT TO DISCOUNT]
<TABLE>
<CAPTION>
==============================================
Band* Rate Period Rate
----------------------------------------------
<S> <C> <C>
Band 1 Day [ ]
Nonday [ ]
----------------------------------------------
Band 2 Day [ ]
Nonday [ ]
----------------------------------------------
Band 3 Day [ ]
Nonday [ ]
----------------------------------------------
Band 4 Day [ ]
Nonday [ ]
----------------------------------------------
Band 5 Day [ ]
Nonday [ ]
----------------------------------------------
Band 6 Day [ ]
Nonday [ ]
----------------------------------------------
Band 7 Day [ ]
nonday [ ]
----------------------------------------------
Band 8 Day [ ]
Nonday [ ]
==============================================
</TABLE>
* As defined in WilTel's F.C.C. Tariff No. 2.
1/14/94 Page 4 of 8 CONFIDENTIAL
<PAGE> 15
WILTEL'S TARIFFED INTRASTATE RATES PER MINUTE (1+ AND 800) (SUBJECT TO CHANGE
BY WILTEL) [NOT SUBJECT TO DISCOUNT]
<TABLE>
<CAPTION>
===================================================================
State Rate State Rate State Rate State Rate
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AL [ ] IN [ ] NH [ ] SC [ ]
- -------------------------------------------------------------------
AR [ ] KS [ ] NJ [ ] SD [ ]
- -------------------------------------------------------------------
AZ [ ] KY [ ] NM [ ] TN [ ]
- -------------------------------------------------------------------
CA [ ] LA [ ] NY [ ] TX [ ]
- -------------------------------------------------------------------
CO [ ] MA [ ] NC [ ] UT [ ]
- -------------------------------------------------------------------
CT [ ] MD [ ] ND [ ] VA [ ]
- -------------------------------------------------------------------
DE [ ] MI [ ] NV [ ] VT [ ]
- -------------------------------------------------------------------
FL [ ] MN [ ] OH [ ] WA [ ]
- -------------------------------------------------------------------
GA [ ] MO [ ] OK [ ] WI [ ]
- -------------------------------------------------------------------
IA [ ] MS [ ] OR [ ] WV [ ]
- -------------------------------------------------------------------
ID [ ] MT [ ] PA [ ] WY [ ]
- -------------------------------------------------------------------
IL [ ] NE [ ]
===================================================================
</TABLE>
D. DEDICATED ACCESS SERVICE
INTERSTATE (1+ AND 800) RATES PER MINUTE
[ ] Day, [ ] Nonday within the 48 contiguous United States.
INTERSTATE (1+) EXTENDED RATES PER MINUTE
[ ] Day, [ ] Nonday from the 48 contiguous United States to Alaska,
Hawaii, Puerto Rico and the United States Virgin Islands.
INTERSTATE (800) EXTENDED RATES PER MINUTE [NOT SUBJECT TO DISCOUNT]
[ ] Day, [ ] Nonday calls from Alaska to the 48 contiguous United
States.
[ ] Day, [ ] Nonday from Hawaii to the 48 contiguous United
States.
[ ] Day, [ ] Nonday from Puerto Rico to the 48 contiguous United
States.
[ ] Day, [ ] Nonday from the United States Virgin Islands to the 48
contiguous United States.
CANADA RATES (800) [NOT SUBJECT TO DISCOUNT]
[ ] Day, [ ] Nonday from all locations in Canada to the 48
contiguous United States.
1/14/94 Page 5 of 8 CONFIDENTIAL
<PAGE> 16
CANADA RATES (1+) [NOT SUBJECT TO DISCOUNT]
<TABLE>
<CAPTION>
================================================================================================
Metro Area or NPA Rate Period 1st 30 Sec. Add'l 6 Sec.
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Montreal Day [ ] [ ]
Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
Ottawa Day [ ] [ ]
Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
Toronto Day [ ] [ ]
Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
Vancouver Day [ ] [ ]
Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
Guelph, Hamilton, London, Day [ ] [ ]
Kitchner Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
NPA 416, 514, 519, 613, Day [ ] [ ]
819 Nonday [ ] [ ]
- ------------------------------------------------------------------------------------------------
All other areas Day [ ] [ ]
Nonday [ ] [ ]
================================================================================================
</TABLE>
MEXICO RATES (1+) [NOT SUBJECT TO DISCOUNT]
<TABLE>
<CAPTION>
=============================================
Band* Rate Period Rate
---------------------------------------------
<S> <C> <C>
Band 1 Day [ ]
Nonday [ ]
---------------------------------------------
Band 2 Day [ ]
Nonday [ ]
---------------------------------------------
Band 3 Day [ ]
Nonday [ ]
---------------------------------------------
Band 4 Day [ ]
Nonday [ ]
---------------------------------------------
Band 5 Day [ ]
Nonday [ ]
---------------------------------------------
Band 6 Day [ ]
Nonday [ ]
---------------------------------------------
Band 7 Day [ ]
nonday [ ]
---------------------------------------------
Band 8 Day [ ]
Nonday [ ]
=============================================
</TABLE>
* As defined in WilTel's F.C.C. Tariff No. 2.
1/14/94 Page 6 of 8 CONFIDENTIAL
<PAGE> 17
WILTEL'S TARIFFED INTRASTATE RATES PER MINUTE (1+ AND 800) (SUBJECT TO CHANGE
BY WILTEL) [NOT SUBJECT TO DISCOUNT]
<TABLE>
<CAPTION>
===================================================================
STATE RATE STATE RATE STATE RATE STATE RATE
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AL [ ] IN [ ] NH [ ] SC [ ]
- -------------------------------------------------------------------
AR [ ] KS [ ] NJ [ ] SD [ ]
- -------------------------------------------------------------------
AZ [ ] KY [ ] NM [ ] TN [ ]
- -------------------------------------------------------------------
CA [ ] LA [ ] NY [ ] TX [ ]
- -------------------------------------------------------------------
CO [ ] MA [ ] NC [ ] UT [ ]
- -------------------------------------------------------------------
CT [ ] MD [ ] ND [ ] VA [ ]
- -------------------------------------------------------------------
DE [ ] MI [ ] NV [ ] VT [ ]
- -------------------------------------------------------------------
FL [ ] MN [ ] OH [ ] WA [ ]
- -------------------------------------------------------------------
GA [ ] MO [ ] OK [ ] WI [ ]
- -------------------------------------------------------------------
IA [ ] MS [ ] OR [ ] WV [ ]
- -------------------------------------------------------------------
ID [ ] MT [ ] PA [ ] WY [ ]
- -------------------------------------------------------------------
IL [ ] NE [ ]
===================================================================
</TABLE>
E. TRAVEL CARD SERVICE
INTERSTATE SERVICE RATES PER MINUTE
[ ] Day, [ ] Nonday within the 48 contiguous United States.
Note: All TRAVEL CARD Service calls (other than Directory Assistance
calls) are subject to a $0.25 surcharge per call.
INTRASTATE TRAVEL CARD SERVICE RATES PER MINUTE [NOT SUBJECT TO
DISCOUNT]
Intrastate charges for calls shall be in accordance with the
applicable intrastate SWITCHED Service rate plus a $0.25 surcharge
per call.
CANADA RATES PER MINUTE [NOT SUBJECT TO DISCOUNT]
[ ] Day, [ ] NonDay for calls originating in the 48 contiguous
United States and terminating in Canada
1/14/94 Page 7 of 8 CONFIDENTIAL
<PAGE> 18
F. DIRECTORY ASSISTANCE SERVICE
INTERSTATE RATE PER CALL: $0.50
WILTEL'S TARIFFED INTRASTATE RATE PER CALL (SUBJECT TO CHANGE BY
WILTEL) [NOT SUBJECT TO DISCOUNT]: $0.60.
G. INTERNATIONAL SERVICE [NOT SUBJECT TO DISCOUNT]
See attached Schedule of applicable WilMAX International Rates.
IN WITNESS WHEREOF, THE PARTIES HAVE EXECUTED THIS PRICING EXHIBIT ON
THE DATE FIRST WRITTEN ABOVE.
WILTEL INC. MCLEOD TELEMANAGEMENT, INC.
BY: [SIG] [SIG]
-------------------------------- ------------------------------------
(SIGNATURE) (SIGNATURE)
Robert Brejcha Kirk E. Kaalberg
-------------------------------- ------------------------------------
(PRINT NAME) (PRINT NAME)
Director Carrier Sales Senior Vice President
-------------------------------- ------------------------------------
(TITLE) (TITLE)
1/14/94 Page 8 of 8 CONFIDENTIAL
<PAGE> 19
PORTIONS OF THIS EXHIBIT FOR WHICH
CONFIDENTIAL TREATMENT HAS BEEN
GRANTED ARE MARKED BY BRACKETS [ ].
WILMAX
SERVICE SCHEDULE
[CARRIER]
This Service Schedule is made as ____ of the day of March, 1994, by
and between WilTel, Inc. ("WILTEL") and McLeod Telemanagement, Inc,
("CUSTOMER") and is a part of their agreement for switched services, identified
as TSA#MCL-940211 ("THE AGREEMENT"). Neither Customer nor WilTel shall be
obligated with respect to the Service described below, nor any other condition
of Service until Customer has submitted and WilTel has accepted a Service
Request with respect to the particular Services.
1. WILMAX SERVICES: During the Service Term of the Agreement, WilTel will
provide the following Services (all as more particularly described herein), (i)
to and from the locations below, (ii) for the charges set forth in the Pricing
Exhibit dated concurrently herewith, and (iii) subject to the Discount Schedule
set forth in the Program Enrollment Terms:
(a) WilMAX Extended Network Termination Service ("TERMINATION
Service") which is WilTel's termination of calls received from Customer's
Service Interconnection(s).
(b) WilMAX Extended Network 800 Service ("800 ORIGINATION
Service") which is the origination of calls by WilTel and the termination of
such calls to Customer's Service Interconnection(s).
(c) WilMAX Switched Access Service ("SWITCHED Service") which is
the origination and termination of calls solely over facilities comprising the
WilTel network.
(d) WilMAX Dedicated Access Service ("DEDICATED ACCESS Service")
which is the origination and termination of calls solely over facilities
comprising the WilTel network.
(e) WilMAX TRAVEL CARD Service ("TRAVEL CARD Service") which is
the origination and termination of calls solely over facilities comprising the
WilTel network.
2. START OF SERVICE:
(a) Start of Service for TERMINATION Service will occur
concurrently with the activation of each circuit comprising Service
Interconnections relevant to WilTel TERMINATION Service.
(b) Start of Service for 800 ORIGINATION Service will occur
concurrently with the activation of each circuit comprising Service
Interconnections relevant to 800 ORIGINATION Service.
(c) Start of Service for SWITCHED Service will occur on (i) an ANI
by ANI basis concurrently with the activation of each ANI to be served, and
(ii) an 800 Number by 800 Number basis concurrently with the activation of each
800 Number.
(d) Start of Service for DEDICATED ACCESS Service will occur
concurrently with the activation of each circuit comprising Service
Interconnections relevant to DEDICATED ACCESS Service.
1/1/94 Page 1 of 7 CONFIDENTIAL
<PAGE> 20
(e) Start of Service for TRAVEL CARD Service will occur on a Code
by Code basis concurrently with the activation of each Code.
3. SERVICE INTERCONNECTIONS - TERMINATION SERVICE AND 800 ORIGINATION
SERVICE:
(a) In order to utilize TERMINATION Service and 800 ORIGINATION
Service, one or more full time dedicated connections between Customer's network
and the WilTel network at one or more WilTel designated locations ("WILTEL
POP") must be established ("Service Interconnection(s)"). Each Service
Interconnection shall be comprised of one or more DS-1 circuits.
(b) The circuit(s) comprising each Service Interconnection to a
WilTel POP shall be requested by Customer on the appropriate WilTel Service
Request. Each Service Request for TERMINATION Service or 800 Origination
Service will describe (among other things) the WilTel POP to which a Service
Interconnection is to be established, the Requested Service Date therefor, the
type and quantity of circuits comprising the Service Interconnection and any
charges and other information relevant thereto, such as, Customer's terminating
or originating switch location, as the case may be. Such additional
information may be obtained from Customer or gathered by WilTel and recorded in
Technical Information Sheets provided by WilTel.
(c) Once ordered, and unless otherwise provided for in this
Agreement, Service Interconnections or the circuits comprising each Service
Interconnection may only be canceled by Customer upon not less than thirty (30)
days prior written notice to WilTel.
(d) Absent the automatic number identification ("ANI") of the
calling party, Customer shall provide WilTel with a written certification ("THE
CERTIFICATION") of the percentage of interstate (including international) and
intrastate minutes of use relevant to the minutes of traffic to be terminated
in the same state in which the WilTel POP is located to which the Service
Interconnection is made. This Certification shall be provided by Customer
prior to Start of Service for any Service Interconnection and may be modified
from time to time by Customer and subject to recertification upon the request
of WilTel which requests shall not be made unilaterally by WilTel more than
once each calendar quarter. Any such modification(s) or Certification(s) shall
be effective as of the first day of any calendar month and following at least
forty-five (45) days notice from Customer. In the event Customer fails to make
such Certification, the relevant minutes of use will be deemed to be subject to
the Intrastate Rates provided for in the Pricing Exhibit. In the event WilTel
or any other third party requires an audit of WilTel's interstate/intrastate
minutes of traffic, Customer agrees to cooperate in such audit at its expense
and make its call detail records, billing systems and other necessary
information reasonably available to WilTel or any third party solely for the
purpose of verifying Customer's interstate/intrastate minutes of traffic.
Customer agrees to indemnify WilTel for any liability WilTel incurs in the
event Customer's Certification is different than that determined by the audit.
(e) Customer shall be solely responsible for establishing and
maintaining each Service Interconnection over facilities subject to WilTel's
approval. Service Interconnections shall only be comprised of DS-1 facilities
unless otherwise provided for in the Service Request and agreed to in writing
by WilTel. If a Service Interconnection is proposed to be made via a local
exchange carrier, WilTel will have the authority to direct Customer to utilize
WilTel's entrance facilities or local serving arrangement ("LSA") with the
relevant local telephone operating company, and Customer will be subject to a
non-discriminatory charge therefor from WilTel. The monthly recurring charge
relevant to Customer's use of LSA capacity shall be subject to upward
adjustment by WilTel from time to time. Such adjustment, if any, shall not
exceed the rate that otherwise would be charged for the equivalent switched
access
1/1/94 Page 2 of 7 CONFIDENTIAL
<PAGE> 21
capacity between the same points by the relevant local telephone operating
company pursuant to its published charges for the type of service in question.
(f) If other private line interexchange facilities are necessary
to establish a Service Interconnection, and such facilities are requested from
WilTel, such facilities will be provided on an individual case basis.
(g) Commencing with the first full calendar month following Start
of Service for each circuit comprising a Service Interconnection and
thereafter, Customer will maintain an average loading of traffic per DS-1 (or
DS-1 equivalent circuit) of not less than 100,000 minutes of use per calendar
month/billing period ("MINIMUM MONTHLY USAGE"). In the event Customer fails to
obtain the required Minimum Monthly Usage level for the circuits comprising
each Service Interconnection, WilTel will charge and Customer will pay [ ]
multiplied by the difference between the Minimum Monthly Usage and the actual
minutes of use for the circuit(s) comprising the Service Interconnection in
question ("Minimum Usage Charge"). WilTel TERMINATION Service and 800
ORIGINATION Service minutes carried over the same Service Interconnection, if
any, shall be included in determining if Customer has met the Minimum Monthly
Usage requirement.
EXAMPLE: CUSTOMER'S ACTUAL MONTHLY USAGE FOR 2 DS-1S
COMPRISING CUSTOMER'S SERVICE INTERCONNECTION AT
WILTEL POP A IS 180,000 MINUTES AND CUSTOMER'S ACTUAL
MONTHLY USAGE FOR 2 DS-1S COMPRISING CUSTOMER'S
SERVICE INTERCONNECTION AT WILTEL POP B IS 270,000
MINUTES. CUSTOMER WOULD BE SUBJECT TO A MINIMUM
USAGE CHARGE OF [ ] SINCE CUSTOMER'S MINIMUM MONTHLY
USAGE AT WILTEL POP A WAS BELOW 200,000 [(2 x
100,000) - 180,000 x [ ] = [ ] AND NO MINIMUM MONTHLY
USAGE CHARGE FOR THE SERVICE INTERCONNECTION AT
WILTEL POP B, BECAUSE CUSTOMER EXCEEDED THE REQUIRED
MINIMUM OF 200,000 IN ACTUAL MINUTES OF USE FOR THE 2
DS-1S COMPRISING THE SERVICE INTERCONNECTION AT
WILTEL POP B.
(h) Customer may cancel circuits comprising the Service
Interconnection(s) at any time without liability to WilTel for cancellation
charges. In the event Customer does not have a Minimum Commitment and Customer
cancels all circuits comprising all Service Interconnections at any time during
the Service Term, the Cancellation Charge described in Subsection 2(A) of the
Agreement shall not apply. Provided, however, Customer shall nevertheless be
liable to pay WilTel a cancellation charge (regardless of the number of DS-1 or
DS-1 equivalent circuits comprising the Service Interconnection(s) in question)
of $1,000 multiplied by the number of months (or pro rata portion thereof)
remaining in the Service Term ("CARRIER SERVICE CANCELLATION CHARGE").
(i) Because the damages to WilTel from Customer's cancellation or
termination of all circuits comprising all Service Interconnections prior to
completion of the Service Term is difficult if not impossible to determine, the
Carrier Service Cancellation Charge due to WilTel in accordance with this
Subsection is intended by the parties to establish liquidated damages payable
by Customer to WilTel and not as a penalty of any kind.
4. SERVICE INTERCONNECTIONS - DEDICATED ACCESS:
(a) In order to utilize DEDICATED ACCESS Service, one or more full
time dedicated connections between an End User's private branch exchange
("PBX") or other customer premise equipment and the WilTel network at one or
more WilTel designated locations ("WILTEL POP") must be established ("DEDICATED
SERVICE INTERCONNECTION(S)"). Each Dedicated Service Interconnection shall be
comprised of one or more DS-1 circuits or DS-3 circuits, as the case may be.
1/1/94 Page 3 of 7 CONFIDENTIAL
<PAGE> 22
(b) The circuit(s) comprising each Dedicated Service
Interconnection to a WilTel POP shall be requested by Customer on the
appropriate WilTel Service Request. Each Service Request for DEDICATED ACCESS
Service will describe (among other things) the WilTel POP to which a Dedicated
Service Interconnection is to be established, the Requested Service Date
therefor, the type and quantity of circuits comprising the Dedicated Service
Interconnection and any charges and other information relevant thereto, such
as, the location of the end user's originating or terminating location, as the
case may be. Such additional information may be obtained from Customer or
gathered by WilTel and recorded in Technical Information Sheets provided by
WilTel.
(c) Once ordered, and unless otherwise provided for in this
Agreement, Dedicated Service Interconnections or the circuits comprising each
Dedicated Service Interconnection may only be canceled by Customer upon not
less than thirty (30) days prior written notice to WilTel.
(d) Customer shall be responsible for establishing each Dedicated
Service Interconnection over facilities subject to WilTel's approval.
Dedicated Service Interconnections shall only be comprised of DS-1 facilities
unless otherwise provided for in the Service Request. If a Dedicated Service
Interconnection is proposed to be made via a local exchange carrier, WilTel
will have the authority to direct Customer to utilize WilTel's entrance
facilities or local serving arrangement ("LSA") with the relevant local
telephone operating company, and Customer will be subject to a
non-discriminatory charge therefor from WilTel. The recurring charge relevant
to Customer's use of LSA capacity shall be stated in the corresponding Service
Request subject, however, to upward adjustment by WilTel. Such adjustment if
any, shall not exceed the rate that otherwise would be charged for the
equivalent capacity between the same points by the relevant local telephone
operating company pursuant to its published charges for the type of service in
question.
(e) Upon Customer's request, WilTel will provision and maintain
local access facilities between the End User Location and the WilTel POP,
subject to any LEC charges plus other applicable terms and charges set forth in
WilTel's F.C.C. Tariff No. 5. If other private line interexchange facilities
are necessary to establish a Dedicated Service Interconnection, such facilities
will be provided on an individual case basis.
(f) DEDICATED ACCESS SERVICE MINUTES OF USE ARE NOT SUBJECT TO
AGGREGATION FOR THE PURPOSE OF DETERMINING IF CUSTOMER HAS MET ITS MINIMUM
MONTHLY USAGE FOR TERMINATION SERVICE OR 800 ORIGINATION SERVICE.
5. BILLING INCREMENTS: U.S. Domestic (including Alaska, Hawaii, United
States Virgin Islands and Puerto Rico) Service calls will be billed in six (6)
second increments and subject to a six (6) second minimum charge (i) utilizing
Hardware Answer Supervision where available, and (ii) with respect to 800
Services, commencing with Customer's switch wink or answer back. If Customer
is found to be non-compliant in passing back appropriate answer supervision,
i.e., answer back, WilTel reserves the right to suspend 800 Service or deny
requests by Customer for additional Service until appropriate compliance is
established. All international calls, with the exception of Mexico, will be
billed in six (6) second increments and subject to a thirty (30) second minimum
charge. Mexico calls will be billed in one (1) minute increments and subject
to a one (1) minute minimum charge.
6. FORECASTS: Before Customer's initial order for Service, Customer shall
provide WilTel with a forecast regarding the number of minutes expected to be
terminated or originated in various LATAs and/or Tandems, so as to enable
WilTel to configure optimum network arrangements. IN THE EVENT CUSTOMER'S
SERVICE TRAFFIC VOLUMES RESULT IN A LOWER THAN INDUSTRY STANDARD COMPLETION
RATE OR
1/1/94 Page 4 of 7 CONFIDENTIAL
<PAGE> 23
OTHERWISE ADVERSELY AFFECT THE WILTEL NETWORK, WILTEL RESERVES THE RIGHT TO
BLOCK THE SOURCE OF SUCH ADVERSE TRAFFIC AT ANY TIME. Customer will provide
WilTel with additional forecasts from time to time upon WilTel's request which
shall not be more frequent than once every three (3) months.
7. RBOC TERMINATION/ORIGINATION: Following Start of Service for
TERMINATION SERVICE or 800 ORIGINATION Service, Customer will maintain at least
80% of the minutes of traffic (during any calendar month or pro rata portion
thereof) comprising Customer's TERMINATION Service or 800 Service for
termination or origination in a Tandem owned and operated by a Regional Bell
Operating Company ("RBOC TERMINATIONS/ORIGINATIONS") and subject to such RBOC's
tariffed access charges. WilTel shall have the right to apply a [ ] per
minute surcharge to the number of minutes by which Non-RBOC
Terminations/Originations exceed 20% of total monthly TERMINATION Service or
800 ORIGINATION Service minutes.
8. SERVICE INTERCONNECTION INSTALLATION:
(a) DS-1 circuits comprising all Service Interconnections
(including Dedicated Service Interconnections) will be subject to a
nonrecurring $400 per DS-1 switch port installation charge.
(b) DS-3 circuits comprising all Service Interconnections
(including Dedicated Service Interconnections) will be subject to a
nonrecurring per DS-3 switch port installation charge as determined on an
individual case basis.
9. CDR TAPES: WilTel will provide Call Detail Records for WilTel's
Services in machine readable form ("CDR TAPES") subject to the provisions set
forth below:
(a) WilTel will provide Customer one (1) CDR Tape once each month
in one of several magnetic tape formats (to be selected on Customer's Service
Request) which WilTel currently is then making available to its Customers.
Monthly CDR Tapes under this Subsection are provided at no charge.
(b) Customer may order a monthly delivery of toll records on 3.5"
floppy diskette subject to a recurring charge of $250 per month.
(c) Customer may order and WilTel will provide Customer one (1)
CDR Tape once each week in one of several magnetic tape formats (to be selected
on Customer's Service Request) which WilTel currently is then making available
to its Customers. Weekly CDR Tapes under this Subsection are subject to a
recurring monthly charge of $150.
10. 800 NUMBERS:
(a) 800 numbers will be issued to Customer (i.e., issuance equates
to activation or reservation, whichever occurs first) on a random basis.
Customer requests for specific numbers will be considered by WilTel, and if
provided, will be subject to additional charges as set forth below and WilTel's
then current reservation policy which shall also apply to any randomly selected
and reserved 800 number. At any time preceding three (3) months from the
scheduled expiration of the Service Term, Customer may only reserve 800 numbers
in an amount equal to the greater of (i) 50, or (ii) fifteen percent (15%) of
the total number of 800 numbers activated by WilTel for Customer. Customer
requests for 800 numbers inconsistent with the above stated conditions may be
considered by WilTel on an individual case basis. 800 numbers reserved for
Customer will be activated upon Customer's request, however, each 800 number
will be subject to reversion to WilTel without notice to Customer after sixty
(60) days from issuance to Customer in the event WilTel records no level of
measured charges associated with such number as of the expiration or after said
sixty (60) day period.
1/1/94 Page 5 of 7 CONFIDENTIAL
<PAGE> 24
(B) CUSTOMER REQUEST FOR SPECIFIC NUMBERS - $25 PER INDIVIDUAL
NUMBER.
(C) CUSTOMER SPECIFICALLY AGREES THAT REGARDLESS OF THE METHOD IN
WHICH AN 800 NUMBER IS RESERVED FOR OR OTHERWISE ASSIGNED TO CUSTOMER, THAT
CUSTOMER WILL NOT SEEK ANY REMEDY FROM WILTEL UNDER A THEORY OF DETRIMENTAL
RELIANCE OR OTHERWISE THAT SUCH 800 NUMBER(S) ARE FOUND NOT TO BE AVAILABLE FOR
CUSTOMER'S USE UNTIL SUCH 800 NUMBER IS PUT IN SERVICE FOR THE BENEFIT OF
CUSTOMER, AND THAT SUCH 800 NUMBER(S) SHALL NOT BE SOLD, BARTERED, BROKERED OR
OTHERWISE RELEASED BY CUSTOMER FOR A FEE ("800 NUMBER TRAFFICKING"). ANY
ATTEMPT BY CUSTOMER TO ENGAGE IN 800 NUMBER TRAFFICKING SHALL BE GROUNDS FOR
RECLAMATION BY WILTEL FOR REASSIGNMENT OF THE 800 NUMBER(S) RESERVED FOR OR
ASSIGNED TO CUSTOMER.
11. RESPORG SERVICES: Responsible Organization Services (relevant to 800
Numbers) if provided by WilTel are provided pursuant to WilTel's F.C.C. Tariff
No. 5.
12. LIMITATION OF ORIGINATION OR TERMINATION LOCATIONS:
(a) TERMINATION Service: (i) origination is available from any
WilTel POP; and (ii) termination is to any direct dialable location worldwide.
(b) 800 ORIGINATION Service: (i) origination is available from
locations in the 50 United States, the United States Virgin Islands, Puerto
Rico and Canada; and (ii) termination is to any Customer designated Service
Interconnection.
(c) SWITCHED Service (1+): (i) origination is available from all
equal access exchanges in the 48 contiguous United States except in LATA 921
(Fishers Island, NY); and (ii) termination is to any direct dialable location
worldwide.
(d) SWITCHED Service (800): (i) origination is available from
locations in the 50 United States, the United States Virgin Islands, Puerto
Rico and Canada; and (ii) termination is available to locations in the 48
contiguous United States.
(e) DEDICATED ACCESS Service (1+): (i) origination is available
from locations in the 48 contiguous United States; and (ii) termination is
available to any direct dialable location worldwide.
(f) DEDICATED ACCESS Service (800): origination is available from
locations in the 50 United States, the United States Virgin Islands, Puerto
Rico and Canada; and (ii) termination is available to any Customer designated
Dedicated Service Interconnection.
(g) TRAVEL CARD Service: (i) origination is available from
locations in the 50 United States, the United States Virgin Islands, Puerto
Rico and Canada; (ii) termination is available to locations in the 48
contiguous United States for calls from locations in the 50 United States, the
United States Virgin Islands, Puerto Rico and Canada; and (iii) termination is
available to locations in the 50 United States, the United States Virgin
Islands, Puerto Rico and Canada for calls from locations in the 48 contiguous
United States.
1/1/94 Page 6 of 7 CONFIDENTIAL
<PAGE> 25
13. AUTHORIZATION CODES: WilTel will supply Customer with authorization
codes ("Codes") containing nine (9) digits for use with a corresponding 800
Service number for origination and termination of Travel Card calls. The Codes
may be obtained by Customer in blocks of ten (10) not to exceed a total of 1000
Codes at any one time. WilTel reserves the right to deny access to any Code at
any time.
14. INBOUND PORTION OF TRAVEL CARD CALL: The inbound service portion of a
TRAVEL CARD Service call (i.e., the 800 Service) must be provided by WilTel.
IN WITNESS WHEREOF, the parties have executed this Service Schedule on
the date first written above.
WILTEL INC. MCLEOD TELEMANAGEMENT, INC.
BY: [SIG] [SIG]
-------------------------------- ------------------------------------
(SIGNATURE) (SIGNATURE)
Robert Brejcha Kirk E. Kaalberg
-------------------------------- ------------------------------------
(PRINT NAME) (PRINT NAME)
Director, Carrier Sales Sr. Vice President
-------------------------------- ------------------------------------
(TITLE) (TITLE)
1/1/94 Page 7 of 7 CONFIDENTIAL
<PAGE> 26
PORTIONS OF THIS EXHIBIT FOR WHICH
CONFIDENTIAL TREATMENT HAS BEEN
GRANTED ARE MARKED BY BRACKETS [ ].
WILMAX
AMENDED and RESTATED
PROGRAM ENROLLMENT TERMS II
[CARRIER]
These Amended and Restated Program Enrollment Terms II ("PET") are
made the first day of June, 1995 (the "Effective Date"), by and between
WorldCom Network Services, Inc. d/b/a WilTel (formerly WilTel, Inc.)
("WilTel") and McLeod Telemanagement, Inc. ("Customer") and are part of
their agreement for switched services, more particularly identified as
TSA#MCL-940211 (the "Agreement").
The parties acknowledge that they previously entered into Amended and
Restated Program Enrollment Terms dated June 1, 1994 (the "Prior Amended
PET"). The parties agree that as of the Effective Date the Prior Amended
PET, and Exhibit I, thereto shall be of no further force or effect, and
shall be superseded by this PET. In accordance with the Agreement, charges
to Customer for Service obtained thereunder shall be subject to the
Discount Schedule set forth below and the Agreement shall also be subject
to the terms and conditions set forth herein.
1. The Service Term will commence on the Effective Date and continue
through October 31, 2001.
2. Discount Schedule. Customer will automatically receive the next higher
discount when Customer's eligible Monthly Revenue reaches the next
level.
<TABLE>
<CAPTION>
Monthly
Revenue (a) Discount
----------------- --------
<S> <C>
$ 0 - $ 49,999 1.5%
$ 50,000 - $249,999 3.0%
$250,000 - $499,999 5.0%
$500,000 - $999,999 8.0%
$1,000,000+ 12.0%
</TABLE>
(a) For purposes of this Agreement "Monthly Revenue" will
include all measured and per call Switched Service charges
(i.e., Directory Assistance and both Domestic and
International) plus three (3) times Customer's recurring
monthly Private Line Interchange Service charges (i.e., both
Domestic and International) from WilTel (exclusive of any
pro rata charges, access charges, ancillary or special
feature charges, such as, Authorization codes or CDR Tapes,
or any other charges other than those identified by the
relevant WilTel invoice as Monthly Recurring Interexchange
Service Charges).
3. Customer's Discount: Commencing with the Effective Date and continuing
through August 31, 1995, provided Customer is not in default of its
obligations under the Agreement, and further provided Customer
maintains Monthly Revenue from WilTel equal to or greater than the
amounts shown below in the months indicated ("Checkpoint Months"),
Customer's applicable percentage discount will be [ ]. In the
event the Customer's actual Monthly Revenues are less than the amounts
shown below in a particular checkpoint Month, then for such Checkpoint
month and each successive month up to but not including the next
Checkpoint Month, Customer will receive the
03/01/95 Page 1 of 5 CONFIDENTIAL
<PAGE> 27
applicable discount described in Section 2 above corresponding with
Customer's actual level of Monthly Revenue. In the event Customer's
actual Monthly Revenue is equal to or greater than the amount shown
below for the next Checkpoint Month, Customer will receive a fifteen
percent (15%) discount for such Checkpoint Month and for the following
months up to but not including the next Checkpoint Month.
<TABLE>
<CAPTION>
Checkpoint Monthly
Month Revenue
--------------- -------
<S> <C>
September, 1995 [ ]
February, 1996 [ ]
</TABLE>
4. Customer's Minimum Commitment: Commencing May 1, 1996 and continuing
through November 30, 1996 (the "First Commitment Period"), Customer
agrees to obtain Monthly Revenue of at least [ ] ("Customer's
First Commitment"). Commencing December 1, 1996 and continuing
through November 30, 1997 (the "Second Commitment Period"), Customer
agrees to obtain Monthly Revenue of at least [ ] ("Customer's
Second Commitment"). Commencing December 1, 1997 and continuing
through the end of the Service Term, including any extensions thereof
(the "Final Commitment Period"), Customer agrees to obtain Monthly
Revenue of at least [ ] ("Customer's Final Commitment").
5. Deficiency Charge: In the event Customer does not maintain Customer's
First Commitment, Customer's Second Commitment, or Customer's Final
Minimum Commitment, during any month of the First Commitment Period, the
Second Commitment Period or the Final Commitment Period, respectively,
then for those month(s) only, Customer will pay WilTel the difference
between Customer's First Commitment, Customer's Second Commitment, or
Customer's Final Commitment, as the case may be, and Customer's actual
Monthly Revenue as described in Section 2 above, net of any applicable
discount, (collectively, the "Deficiency Charge"). The Deficiency
Charge will be due at the same time payment is due for Service
provided to Customer, or immediately in an amount equal to Customer's
Minimum Commitment for the unexpired portion of the Term, if
(i) Customer cancels all circuits comprising all Service
Interconnections as described in the Service Schedules, or (ii) WilTel
terminates the Agreement based on Customer's default.
6. Application of Discounts: The applicable percentage will only be
applied to Monthly Revenues comprised of Customer's interstate
(including Alaska, Hawaii, the United States Virgin Islands and Puerto
Rico unless otherwise noted on the Pricing Exhibit dated concurrently
herewith) measured usage charges (which includes 1+ and 800 usage,
whether switched access or dedicated access). During the Service Term
of the Agreement, accumulated credits derived from the Discount will
be applied in arrears commencing with the first day of the month
following the Effective Date, that is, the Discount will be applied to
Customer's interstate measured usage charges for the preceding month
(the "Discount Period").
Example: In March, 1996, Customer has $50,000 in Private Line
Interexchange Service charges (both Interstate and
Intrastate) and is credited with $150,000 in Monthly
Revenue plus $150,000 in Switched Service Intrastate
charges and $1,000,000 in Interstate Switched Service
charges. Customer's Monthly Revenue for the month in
question would equal a total of $1,300,000. Customer
would receive a [ ] discount which, subject to the
other conditions set forth in this Section Six would be
applied to the total Interstate Switched Service
charges of $1,000,000 to produce a credit relevant to
the month in question of [ ].
03/01/95 Page 2 of 5 CONFIDENTIAL
<PAGE> 28
Each Discount will result in the application of a credit obtained
during the Discount Period to the WilTel invoice to Customer relevant
to the billed measured Interstate Switched Service for the calendar
month next following the completion of each Discount Period, provided
Customer has paid undisputed charges on a current basis for that month
and has not otherwise been subject to a Suspension Notice in
accordance with the Agreement. Failure of Customer to comply with the
foregoing provision shall result in no credit for the Discount Period
in question. In addition, as the Discount is only applicable for
purposes of reducing the Interstate Switched Service charge to
Customer, the Discount will only be applied to the Interstate Switched
Service charges for the Discount Period in question to the extent that
such charge shall not be reduced below zero and without carry-forward
of any unused portion of the accumulated credit if Interstate Switched
Service charges for the month in question do not exceed the
accumulated credit.
7. Cancellation: The parties agree to delete Subsection 2(A) of the
Agreement in its entirety and replace it with the following:
(A) Cancellation Charge: At any time after the Effective Date,
Customer may cancel this Agreement if Customer sends written
notification thereof to WilTel not less than sixty (60) days prior to
the effective date of cancellation, and provided the effective date of
cancellation is on the first day of a calendar month. In such case,
Customer shall pay to WilTel (i) all charges for Service provided
through the effective date of such cancellation, plus (ii) a
cancellation charge equal to [ ] times the number of months
remaining in the service Term after the effective date of
cancellation, plus (iii) an amount equal to the difference between the
discounts actually received by Customer under the Agreement (i.e.,
taking into account Customer's discount of [ ], if applicable) and
the discounts Customer would have received under the Discount Schedule
shown in Section 2 above based on the Customer's actual Monthly
Revenue (collectively referred to as the "Cancellation Charge").
8. Modification of Charges: the parties agree to delete Subsection 5(D)
of the Agreement in its entirety and replace it with the following
provision:
(D) Modification of Charges: WilTel reserves the right to eliminate
Service offerings and/or modify charges for Service offerings (which
charge modification will not exceed 10% and which shall be non-
discriminatory, that is, applicable to all WilTel customers obtaining
the same Service) upon not less than sixty (60) days prior notice to
Customer, which notice will state the effective date for the charge
modification which date must be the first day of a calendar month.
Wiltel may, however, increase its charges for Service offerings by
more than ten percent (10%) provided WilTel gives Customer
satisfactory evidence that such increase is based on WilTel's local
access costs. In the event WilTel notifies Customer of the
elimination of a Service offering and/or an increase in the charges,
Customer may terminate Customer's Minimum Commitment (as described in
Section 4 of the PET) without incurring any Cancellation Charge
described in Section 7 above, provided Customer notifies WilTel, in
writing, at least sixty (60) days prior to the monthly billing period
in which the termination is to be effective. Commencing with the
effective date of termination and continuing through the end of the
Service Term (including any extensions thereof), Customer will receive
the applicable discount described in Section 2 above.
9. Service Interconnections: The parties agree to delete Subsection 3(a)
of the Service Schedule dated concurrently with this Agreement in its
entirety and replace it with the following provision:
03/01/95 Page 3 of 5 CONFIDENTIAL
<PAGE> 29
(a) In order to utilize TERMINATION Service and 800 ORIGINATION
Service, one or more full time dedicated connections must be
established between the WilTel network at one or more WilTel
designated locations ("WilTel POP") and Customer's network or certain
Centrex or other Central Office locations of the LECS ("Service
Interconnection(s)"). Each Service Interconnection shall be comprised
of one or more DS-1 circuits.
10. DS-1 Aggregation: The parties agree to delete Subsection 3(G) of the
Service Schedule in its entirety and replace it with the following:
(g) Commencing with the [ ] full calendar month following the
Effective Date, Customer will maintain an average loading of traffic
per DS-1 (or DS-1 equivalent circuit) of not less than 100,000 minutes
of use per calendar month billing period ("Minimum Monthly Usage").
In the event Customer fails to obtain the required Minimum Monthly
Usage level, WilTel will charge and Customer will pay [ ]
multiplied by the difference between the Minimum Monthly Usage and the
actual minutes of use for the for the DS-1 circuits in question ("Minimum
Usage Charge"). WilTel TERMINATION and 800 ORIGINATION Service
minutes carried over the same DS-1 circuit shall be included in
determining if Customer has met the Minimum Monthly Usage requirement.
11. Minimum Usage Charge: The parties agree to add Subsection 3(j) to the
Service Schedule dated concurrently with the Agreement to read as
follows:
(j) Notwithstanding anything to the contrary, the Minimum Monthly
Usage and Minimum Usage Charge shall not apply (and, if applicable,
Customer will receive a credit equal to the amount of any Minimum
Usage charge assessed by WilTel) for a period of [ ] full
calendar months following the Effective Date.
12. [
]
13. Exclusivity: During the Service Term, Customer agrees to utilize
WilTel; or at least [ ] of its terminating traffic (which
includes traffic terminating within the fifty United States as well as
international locations). WilTel shall have the right, at WilTel
expense to
03/01/95 Page 4 of 5 CONFIDENTIAL
<PAGE> 30
audit Customer's records not more than one time in any 12-month
period, for the purpose of determining Customer's compliance with the
foregoing requirement.
IN WITNESS WHEREOF, the parties have executed these Program Enrollment
Terms on the date first written above.
WORLDCOM NETWORK SERVICES, INC. MCLEOD TELEMANAGEMENT, INC.
D/B/A WILTEL
By: /s/ DENNIS PFLAUM /s/ STEPHEN BRANDENBERG
-------------------- ---------------------------------
(Signature) (Signature)
Dennis Pflaum Stephen Brandenberg
- ----------------------- --------------------------------
(Print Name) (Print Name)
Sr. Vice President
RVP, Central Region Intelligent Technologies Systems
- ----------------------- --------------------------------
(Title) (Title)
03/01/95 Page 5 of 5 CONFIDENTIAL
<PAGE> 1
EXHIBIT 10.50
FIRST AMENDMENT TO
AGREEMENT REGARDING SUPPORT AGREEMENT
THIS FIRST AMENDMENT to a certain Agreement Regarding Support Agreement is
made and entered into this 14th day of May, 1996, by and between McLeod, Inc.
("McLeod"), a Delaware corporation, and IES Diversified Inc. ("IES"), a
Delaware corporation, and IES Investments, Inc., a Delaware Corporation
("Investments").
WHEREAS, McLeod and IES entered into a certain Agreement Regarding Support
Agreement as of December 1, 1994 (the "Agreement"), pursuant to which McLeod
granted certain options to Investments in order to induce Diversified to enter
into a certain Support Agreement, also dated December 1, 1994; and
WHEREAS, the rights of Investments with respect to such options are set
forth in a Nonqualified Stock Option Plan adopted December 1, 1994 (the "Stock
Option Plan"), and are also specifically referred to in the Agreement; and
WHEREAS, the Stock Option Plan has been amended to clarify the meaning of
the term "calendar quarter" and the Agreement contains various references to
"calendar quarter" and the McLeod and IES and Investments wish to clarify their
original agreements and understandings as to the meaning of that term so that
the Agreement conforms to the terms of the Stock Option Plan and their original
intentions.
NOW, THEREFORE, in further consideration of the covenants and agreements
and undertakings reflected therein, the Agreement is amended, effective from
its execution on December 1, 1994, as follows:
1. All references to the term "calendar quarter" shall mean any one of
the periods beginning January 2 of any calendar year and ending on
the immediately succeeding April 1 of the same calendar year or
beginning April 2 of any calendar year and ending on the immediately
succeeding July 1 of the same calendar year or beginning July 2 of
any calendar year and ending on the immediately following October 1
of the same calendar year or beginning October 2 of any calendar year
and ending on January 1 of the immediately following calendar year.
2. Except as expressly provided above, and in all other respects, the
Agreement Regarding Support Agreement entered into as of December 1, 1994, is
approved, ratified and confirmed.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have entered into this First
Amendment to Agreement Regarding Support Agreement on the date and year first
above written.
McLeod, Inc.
By: /s/ JAMES L. CRAM
------------------------------------
IES Diversified Inc.
By: /s/ DENNIS B. VASS
------------------------------------
IES Investments Inc.
By: /s/ DENNIS B. VASS
------------------------------------
<PAGE> 1
EXHIBIT 10.51
FIRST AMENDMENT TO
AGREEMENT REGARDING GUARANTEE
THIS FIRST AMENDMENT to a certain Agreement Regarding Guarantee is made
and entered into this 14th day of May, 1996, by and between McLeod, Inc.
("McLeod"), a Delaware corporation, and IES Investments Inc. ("Investments"), a
Delaware corporation, and IES Diversified Inc. ("IES"), a Delaware corporation.
WHEREAS, McLeod and IES entered into said Agreement Regarding Guarantee as
of May 16, 1994 (the "Agreement"), pursuant to which McLeod granted certain
options to Investments in order to induce IES to execute and deliver an
unconditional guarantee of the Line of Credit obligation of McLeod to First
National Bank of Chicago; and
WHEREAS, the rights of Investments with respect to such options are set
forth in a Nonqualified Stock Option Plan adopted by resolution of the Board on
January 27, 1994 and approved by shareholders on February 23, 1994 (the "Stock
Option Plan"), and are also specifically referred to in the Agreement; and
WHEREAS, the Stock Option Plan has been amended to clarify the meaning of
the term "calendar quarter" and the Agreement contains various references to
"calendar quarter" and the McLeod and IES and Investments wish to clarify their
original agreements and understandings as to the meaning of that term so that
the Agreement conforms to the terms of the Stock Option Plan and their original
intentions.
NOW, THEREFORE, in further consideration of the covenants and agreements
and undertakings reflected therein, the Agreement is amended, effective from
its execution on May 16, 1994, as follows:
1. All references to the term "calendar quarter" shall mean any one of
the periods beginning May 17 of any calendar year and ending on the
immediately succeeding August 16 of the same calendar year or
beginning August 17 of any calendar year and ending on the
immediately succeeding November 16 of the same calendar year or
beginning November 17 of any calendar year and ending on the
immediately following February 16 of the immediately following
calendar year or beginning February 17 of any calendar year and
ending on the immediately following May 16 of the same calendar year.
<PAGE> 2
2. Except as expressly provided above, and in all other respects, the
Agreement Regarding Guarantee entered into as of May 16, 1994, is approved,
ratified and confirmed.
IN WITNESS WHEREOF, the parties hereto have entered into this First
Amendment to Agreement Regarding Guarantee on the date and year first above
written.
McLeod, Inc.
By: /s/ JAMES L. CRAM
-----------------------------------
IES Diversified Inc.
By: /s/ DENNIS B. VASS
-----------------------------------
IES Investments Inc.
By: /s/ DENNIS B. VASS
-----------------------------------
<PAGE> 1
EXHIBIT 10.53
EMPLOYMENT AGREEMENT
BETWEEN
MCLEOD, INC.
AND
[EMPLOYEE]
DATED AS OF MAY ___, 1996
[FORM EXECUTED BY THE OFFICERS EXECUTING
A CHANGE-OF-CONTROL AGREEMENT]
<PAGE> 2
EMPLOYMENT, CONFIDENTIALITY
AND NON-COMPETITION AGREEMENT
THIS AGREEMENT is entered into as of May ___, 1996 by and between
McLeod, Inc., a Delaware corporation (together with its subsidiaries, the
"Company"), and [Employee] (the "Employee").
WHEREAS, the Company employs the Employee as its [Title];
WHEREAS, the Company believes that because of the Employee's
substantial knowledge, skill and experience, and because of the Employee's
access to confidential and proprietary information of the Company, the
Employee, should his/her employment by the Company be terminated by either
party hereto, would be able to take actions that would be competitive with the
activities of the Company and/or disclose confidential Company information;
WHEREAS, the Company wishes to continue the Employee's employment, but
is willing to do so only if the Employee will subject himself/herself to the
terms of this Agreement, and, in further consideration of the Employee's
execution hereof, the Company has granted to the Employee options to purchase
[Number] shares of the Class A Common Stock of the Company (effective upon
consummation on or before December 31, 1996 of an initial public offering of
the Company's Class A Common Stock) at an issue price equal to the initial
public offering price per share;
WHEREAS, the Company has entered into a letter agreement with the
Employee regarding certain additional benefits to be provided to the Employee
in certain circumstances in the event of a change of control of the Company
(the "Change-of-Control" Agreement); and
WHEREAS, this Agreement supersedes and replaces an Employment and
Confidentiality Agreement entered into on [Date] between the Employee and the
Company;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto hereby agree
as follows:
1. TERM OF EMPLOYMENT
The Employee shall be employed by the Company for an indefinite period
that may be terminated pursuant to the provisions of this Section 1 (the "Term
of Employment"). Either the Employee or the Company may (with or without
cause) terminate the Term of Employment by furnishing 30 days' written notice
of such termination to the other, and in either such case the Company shall
have the right,
-1-
<PAGE> 3
but not the obligation, to accelerate such termination to any date prior to the
expiration of such notice period.
2. DUTIES
While employed by the Company, the Employee shall perform such duties
as may be designated by and subject to the supervision of the Company's Board
of Directors or officers. During such period, the Employee shall devote
his/her full attention, time and energies to the business and affairs of the
Company, and shall use his/her best efforts to promote the interests and
reputation of the Company. The Employee agrees to disclose to the Company's
Board of Directors any and all investments or activities that might impact
performance of his/her responsibilities pursuant to this Agreement and further
agrees not to expand such investments or activities without prior approval of
the Company's Board of Directors.
3. RESTRICTIVE COVENANT
3.1. COVENANT
During the term of his/her employment by the Company and for the
two-year period following his/her termination "for cause" (as defined below),
resignation, or voluntary termination of his/her employment for any other
reason except for the Company's discontinuance of activities (which
discontinuance shall render this Section 3 of no further effect), the Employee
shall not, directly or indirectly, engage in or become an owner of, render any
service to, enter the employment of, or represent or solicit for any business
that (a) competes with any activity of the Company conducted at any time during
the Term of Employment, or conducted during the six-month period following the
termination of the Term of Employment as a result of plans initiated prior to
such termination, and (b) is located and/or conducts business within any of the
states in which the Company conducted any business during the Term of
Employment or during the six-month period following the termination of the Term
of Employment as a result of plans initiated prior to such termination.
Further, during the restrictive period of this Agreement following any
termination of the Term of Employment, the Employee shall not employ or
associate with his/her own activities, directly or indirectly, any individual
then employed in a management position by the Company.
3.2. TERMINATION "FOR CAUSE"
For purposes of this Section 3 an Employee shall be deemed to have
been terminated "for cause" if such termination follows: (a) the Employee's
engaging in a criminal act involving the Company, or the conviction of the
Employee of a felony; (b) the Employee's engaging in willful misconduct or
omission that is injurious to the Company, monetarily or otherwise, or (c) the
willful and continued failure by the Employee to substantially perform his/her
duties (other than any such failure resulting from the Employee's inability to
perform such duties as a result of
-2-
<PAGE> 4
physical or mental illness or incapacity), after delivery to the Employee of a
written demand for substantial performance that specifically identifies the
manner in which the Company believes that the Employee has not substantially
performed his/her duties and a reasonable opportunity for the Employee to cure
such nonperformance.
3.3. ENFORCEABILITY OF COVENANT
The parties expressly agree that the duration and geographical area
set forth in this Section 3 are reasonable, that the covenant shall be
construed as an agreement independent of any other provision herein, and that
the existence of any claim or cause of action of the Employee against the
Company, regardless of how arising, shall not constitute a defense to the
enforcement by the Company of this Section 3. If any portion of the covenant
is held by a court of law to be unenforceable with respect either to its
duration or geographical area, for whatever reason, it shall be considered
divisible both as to time and geographical area, so that each month of the
specified period shall be deemed a separate period of time and each county
within a particular state a separate geographical area, resulting in an
intended requirement that the longest lesser period of time or largest lesser
geographical area found by such court to be a reasonable restriction shall
remain an effective restrictive covenant, specifically enforceable against the
Employee.
3.4. PERMITTED EQUITY OWNERSHIP
Notwithstanding any statement contained in this Agreement to the
contrary, legal or beneficial ownership by the Employee of an equity interest
that constitutes less than five percent of the outstanding voting power in a
competitive corporation, at least one class of capital stock of which is
publicly traded on a national or regional stock exchange or by means of an
electronic interdealer quotation system, shall not be deemed to constitute a
breach by the Employee of the terms hereof.
4. CONFIDENTIALITY
4.1. DISCLOSURE OF CONFIDENTIAL INFORMATION
Unless authorized or instructed in writing by the Company, the Employee
shall not, during or at any time after the Term of Employment except as
required in the conduct of the Company's business, disclose to others, or use,
or permit to be disclosed to others or used, any of the Company's inventions,
discoveries, works, ideas, information, knowledge or data (whether in oral,
written, or machine-readable form) that the Employee may develop or obtain
during the course of or in connection with the Employee's employment, including
such inventions, discoveries,
-3-
<PAGE> 5
works, ideas, information, knowledge, or data relating to machines, equipment,
products, systems, software, research and/or development, designs,
compositions, formulae, processes, manufacturing procedures or business
methods, whether or not developed by the Employee, by others in the Company or
obtained by the Company from third parties, and irrespective of whether or not
such inventions, discoveries, works, ideas, information, knowledge or data have
been identified by the Company as secret or confidential, unless and until, and
then to the extent and only to the extent that, such inventions, discoveries,
works, ideas, information, knowledge or data become available to the public
otherwise than by the Employee's act or omission.
4.2. DISCLOSURE OF OTHER CONFIDENTIAL INFORMATION
During the Term of Employment and for a period of two years thereafter
the Employee shall not, except as required in the conduct of the Company's
business, disclose to others, or use, any of the information relating to
present and prospective customers of the Company, business dealings with such
customers, prospective marketing, promotion, sales and advertising programs and
strategies, and agreements with representatives or prospective representatives
of the Company, present or prospective sources of supply or any other business
arrangements of the Company, including but not limited to customers, customer
lists, costs, prices and earnings, whether or not such information is developed
by the Employee, by others in the Company or obtained by the Company from third
parties, and irrespective of whether or not such information has been
identified by the Company as secret or confidential, unless and until, and then
to the extent and only to the extent that, such information becomes available
to the public otherwise than by the Employee's act or omission.
4.3. DEFINITION
All inventions, discoveries, works, ideas, information, knowledge, and
data described or referred to in Sections 4.1 and 4.2 are referred to herein
collectively as "Confidential Information".
4.4. EMPLOYEE ACKNOWLEDGEMENT
The Employee acknowledges (i) that the use, misappropriation or
disclosure of the Confidential Information (as defined in Section 4.3) would
constitute a breach of trust and cause irreparable injury to the Company, (ii)
that all such Confidential Information is the property of the Company, and
(iii) that it is essential to the protection of the Company's good will and to
the maintenance of the Company's competitive position that the Confidential
Information be kept secret and that the Confidential Information not be
disclosed by the Employee to others or used by the Employee to the Employee's
own advantage or the advantage of others. The Employee further acknowledges
that the Employee's agreement to the provisions of this Section 4 and the
enforceability of such provisions against the Employee are an essential element
of this Agreement and that, absent such provisions and the enforceability
thereof, the Company would not (i) employ or continue the employment of the
Employee, nor (ii) permit the Employee access to and use of Confidential
Information.
-4-
<PAGE> 6
5. REMEDIES FOR BREACH OF EMPLOYEE'S OBLIGATIONS
The parties agree that the services of the Employee are of a personal,
specific, unique and extraordinary character and cannot be readily replaced by
the Company. They further agree that in the course of performing his/her
services, the Employee will have access to various types of proprietary
information of the Company, that, if released to others or used by the Employee
other than for the benefit of the Company, in either case without the Company's
consent, could cause the Company to suffer irreparable injury. Therefore, the
obligations of the Employee established under this Agreement shall be
enforceable both at law and in equity, by injunction, specific performance,
damages or other remedy; and the right of the Company to obtain any such remedy
shall be cumulative and not alternative and shall not be exhausted by any one
or more uses thereof.
6. MISCELLANEOUS
6.1. ADDITIONAL ACTIONS AND DOCUMENTS
Each of the parties hereto hereby agrees to take or cause to be
taken such further actions, to execute, deliver and file or cause to be
executed, delivered and filed such further documents, and will obtain such
consents, as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Agreement.
6.2. ASSIGNMENT
The Employee shall not assign his/her rights and obligations
under this Agreement, in whole or in part, whether by operation of law or
otherwise, without the prior written consent of the Company, and any such
assignment contrary to the terms hereof shall be null and void and of no force
and effect.
6.3. ENTIRE AGREEMENT; AMENDMENT
This Agreement and the Change-of-Control Agreement constitute the
entire agreement between the parties hereto with respect to the transactions
contemplated herein and therein, and supersede all prior oral or written
agreements, commitments or understandings with respect to the matters provided
for herein and therein; provided, however, that in the event of a conflict
between a provision of this Agreement and a provision of the Change-of-Control
Agreement, the provision of the Change-of-Control Agreement shall govern. No
amendment, modification or discharge of this Agreement shall be valid or
binding unless set forth in writing and duly executed and delivered by the
party against whom enforcement of the amendment, modification, or discharge is
sought.
-5-
<PAGE> 7
6.4. WAIVER
No delay or failure on the part of any party hereto in exercising
any right, power or privilege under this Agreement or under any other documents
furnished in connection with or pursuant to this Agreement shall impair any
such right, power or privilege or be construed as a waiver of any default or
any acquiescence therein. No single or partial exercise of any such right,
power or privilege shall preclude the further exercise of such right, power or
privilege, or the exercise of any other right, power or privilege. No waiver
shall be valid against any party hereto unless made in writing and signed by
the party against whom enforcement of such waiver is sought and then only to
the extent expressly specified therein.
6.5. GOVERNING LAW
This Agreement, the rights and obligations of the parties hereto,
and any claims or disputes relating thereto, shall be governed by and construed
in accordance with the laws of the State of Delaware (excluding the choice of
law rules thereof).
6.6. NOTICES
All notices, demands, requests, or other communications that may
be or are required to be given, served, or sent by any party to any other party
pursuant to this Agreement shall be in writing and shall be hand delivered,
sent by overnight courier or mailed by first-class, registered or certified
mail, return receipt requested, postage prepaid, or transmitted by telegram,
telecopy or telex, addressed as follows:
(i) If to the Company:
McLeod, Inc.
221 Third Avenue SE, Suite 500
Cedar Rapids, IA 52401
ATTENTION: President
(ii) If to the Employee:
[Employee]
[Address]
Each party may designate by notice in writing a new address to which any
notice, demand, request or communication may thereafter be so given, served or
sent. Each notice, demand, request, or communication that shall be hand
delivered, sent, mailed, telecopied or telexed in the manner described above,
or that shall be delivered to a telegraph company, shall be deemed sufficiently
given, served, sent, received or delivered for all purposes at such time as it
is delivered to the
-6-
<PAGE> 8
addressee (with the return receipt, the delivery receipt, or (with respect to a
telecopy or telex) the answerback being deemed conclusive, but not exclusive,
evidence of such delivery) or at such time as delivery is refused by the
addressee upon presentation.
6.7. BINDING EFFECT
Subject to any provisions hereof restricting assignment, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors, heirs, executors, administrators, legal
representatives and assigns.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, or have caused this Agreement to be duly executed on their behalf,
as of the day and year first above written.
MCLEOD, INC.
By:
--------------------------
Name:
Title:
THE EMPLOYEE:
---------------------------------
-7-
<PAGE> 9
EXHIBIT 10.53
EMPLOYMENT AGREEMENT
BETWEEN
MCLEOD, INC.
AND
{EMPLOYEE}
DATED AS OF May __, 1996
<PAGE> 10
EMPLOYMENT, CONFIDENTIALITY
AND NON-COMPETITION AGREEMENT
THIS AGREEMENT is entered into as of May __, 1996 by and between
McLeod, Inc., a Delaware corporation (together with its subsidiaries, the
"Company"), and {EMPLOYEE} (the "Employee").
WHEREAS, the Company employs the Employee as its {TITLE};
WHEREAS, the Company believes that because of the Employee's
substantial knowledge, skill and experience, and because of the Employee's
access to confidential and proprietary information of the Company, the
Employee, should his/her employment by the Company be terminated by either
party hereto, would be able to take actions that would be competitive with the
activities of the Company and/or disclose confidential Company information;
WHEREAS, the Company wishes to continue the Employee's employment, but
is willing to do so only if the Employee will subject himself/herself to the
terms of this Agreement, and, in further consideration of the Employee's
execution hereof, the Company has granted to the Employee options to purchase
{NUMBER} shares of the Class A Common Stock of the Company (effective upon
consummation on or before December 31, 1996 of an initial public offering of
the Company's Class A Common Stock) at an exercise price equal to the initial
public offering price per share; and
WHEREAS, this Agreement supersedes and replaces an Employment and
Confidentiality Agreement entered into on {DATE} between the Employee and the
Company;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto hereby agree
as follows:
1. TERM OF EMPLOYMENT
The Employee shall be employed by the Company for an indefinite period
that may be terminated pursuant to the provisions of this Section 1 (the "Term
of Employment"). Either the Employee or the Company may (with or without
cause) terminate the Term of Employment by furnishing 30 days' written notice
of such termination to the other, and in either such case the Company shall
have the right, but not the obligation, to accelerate such termination to any
date prior to the expiration of such notice period.
- 1 -
<PAGE> 11
2. DUTIES
While employed by the Company, the Employee shall perform such duties
as may be designated by and subject to the supervision of the Company's Board
of Directors or officers. During such period, the Employee shall devote
his/her full attention, time and energies to the business and affairs of the
Company, and shall use his/her best efforts to promote the interests and
reputation of the Company. The Employee agrees to disclose to the Company's
Board of Directors any and all investments or activities that might impact
performance of his/her responsibilities pursuant to this Agreement and further
agrees not to expand such investments or activities without prior approval of
the Company's Board of Directors.
3. RESTRICTIVE COVENANT
3.1. COVENANT
During the term of his/her employment by the Company and for the
one-year period following his/her termination "for cause" (as defined
below), resignation, or voluntary termination of his/her employment for any
other reason except for the Company's discontinuance of activities (which
discontinuance shall render this Section 3 of no further effect), the Employee
shall not, directly or indirectly, engage in or become an owner of, render any
service to, enter the employment of, or represent or solicit for any business
that (a) competes with any activity of the Company conducted at any time during
the Term of Employment, or conducted during the six-month period following the
termination of the Term of Employment as a result of plans initiated prior to
such termination, and (b) is located and/or conducts business within any of the
states in which the Company conducted any business during the Term of
Employment or during the six-month period following the termination of the
Term of Employment as a result of plans initiated prior to such termination.
Further, during the restrictive period of this Agreement following any
termination of the Term of Employment, the Employee shall not employ or
associate with his/her own activities, directly or indirectly, any individual
then employed in a management position by the Company.
3.2. TERMINATION "FOR CAUSE"
For purposes of this Section 3 an Employee shall be deemed to have
been terminated "for cause" if such termination follows: (a) the Employee's
engaging in a criminal act involving the Company, or the conviction of the
Employee of a felony; (b) the employee's engaging in willful misconduct or
omission that is injurious to the Company, monetarily or otherwise, or (c) the
willful and continued failure by the Employee to substantially perform his/her
duties (other than any such failure resulting from the Employee's inability to
perform such duties as a result of
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<PAGE> 12
physical or mental illness or incapacity), after delivery to the Employee of a
written demand for substantial performance that specifically identifies the
manner in which the Company believes that the Employee has not substantially
performed his/her duties and a reasonable opportunity for the Employee to cure
such nonperformance.
3.3. ENFORCEABILITY OF COVENANT
The parties expressly agree that the duration and geographical area
set forth in this Section 3 are reasonable, that the covenant shall be
construed as an agreement independent of any other provision herein, and that
the existence of any claim or cause of action of the Employee against the
Company, regardless of how arising, shall not constitute a defense to the
enforcement by the Company of this Section 3. If any portion of the covenant
is held by a court of law to be unenforceable with respect either to its
duration or geographical area, for whatever reason, it shall be considered
divisible both as to time and geographical area, so that each month of the
specified period shall be deemed a separate period of time and each county
within a particular state a separate geographical area, resulting in an
intended requirement that the longest lesser period of time or largest lesser
geographical area found by such court to be a reasonable restriction shall
remain an effective restrictive covenant, specifically enforceable against the
Employee.
3.4. PERMITTED EQUITY OWNERSHIP
Notwithstanding any statement contained in this Agreement to the
contrary, legal or beneficial ownership by the Employee of an equity interest
that constitutes less than five percent of the outstanding voting power in a
competitive corporation, at least one class of capital stock of which is
publicly traded on a national or regional stock exchange or by means of an
electronic interdealer quotation system, shall not be deemed to constitute a
breach by the Employee of the terms hereof.
4. CONFIDENTIALITY
4.1. DISCLOSURE OF CONFIDENTIAL INFORMATION
Unless authorized or instructed in writing by the Company, the Employee
shall not, during or at any time after the Term of Employment except as
required in the conduct of the Company's business, disclose to others, or use,
or permit to be disclosed to others or used, any of the Company's inventions,
discoveries, works, ideas, information, knowledge or data (whether in oral,
written, or machine-readable form) that the Employee may develop or obtain
during the course of or in connection with the Employee's employment, including
such inventions, discoveries, works, ideas, information, knowledge, or data
relating to machines, equipment, products, systems, software, research and/or
development, designs, compositions, formulae, processes, manufacturing
procedures or business methods, whether or not developed by the Employee, by
others in the Company or obtained by the Company from third parties, and
irrespective of whether or not such inventions, discoveries,
- 3 -
<PAGE> 13
works, ideas, information, knowledge or data have been identified by the
Company as secret or confidential, unless and until, and then to the extent
and only to the extent that, such inventions, discoveries, works, ideas,
information, knowledge or data become available to the public otherwise than
by the Employee's act or omission.
4.2. DISCLOSURE OF OTHER CONFIDENTIAL INFORMATION
During the Term of Employment and for a period of two years thereafter
the Employee shall not, except as required in the conduct of the Company's
business, disclose to others, or use, any of the information relating to
present and prospective customers of the Company, business dealings with such
customers, prospective marketing, promotion, sales and advertising programs and
strategies, and agreements with representatives or prospective representatives
of the Company, present or prospective sources of supply or any other business
arrangements of the Company, including but not limited to customers, customer
lists, costs, prices and earnings, whether or not such information is developed
by the Employee, by others in the Company or obtained by the Company from third
parties, and irrespective of whether or not such information has been
identified by the Company as secret or confidential, unless and until, and then
to the extent and only to the extent that, such information becomes available
to the public otherwise than by the Employee's act or omission.
4.3. DEFINITION
All inventions, discoveries, works, ideas, information, knowledge, and
data described or referred to in Sections 4.1 and 4.2 are referred to herein
collectively as "Confidential Information".
4.4. EMPLOYEE ACKNOWLEDGEMENT
The Employee acknowledges (i) that the use, misappropriation or
disclosure of the Confidential Information (as defined in Section 4.3) would
constitute a breach of trust and cause irreparable injury to the Company, (ii)
that all such Confidential Information is the property of the Company, and
(iii) that it is essential to the protection of the Company's good will and to
the maintenance of the Company's competitive position that the Confidential
Information be kept secret and that the Confidential Information not be
disclosed by the Employee to others or used by the Employee to the Employee's
own advantage or the advantage of others. The Employee further acknowledges
that the Employee's agreement to the provisions of this Section 4 and the
enforceability of such provisions against the Employee are an essential element
of this Agreement and that, absent such provisions and the enforceability
thereof, the Company would not (i) employ or continue the employment of the
Employee, nor (ii) permit the Employee access to and use of Confidential
Information.
- 4 -
<PAGE> 14
5. REMEDIES FOR BREACH OF EMPLOYEE'S OBLIGATIONS
The parties agree that the services of the Employee are of a personal,
specific, unique and extraordinary character and cannot be readily replaced by
the Company. They further agree that in the course of performing his/her
services, the Employee will have access to various types of proprietary
information of the Company, that, if released to others or used by the Employee
other than for the benefit of the Company, in either case without the Company's
consent, could cause the Company to suffer irreparable injury. Therefore, the
obligations of the Employee established under this Agreement shall be
enforceable both at law and in equity, by injunction, specific performance,
damages or other remedy; and the right of the Company to obtain any such remedy
shall be cumulative and not alternative and shall not be exhausted by any one
or more uses thereof.
6. MISCELLANEOUS
6.1. ADDITIONAL ACTIONS AND DOCUMENTS
Each of the parties hereto hereby agrees to take or cause to be
taken such further actions, to execute, deliver and file or cause to be
executed, delivered and filed such further documents, and will obtain such
consents, as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Agreement.
6.2. ASSIGNMENT
The Employee shall not assign his/her rights and obligations
under this Agreement, in whole or in part, whether by operation of law or
otherwise, without the prior written consent of the Company, and any such
assignment contrary to the terms hereof shall be null and void and of no force
and effect.
6.3. ENTIRE AGREEMENT; AMENDMENT
This Agreement constitutes the entire agreement among the parties
hereto with respect to the transactions contemplated herein, and it supersedes
all prior oral or written agreements, commitments or understandings with
respect to the matters provided for herein. No amendment, modification or
discharge of this Agreement shall be valid or binding unless set forth in
writing and duly executed and delivered by the party against whom enforcement
of the amendment, modification, or discharge is sought.
6.4. WAIVER
No delay or failure on the part of any party hereto in exercising
any right, power or privilege under this Agreement or under any other documents
furnished in connection with or pursuant to this Agreement shall impair any
such right, power or privilege or be construed as a waiver of any default or
any
- 5 -
<PAGE> 15
acquiescence therein. No single or partial exercise of any such right, power
or privilege shall preclude the further exercise of such right, power or
privilege, or the exercise of any other right, power or privilege. No waiver
shall be valid against any party hereto unless made in writing and signed by
the party against whom enforcement of such waiver is sought and then only to
the extent expressly specified therein.
6.5. GOVERNING LAW
This Agreement, the rights and obligations of the parties hereto,
and any claims or disputes relating thereto, shall be governed by and construed
in accordance with the laws of the State of Delaware (excluding the choice of
law rules thereof).
6.6. NOTICES
All notices, demands, requests, or other communications that may
be or are required to be given, served, or sent by any party to any other party
pursuant to this Agreement shall be in writing and shall be hand delivered,
sent by overnight courier or mailed by first-class, registered or certified
mail, return receipt requested, postage prepaid, or transmitted by telegram,
telecopy or telex, addressed as follows:
(i) If to the Company:
McLeod, Inc.
221 Third Avenue SE, Suite 500
Cedar Rapids, IA 52401
ATTENTION: President
(ii) If to the Employee:
[EMPLOYEE]
[ADDRESS]
Each party may designate by notice in writing a new address to which any
notice, demand, request or communication may thereafter be so given, served or
sent. Each notice, demand, request, or communication that shall be hand
delivered, sent, mailed, telecopied or telexed in the manner described above,
or that shall be delivered to a telegraph company, shall be deemed sufficiently
given, served, sent, received or delivered for all purposes at such time as it
is delivered to the addressee (with the return receipt, the delivery receipt,
or (with respect to a telecopy or telex) the answerback being deemed
conclusive, but not exclusive,
- 6 -
<PAGE> 16
evidence of such delivery) or at such time as delivery is refused by the
addressee upon presentation.
6.7. BINDING EFFECT
Subject to any provisions hereof restricting assignment, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors, heirs, executors, administrators, legal
representatives and assigns.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, or have caused this Agreement to be duly executed on their behalf,
as of the day and year first above written.
McLEOD, INC.
By:
-------------------------------------
Name:
Title:
THE EMPLOYEE:
--------------------------------------------
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<PAGE> 1
EXHIBIT 10.54
[DATE]
[NAME AND ADDRESS OF EMPLOYEE]
Dear [EMPLOYEE NAME]:
The Board of Directors of McLeod, Inc. (together with its subsidiaries,
the "Company") considers excellent management to be essential to protecting and
enhancing the best interests of the Company and its stockholders. Although no
change of control of the Company is currently contemplated, the Board of
Directors recognizes that the possibility of such a change of control may be
unsettling to you and other officers of the Company and may result in the
departure or distraction of management personnel to the detriment of the
Company and its stockholders. Accordingly, the Board of Directors of the
Company has determined that appropriate steps should be taken (1) to reinforce
and encourage the continued attention and dedication of members of the
Company's management, including yourself, to their assigned duties without
financial or employment concerns arising from the possibility of such event,
and (2) to enable such key employees to consider only the best interests of all
stockholders and employees in negotiating with respect to such a change of
control.
This letter agreement sets forth the severance benefits that the
Company agrees will be provided to you in the event your employment with the
Company is terminated after a "change in control of the Company" (as defined in
SECTION 1) under the circumstances described below. This letter supersedes and
replaces any prior agreement between you and the Company relating to the
matters addressed herein.
1. CHANGE OF CONTROL
No benefits shall be payable hereunder unless there is a "Change of
Control" of the Company, as set forth below, and your employment by the Company
<PAGE> 2
[EMPLOYEE NAME]
[DATE]
Page 2
terminates in accordance with SECTION 2. For purposes of this Agreement, a
"Change of Control" of the Company means:
(a) execution by the Company of an agreement for the merger of the
Company into or with another Company, the result of which would
be that the stockholders of the Company at the time of execution
of such agreement would own less than 50% of the total equity of
the company surviving the merger; or
(b) the sale of assets of the Company having an aggregate book value
of 40% or more of the total book value of all assets of the
Company as shown on the then most recent annual audited financial
statement of the Company; 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 Securities Exchange Act of 1934, as
amended (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 Company representing 50% of the
Company'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 April 1996 of an Investor Agreement
among the Company, IES Investments Inc., Midwest Capital Group,
Inc., MWR Investments, Inc., Clark and Mary McLeod, and certain
other stockholders.
2. TERMINATION FOLLOWING CHANGE OF CONTROL
If any of the events described in SECTION 1 constituting a Change of
Control of the Company occurs, you will be entitled to the benefits provided in
SECTION 3 upon (1) the subsequent voluntary termination of your employment
within six months following the Change of Control; (2) the subsequent
involuntary termination of your employment within 24 months following the
Change of Control unless the termination is for Disability or Cause or because
of your death or
<PAGE> 3
[EMPLOYEE NAME]
[DATE]
Page 3
Retirement, as these terms are defined below; or (3) the subsequent voluntary
termination of your employment within 24 months following the Change of Control
if your voluntary termination follows a Material Reduction in your
responsibilities or compensation, as defined below.
2.1. DISABILITY
Termination by the Company of your employment based on
"Disability" means termination because of your absence from your duties with
the Company on a full-time basis for 180 consecutive business days as a result
of your incapacity due to physical or mental illness.
2.2. RETIREMENT
Termination by the Company of your employment based on
"Retirement" means termination in accordance with the Company's retirement
policy, including early retirement, generally applicable to its salaried
employees.
2.3. CAUSE
Termination by the Company of your employment for "Cause"
means termination following (i) your engaging in a criminal act involving the
Company, or (ii) your engaging in willful misconduct that is materially
injurious to the Company, monetarily or otherwise. For purposes of this
paragraph, no act, or failure to act, on your part shall be considered
"willful" unless done, or omitted to be done, by you in bad faith and without
reasonable belief that your action or omission was in the best interest of the
Company. In any event, you will not be deemed to have been terminated for
Cause unless and until (1) you have been given reasonable written notice of the
reasons for the termination, which notice sets a date and time for you to be
heard by the Board of Directors of the Company as to the allegations against
you; (2) you have been given the opportunity to appear before the Board of
Directors, with your counsel, for the purpose of answering the allegations
against you, at which time you or your counsel will have an opportunity to
present evidence and to confront and cross-examine witnesses against you; (3)
you have received a verbatim transcript of the proceedings before the Board of
Directors; and (4) there shall have been delivered to you a copy of a Notice of
Termination from the Chief Executive Officer or the Board of Directors of the
Company, finding (after any hearing described in clause (2) above) that in the
good faith opinion of the Board you were guilty of conduct referred to above in
clauses (i) or (ii) of the first sentence
<PAGE> 4
[EMPLOYEE NAME]
[DATE]
Page 4
of this paragraph and specifying the particulars thereof in detail. You will
not be required to move from the location at which you are principally employed
at the time of the Change of Control, and any refusal by you to so move will
not be construed as misconduct.
2.4. MATERIAL REDUCTION IN RESPONSIBILITIES OR COMPENSATION
Voluntary termination of your employment following a "Material
Reduction" in responsibilities or compensation means your voluntary termination
following (i) a reduction in your position so that you no longer occupy the
position you held immediately before the Change of Control or a substantially
similar position with an appropriate title, or (ii) a material reduction in
your authority, duties, responsibilities or compensation.
2.5. NOTICE OF TERMINATION
Any purported termination of your employment by the Company
will be communicated by written Notice of Termination to you. Any purported
termination of your employment by you following a Material Reduction must be
communicated by written Notice of Termination to the Company. For purposes of
this Agreement, a "Notice of Termination" means a notice that indicates the
specific reason(s) for the termination and sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of your
employment.
2.6. DATE OF TERMINATION
"Date of Termination" means:
(i) if your employment is terminated for Cause, the date
specified in the Notice of Termination, which shall be not less than five
business days after the date on which the Notice of Termination is given, or
(ii) if your employment is terminated for any other
reason, five business days after the date on which the Notice of Termination is
given.
3. CERTAIN BENEFITS UPON TERMINATION
You will be entitled pursuant to SECTION 2 to the benefits
described below if your employment is terminated as specified in SECTION 2.
<PAGE> 5
[EMPLOYEE NAME]
[DATE]
Page 5
3.1. COMPENSATION THROUGH DATE OF TERMINATION
The Company will pay you your "Full Compensation" through the
Date of Termination. Full Compensation for the purpose of this subsection
means your base salary at the rate in effect at the time Notice of Termination
is given, plus credit for any vacation earned but not taken, plus any
additional direct compensation or bonus payable to you with respect to any
period ending on or before the Date of Termination, plus the pro rata portion
of any quarterly and/or annual bonus that would have accrued with respect to
any period during which the Date of Termination occurs if the Date of
Termination had occurred after the end of such period and the Company's
performance had entitled you to 100% of such bonus amount, prorated to the
actual Date of Termination, less any payments thereto previously made.
3.2. LUMP SUM PAYMENT
On the Date of Termination, the Company will pay to you a lump
sum amount equal to the product of 24 times the "Average Monthly Compensation"
that was in effect during the 12 months immediately preceding the Change of
Control or the Date of Termination, whichever is higher. Average Monthly
Compensation for the purpose of this subsection means your base salary plus any
additional direct compensation or bonus payable to you. If your compensation
generally includes a bonus award but such bonus award has not yet been decided
at the Date of Termination, then the bonus to be included to determine average
monthly compensation shall be equal to the bonus paid to you for the previous
12-month period.
3.3. OPTIONS VEST
All outstanding options to purchase stock of the Company
previously granted to you on or before the Change of Control will become
immediately exercisable in full upon the giving of the Notice of Termination,
irrespective of whether or not such options otherwise were exercisable on such
date. Notwithstanding the provisions of any plan or agreement pursuant to
which such options have been granted, you may direct the Company to apply some
portion or all of the lump sum amount otherwise payable to you pursuant to
SECTION 3.2 toward partial or full payment of any exercise price payable to the
Company with respect to your exercise of stock options.
<PAGE> 6
[EMPLOYEE NAME]
[DATE]
Page 6
3.4. "COBRA" BENEFITS
In connection with a Termination, the Company agrees that you
may elect to continue coverage under the Company's group health plan pursuant
to Section 4980B of the Internal Revenue Code of 1986, as amended; if you do so
the Company agrees to continue to pay the employer portion of the premiums for
that coverage for the longer of (i) the period of your eligibility for benefits
pursuant to Section 4980B from the Date of Termination, or (ii) 24 months from
the Date of Termination.
3.5. CERTAIN LIMITATIONS
Notwithstanding any other provision of this Agreement or of
any other agreement, contract, or understanding heretofore or hereafter entered
into by you with the Company, except an agreement, contract, or understanding
hereafter entered into that expressly modifies or excludes application of this
paragraph (an "Other Agreement"), and notwithstanding any formal or informal
plan or other arrangement for the direct or indirect provision of compensation
to you (including groups or classes of participants or beneficiaries of which
you are a member), whether or not such compensation is deferred, is in cash, or
is in the form of a benefit to or for you (a "Benefit Arrangement"), if you are
a "disqualified individual," as defined in Section 280G(c) of the Internal
Revenue Code, as amended, any right to receive any payment or other benefit
under this Agreement shall not become exercisable or vested to the extent that:
(i) such right to exercise, vesting, payment, or benefit,
taking into account all other rights, vesting, payments, or
benefits to or for you under this Agreement, all Other
Agreements, and all Benefit Arrangements, would cause (as
determined by you in your reasonable discretion) any rights,
vesting, payments or benefits to you under this Agreement to
be considered a "parachute payment" within the meaning of
Section 280G(b)(2) of the Internal Revenue Code as then in
effect (a "Parachute Payment"); and
(ii) if, as a result of receiving a Parachute Payment, the
aggregate after-tax amounts received by you from the Company
under this Agreement, all Other Agreements, and all Benefit
Arrangements would be less than the maximum after-tax amount
that could be
<PAGE> 7
[EMPLOYEE NAME]
[DATE]
Page 7
received by you without causing any such right, vesting,
payment or benefit to be considered a Parachute Payment.
In the event that the receipt of any such right to exercise, vesting, payment,
or benefit under this Agreement, in conjunction with all other rights, vesting,
payments, or benefits to or for you under any Other Agreement or any Benefit
Arrangement would cause you to be considered to have received a Parachute
Payment under this Agreement that would have the effect of decreasing the
after-tax amount received by you as described in clause (ii) of the preceding
sentence, then you shall have the right, in your sole discretion, to designate
those rights, vesting, payments, or benefits under this Agreement, any Other
Agreements, and any Benefit Arrangements that should be reduced or eliminated
so as to avoid having the rights, vesting, payments or benefits to you under
this Agreement be deemed to be a Parachute Payment.
4. RESTRICTIVE COVENANT
You will be subject to the restrictive covenant described
below if your employment is terminated as specified in SECTION 2 and the
benefits specified in SECTION 3 are paid to you.
4.1. COVENANT
For a two-year period following a Termination, you shall not,
directly or indirectly, engage in or become an owner of, render any service to,
enter the employment of, or represent or solicit for any business that (a)
competes with any activity of the Company conducted at any time during the two
years prior to the Termination, or conducted during the six-month period
following the Termination as a result of plans initiated prior to such
termination, and (b) is located and/or conducts business within any of the
states in which the Company conducted any business during the two years prior
to the Termination or during the six-month period following the Termination as
a result of plans initiated prior to such Termination. Further, during the
restrictive period of this Agreement following any Termination, you shall not
employ or associate with your own activities, directly or indirectly, any
individual then employed in a management position by the Company.
<PAGE> 8
[EMPLOYEE NAME]
[DATE]
Page 8
4.2. ENFORCEABILITY OF COVENANT
You expressly agree that the duration and geographical area
set forth in this SECTION 4 are reasonable, that the covenant shall be
construed as an agreement independent of any other provision herein, and that
the existence of any claim or cause of action by you against the Company,
regardless of how arising, shall not constitute a defense to the enforcement by
the Company of this SECTION 4. If any portion of the covenant is held by a
court of law to be unenforceable with respect either to its duration or
geographical area, for whatever reason, it shall be considered divisible both
as to time and geographical area, so that each month of the specified period
shall be deemed a separate period of time and each county within a particular
state a separate geographical area, resulting in an intended requirement that
the longest lesser period of time or largest lesser geographical area found by
such court to be a reasonable restriction shall remain an effective restrictive
covenant, specifically enforceable against you.
4.3. PERMITTED EQUITY OWNERSHIP
Notwithstanding any statement contained in this Agreement to
the contrary, legal or beneficial ownership by you of an equity interest that
constitutes less than five percent of the outstanding voting power in a
competitive corporation, at least one class of capital stock of that is
publicly traded on a national or regional stock exchange or by means of an
electronic interdealer quotation system, shall not be deemed to constitute a
breach by you of the terms hereof.
4.4. REMEDIES FOR BREACH OF YOUR OBLIGATIONS
You agree that your services are of a personal, specific,
unique and extraordinary character and cannot be readily replaced by the
Company. You further agree that in the course of performing your services, you
will have access to various types of proprietary information of the Company,
that, if released to others or used by you other than for the benefit of the
Company, in either case without the Company's consent, could cause the Company
to suffer irreparable injury. Therefore, your obligations established under
this Agreement shall be enforceable both at law and in equity, by injunction,
specific performance, damages or other remedy; and the right of the Company to
obtain any such remedy shall be cumulative and not alternative and shall not be
exhausted by any one or more uses thereof.
<PAGE> 9
[EMPLOYEE NAME]
[DATE]
Page 9
5. TERM OF AGREEMENT
This Agreement will terminate at midnight on December 31, 2006
unless a Change of Control occurs during the six months preceding such date, in
which case this Agreement will terminate on December 31, 2007; provided,
however, that the restrictive covenant contained in SECTION 4 shall survive the
termination of this Agreement.
6. SUCCESSORS; BINDING AGREEMENT
The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, the term "Company" refers to the
Company as defined above and any successor to its business and/or assets that
assumes and agrees to perform this Agreement or which otherwise becomes bound
by all the terms and provisions of this Agreement by operation of law. In any
event, the rights and obligations of the Company under this Agreement shall
inure to the benefit of and be binding upon any of the Company's successors or
assigns. This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devises and legatees. If you die while any amount
hereunder remains to be paid to you, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement
to your devisee, legatee or other designee or, if there be no such designee, to
your estate.
7. NOTICES
For the purposes of this Agreement, notices and all other
communications provided for in the Agreement must be in writing and will be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company should be directed to the attention of the
Board of Directors of the Company with a copy to the Secretary of the Company,
or to such other address as
<PAGE> 10
[EMPLOYEE NAME]
[DATE]
Page 10
either party may have furnished to the other in writing in accordance herewith
(and any notice of change of address will be effective only upon receipt).
8. MISCELLANEOUS
No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing signed by you and such officer as may be specifically designated by the
Board of Directors of the Company. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter
hereof have been made by either party that are not expressly set forth in this
Agreement; provided, however, that this Agreement does not supersede or in any
way limit the rights, duties or obligations you may have under any other
written agreement with the Company. References herein to Sections are to
Sections of this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Delaware (excluding the choice of law provisions thereof).
9. VALIDITY
The invalidity or unenforceability of and provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
10. COUNTERPARTS
This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
<PAGE> 11
[EMPLOYEE NAME]
[DATE]
Page 11
If this letter correctly sets forth our agreement on the
subject matter hereof, kindly sign and return to the Company the enclosed copy
of this letters which will then constitute our agreement on this subject.
Yours truly,
McLEOD, INC.
By:
------------------------------
Agreed to as of
(Date)
- -------------------------------------
- -------------------------------------
[EMPLOYEE NAME]
<PAGE> 1
EXHIBIT 10.55
McLEOD, INC.
1996 EMPLOYEE STOCK OPTION PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.1. Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.2. No Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6. EFFECTIVE DATE AND TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.1. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.2. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
7. GRANT OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
8. LIMITATION ON INCENTIVE STOCK OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
9. OPTION AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
10. OPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
11. TERM AND EXERCISE OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
11.1. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
11.2. Exercise by Optionee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
11.3. Option Period and Limitations on Exercise . . . . . . . . . . . . . . . . . . . . . 6
11.4. Method of Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
12. TRANSFERABILITY OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
13. TERMINATION OF EMPLOYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
14. RIGHTS IN THE EVENT OF DEATH OR DISABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 8
14.1. Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
14.2. Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
15. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
16. SECURITIES LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
17. EXCHANGE ACT: RULE 16b-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
17.1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
17.2. Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
17.3. Restriction on Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . . . . 11
17.4. Requirement of Stockholders' Approval . . . . . . . . . . . . . . . . . . . . . . 11
18. AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
19. EFFECT OF CHANGES IN CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
19.1 Changes in Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
19.2. Reorganization With Corporation Surviving . . . . . . . . . . . . . . . . . . . . 12
19.3. Other Reorganizations; Sale of Assets or Stock . . . . . . . . . . . . . . . . . . 12
19.4. Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
19.5. No Limitations on Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 13
20. WITHHOLDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
21. DISCLAIMER OF RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
22. NONEXCLUSIVITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
23. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
ii
<PAGE> 4
McLEOD, INC.
1996 EMPLOYEE STOCK OPTION PLAN
McLEOD, INC., a Delaware corporation (the "Corporation"), sets
forth herein the terms of the 1996 Employee Stock Option Plan (the "Plan") as
follows:
1. PURPOSE
The Plan is intended to advance the interests of the
Corporation by providing eligible individuals (as designated pursuant to
Section 5 hereof) an opportunity to acquire or increase a proprietary interest
in the Corporation, which thereby will create a stronger incentive to expend
maximum effort for the growth and success of the Corporation and its
subsidiaries and will encourage such eligible individuals to remain in the
employ of the Corporation or that of one or more of its subsidiaries. Each
stock option granted under the Plan is intended to be an Incentive Stock Option
within the meaning of Section 422 of the Code, except (a) to the extent that
any such Option would exceed the limitations set forth in Section 8 hereof and
(b) for Options specifically designated at the time of grant as not being
Incentive Stock Options.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents
(including Option Agreements), the following definitions shall apply:
2.1 "Affiliate" means McLeod, Inc. and any company or other
trade or business that is controlled by or under common control with the
Corporation, (determined in accordance with the principles of Section 414(b)
and 414(c) of the Code and the regulations thereunder) or is an affiliate of
the Corporation within the meaning of Rule 405 of Regulation C under the 1933
Act.
2.2 "Board" means the Board of Directors of the Corporation.
2.3 "Code" means the Internal Revenue Code of 1986, as now in
effect or as hereafter amended.
2.4 "Committee" means the Compensation Committee of the Board
which must consist of no fewer than two members of the Board and shall be
appointed by the Board.
2.5 "Corporation" means McLeod, Inc.
2.6 "Effective Date" means the date of adoption of the Plan by
the Board.
<PAGE> 5
2.7 "Employer" means McLeod, Inc. or other Affiliate which
employs the designated recipient of an Option.
2.8 "Exchange Act" means the Securities Exchange Act of 1934,
as now in effect or as hereafter amended.
2.9 "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 shares of Stock are listed on an established national or
regional stock exchange, are admitted to quotation on the National Association
of Securities Dealers Automated Quotation System, or are publicly traded on an
established securities market, the Fair Market Value of the shares of Stock
shall be the closing price of the shares of 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 such
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 shares of Stock is reported for such trading day, on the next
preceding day on which any sale shall have been reported. If the shares of
Stock are not listed on such an exchange, quoted on such System or traded on
such a market, Fair Market Value shall be determined by the Board in good
faith.
2.10 "Grant Date" means the later of (i) the date as of which
the Committee approves the grant and (ii) the date as of which the Optionee and
the Corporation or Affiliate enter the relationship resulting in the Optionee
being eligible for grants.
2.11 "Incentive Stock Option" means an "incentive stock
option" within the meaning of section 422 of the Code.
2.12 "Option" means an option to purchase one or more shares
of Stock pursuant to the Plan.
2.13 "Option Agreement" means the written agreement evidencing
the grant of an Option hereunder.
2.14 "Optionee" means a person who holds an Option under the
Plan.
2.15 "Option Period" means the period during which Options may
be exercised as defined in Section 11.
2.16 "Option Price" means the purchase price for each share of
Stock subject to an Option.
2
<PAGE> 6
2.17 "Plan" means the McLeod, Inc. 1996 Employee Stock Option
Plan.
2.18 "1933 Act" means the Securities Act of 1933, as now in
effect or as hereafter amended.
2.19 "Stock" mean the shares of Class A common stock, par
value $.01 per share, of the Corporation.
2.20 "Subsidiary" means any "subsidiary corporation" of the
Corporation within the meaning of Section 425(f) of the Code.
3. ADMINISTRATION
3.1. COMMITTEE
The Plan shall be administered by the Committee appointed by
the Board, which shall have the full power and authority to take all actions
and to make all determinations required or provided for under the Plan or any
Option granted or Option Agreement entered into hereunder and all such other
actions and determinations not inconsistent with the specific terms and
provisions of the Plan deemed by the Committee to be necessary or appropriate
to the administration of the Plan or any Option granted or Option Agreement
entered into hereunder. The interpretation and construction by the Committee
of any provision of the Plan or of any Option granted or Option Agreement
entered into hereunder shall be final and conclusive.
3.2. NO LIABILITY
No member of the Board or of the Committee shall be liable for
any action or determination made, or any failure to take or make an action or
determination, in good faith with respect to the Plan or any Option granted or
Option Agreement entered into hereunder.
4. STOCK
The stock that may be issued pursuant to Options granted under
the Plan shall be Stock, which shares may be treasury shares or authorized but
unissued shares. The number of shares of Stock that may be issued pursuant to
Options granted under the Plan shall not exceed in the aggregate 4,525,000
shares of Stock, which number of shares is subject to adjustment as provided in
Section 19 hereof. If any Option expires, terminates or is terminated for any
reason prior to exercise in full, the shares of Stock that were subject to the
unexercised portion of such Option shall be available for future Options
granted under the Plan. It is the
3
<PAGE> 7
intention of the Board that the shares of Stock that are subject to unexercised
Options granted under the Plan, and all other plans of the Corporation pursuant
to which stock options can be granted, shall not exceed 15% of the then-issued
and outstanding shares of Stock and the then-granted and outstanding options.
5. ELIGIBILITY
Options may be granted under the Plan to any officer or key
employee of the Corporation or any Subsidiary (including any such officer or
key employee who is also a director of the Corporation or any Subsidiary) as
the Committee shall determine and designate from time to time prior to
expiration or termination of the Plan. An individual may hold more than one
Option, subject to such restrictions as are provided herein.
6. EFFECTIVE DATE AND TERM
6.1. EFFECTIVE DATE
The Plan shall become effective as of the date of adoption by
the Board, subject to stockholders' approval of the Plan within one year of
such 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 By-Laws 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 such effective date, any Options granted hereunder shall be
null, void and of no effect.
6.2. TERM
The Plan shall terminate on the date 10 years after the
effective date.
7. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Committee
may, at any time and from time to time prior to the date of termination of the
Plan, grant to such eligible individuals as the Committee may determine Options
to purchase such number of shares of Stock on such terms and conditions as the
Committee may determine, including any terms or conditions which may be
necessary to qualify
4
<PAGE> 8
such Options as Incentive Stock Options. Without limiting the foregoing, the
Committee may at any time, with the consent of the Optionee, amend the terms of
outstanding Options or issue new Options in exchange for the surrender and
cancellation of outstanding Options. The date on which the Committee approves
the grant of an Option (or such later date as is specified by the Committee)
shall be considered the date on which such Option is granted. The maximum
number of shares of Stock subject to Options that can be awarded under the Plan
to any person is 2,000,000 shares.
8. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option (other than an Option described in Section 1 hereof)
shall constitute an Incentive Stock Option only to the extent that the
aggregate fair market value (determined at the time the Option is granted) of
the Stock with respect to which Incentive Stock Options are exercisable for the
first time by any Optionee during any calendar year (under the Plan and all
other plans of the Optionee's employer corporation and its parent and
subsidiary corporations within the meaning of Section 422(d) of the Code) does
not exceed $100,000. This limitation shall be applied by taking Options into
account in the order in which such Options were granted.
9. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by
written agreements to be executed by the Corporation and the Optionee, in such
form or forms as the Committee shall from time to time determine. Option
Agreements covering Options granted from time to time or at the same time need
not contain similar provisions; provided, however, that all such Option
Agreements shall comply with all terms of the Plan.
10. OPTION PRICE
The purchase price of each share of Stock subject to an Option
shall be fixed by the Committee and stated in each Option Agreement. In the
case of an Option that is intended to constitute an Incentive Stock Option, the
Option Price shall be not less than the greater of par value or 100 percent of
the fair market value of a share of the Stock covered by the Option on the date
the Option is granted (as determined in good faith by the Committee); provided,
however, that in the event the Optionee would otherwise be ineligible to
receive an Incentive Stock Option by reason of the provisions of Sections
422(b)(6) and 424(d) of the Code (relating to stock ownership of more than 10
percent), the Option Price of an Option which is intended to be an Incentive
Stock Option shall be not less than the greater of par value or 110 percent of
the fair market value of a share of the Stock covered
5
<PAGE> 9
by the Option at the time such Option is granted. In the case of an Option
not intended to constitute an Incentive Stock Option, the Option Price shall be
not less than the greater of par value or 50 percent of the Fair Market Value
of a share of the Stock covered by the Option on the date the Option is granted
(as determined in good faith by the Committee).
11. TERM AND EXERCISE OF OPTIONS
11.1. TERM
Each Option granted under the Plan shall terminate and all
rights to purchase shares thereunder shall cease upon the expiration of 10
years from the date such Option is granted, or on such date prior thereto as
may be fixed by the Committee and stated in the Option Agreement relating to
such Option; provided, however, that in the event the Optionee would otherwise
be ineligible to receive an Incentive Stock Option by reason of the provisions
of Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of
more than 10 percent), an Option granted to such Optionee which is intended to
be an Incentive Stock Option shall in no event be exercisable after the
expiration of five years from the date it is granted.
11.2. EXERCISE BY OPTIONEE
Only the Optionee receiving an Option (or, in the event of the
Optionee's legal incapacity or incompetency, the Optionee's guardian or legal
representative, and in the case of the Optionee's death, the Optionee's estate)
may exercise the Option.
11.3. OPTION PERIOD AND LIMITATIONS ON EXERCISE
Each Option granted under the Plan shall be exercisable in
whole or in part at any time and from time to time over a period commencing on
or after the date of grant of the Option and ending upon the expiration or
termination of the Option, as the Committee shall determine and set forth in
the Option Agreement relating to such Option. Without limitation of the
foregoing, the Committee, subject to the terms and conditions of the Plan, may
in its sole discretion provide that an Option may not be exercised in whole or
in part for any period or periods of time during which such Option is
outstanding as the Committee shall determine and set forth in the Option
Agreement relating to such Option. Any such limitation on the exercise of an
Option contained in any Option Agreement may be rescinded, modified or waived
by the Committee, in its sole discretion, at any time and from time to time
after the date of grant of such Option. Notwithstanding any other provisions
of the Plan, no Option shall be exercisable in whole or in part prior to the
date the Plan is approved by the stockholders of the Corporation as provided in
Section 6.1 hereof.
6
<PAGE> 10
11.4. METHOD OF EXERCISE
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, as determined by the Committee and set forth in the Option
Agreement pertaining to an Option, (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 Sections 11.4(a) and 11.4(b) hereof; provided, however, that the Committee
may in its discretion impose and set forth in the Option Agreement pertaining
to an Option such limitations or prohibitions on the use of shares of Stock to
exercise Options as it deems appropriate. Payment in full of the Option Price
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. A
separate Stock certificate or certificates shall be issued for any shares
purchased pursuant to the exercise of an Option which is an Incentive Stock
Option, which certificate or certificates shall not include any shares which
were purchased pursuant to the exercise of an Option which is not an Incentive
Stock Option. An individual holding or exercising an Option shall have none of
the rights of a stockholder until the shares of Stock covered thereby are fully
paid and issued to such individual and, except as provided in Section 19
hereof, no adjustment shall be made for dividends or other rights for which the
record date is prior to the date of such issuance.
7
<PAGE> 11
12. TRANSFERABILITY OF OPTIONS
No Option shall be assignable or transferable by the Optionee
to whom it is granted, other than by will or the laws of descent and
distribution.
13. TERMINATION OF EMPLOYMENT
The Committee may provide, by inclusion of appropriate
language in any Option Agreement, that an Optionee may (subject to the general
limitations on exercise set forth in Section 11.3 hereof), in the event of
termination of employment of the Optionee with the Corporation or a Subsidiary,
exercise an Option, in whole or in part, at any time subsequent to such
termination of employment and prior to termination of the Option pursuant to
Section 11.1 hereof, either subject to or without regard to any installment
limitation on exercise imposed pursuant to Section 11.3 hereof, as the
Committee, in its sole and absolute discretion, shall determine and set forth
in the Option Agreement. Whether a leave of absence or leave on military or
government service shall constitute a termination of employment for purposes of
the Plan shall be determined by the Committee, which determination shall be
final and conclusive. For purposes of the Plan, a termination of employment
with the Corporation or a Subsidiary shall not be deemed to occur if the
Optionee is immediately thereafter employed with the Corporation or any other
Subsidiary.
14. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
14.1. DEATH
If an Optionee dies while employed by the Corporation or a
Subsidiary or within the period following the termination of employment during
which the Option is exercisable under Section 13 or 14.2 hereof, the executors,
administrators, legatees or distributees of such Optionee's estate shall have
the right (subject to the general limitations on exercise set forth in Section
11.3 hereof), at any time within three months after the date of such Optionee's
death and prior to termination of the Option pursuant to Section 11.1 hereof,
to exercise any Option held by such Optionee at the date of such Optionee's
death, to the extent such Option was exercisable immediately prior to such
Optionee's death; provided, however, that the Committee may provide by
inclusion of appropriate language in any Option Agreement that, in the event of
the death of an Optionee, the executors, administrators, legatees or
distributees of such Optionee's estate may exercise an Option (subject to the
general limitations on exercise set forth in Section 11.3 hereof), in whole or
in part, at any time subsequent to such Optionee's death and prior to
termination of the Option pursuant to Section 11.1 hereof, either subject to or
without regard to any installment limitation on exercise imposed pursuant to
8
<PAGE> 12
Section 11.3 hereof, as the Committee, in its sole and absolute discretion,
shall determine and set forth in the Option Agreement.
14.2. DISABILITY
If an Optionee terminates employment with the Corporation or a
Subsidiary by reason of the "permanent and total disability" (within the
meaning of Section 22(e) (3) of the Code) of such Optionee, then such Optionee
shall have the right (subject to the general limitations on exercise set forth
in Section 11.3 hereof), at any time within three months after such termination
of employment and prior to termination of the Option pursuant to Section 11.1
hereof, to exercise, in whole or in part, any Option held by such Optionee at
the date of such termination of employment, to the extent such Option was
exercisable immediately prior to such termination of employment; provided,
however, that the Committee may provide, by inclusion of appropriate language
in any Option Agreement, that an Optionee may (subject to the general
limitations on exercise set forth in Section 11.3 hereof), in the event of the
termination of employment of the Optionee with the Corporation or a Subsidiary
by reason of the "permanent and total disability" (within the meaning of
Section 22(e)(3) of the Code) of such Optionee, exercise an Option, in whole or
in part, at any time subsequent to such termination of employment and prior to
termination of the Option pursuant to Section 11.1 hereof, either subject to or
without regard to any installment limitation on exercise imposed pursuant to
Section 11.3 hereof, as the Committee, in its sole and absolute discretion,
shall determine and set forth in the Option Agreement. Whether a termination
of employment is to be considered by reason of "permanent and total disability"
for purposes of the Plan shall be determined by the Committee, which
determination shall be final and conclusive.
15. 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.
16. SECURITIES LAWS
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 violation by the individual exercising the Option or by 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. If at any time the Corporation shall determine, in its
discretion, that the listing, registration or qualification of any shares
subject to the Option upon any securities exchange or
9
<PAGE> 13
under any state or federal law, or the consent of any government regulatory
body, is necessary or desirable as a condition of, or in connection with, the
issuance or purchase of shares, the Option may not be exercised in whole or in
part unless such listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not acceptable to
the Corporation, and any delay caused thereby shall in no way affect the date
of termination of the Option. 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 Corporation has received evidence satisfactory to the Corporation
that the Optionee may acquire such shares pursuant to an exemption from
registration under the Securities Act. Any determination in this connection by
the Corporation 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.
17. EXCHANGE ACT: RULE 16B-3
17.1. GENERAL
The Plan is intended to comply with Rule 16b-3 ("Rule 16b-3")
(and any successor thereto) under the Exchange Act. Any provision inconsistent
with Rule 16b-3 shall, to the extent permitted by law and determined to be
advisable by the Committee (constituted in accordance with Section 17.2
hereof), be inoperative and void.
17.2. COMPENSATION COMMITTEE
The Committee appointed in accordance with Section 3.1 hereof
shall consist of not fewer than two members of the Board each of whom shall
qualify (at the time of appointment to the Committee and during all periods of
service on the Committee) in all respects as a "disinterested person" as
defined in Rule 16b-3.
10
<PAGE> 14
17.3. RESTRICTION ON TRANSFER OF STOCK
No director, officer or other "insider" of the Corporation
subject to Section 16 of the Exchange Act shall be permitted to sell Stock
(which such "insider" had received upon exercise of an Option) during the six
months immediately following the grant of such Option.
17.4. REQUIREMENT OF STOCKHOLDERS' APPROVAL
No amendment by the Board shall, without approval 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 amendment, or by
written consent in accordance with applicable state law and the Certificate of
Incorporation and By-Laws of the Corporation, materially increase the benefits
accruing to Section 16 "insiders" under the Plan or take any other action that
would require the approval of such stockholders pursuant to Rule 16b-3.
18. AMENDMENT AND TERMINATION
The Board may, at any time and from time to time, amend,
suspend or terminate the Plan as to any shares of Stock as to which Options
have not been granted; provided, however, that no amendment by the Board shall,
without approval 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 amendment, or by written consent in accordance with applicable state law
and the Certificate of Incorporation and By-Laws of the Corporation, materially
change the requirements as to eligibility to receive Options or increase the
maximum number of shares of Stock in the aggregate that may be sold pursuant to
Options granted under the Plan (except as permitted under Section 19 hereof).
The Corporation also may retain the right in an Option Agreement to cause a
forfeiture of the shares or gain realized by an Optionee on account of the
Optionee taking actions in "competition with the Corporation," as defined in
the applicable Option Agreement. Furthermore, the Corporation may, in the
Option Agreement, retain the right to annul the grant of an Option if the
holder of such grant was an employee of the Corporation or a Subsidiary and is
terminated "for cause," as defined in the applicable Option Agreement. Except
as permitted under Section 19 hereof, no amendment, suspension or termination
of the Plan shall, without the consent of the Optionee, alter or impair rights
or obligations under any Option theretofore granted under the Plan.
11
<PAGE> 15
19. EFFECT OF CHANGES IN CAPITALIZATION
19.1 CHANGES IN STOCK
If the number of outstanding shares of Stock is 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 in capital stock, or other
increase or decrease in such shares effected without receipt of consideration
by the Corporation, occurring after the effective date of the Plan, a
proportionate and appropriate adjustment shall be made by the Corporation in
the number and kind of shares for which Options are outstanding, so that the
proportionate interest of the Optionee 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.
19.2. REORGANIZATION WITH CORPORATION SURVIVING
Subject to Section 19.3 hereof, if the Corporation shall be
the surviving entity in any reorganization, merger or consolidation of the
Corporation with one or more other entities, 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.
19.3. OTHER REORGANIZATIONS; SALE OF ASSETS OR STOCK
Upon the dissolution or liquidation of the Corporation, or
upon a merger, consolidation or reorganization of the Corporation with one or
more other entities in which the Corporation is not the surviving entity, or
upon a sale of substantially all of the assets of the Corporation to another
entity, or upon any transaction (including, without limitation, a merger or
reorganization in which the Corporation is the surviving entity) approved by
the Board that results in any person or entity (other than persons who are
holders of stock of the Corporation at the time the Plan is approved by the
Stockholders and other than an Affiliate) 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,
12
<PAGE> 16
except to the extent provision is made in connection with such transaction for
the continuation of the Plan and/or the assumption of the Options theretofore
granted, or for the substitution for such Options of new options covering the
stock of a successor entity, 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 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, each Optionee shall have the right (subject to the
general limitations on exercise set forth in Section 11.3 hereof and except as
otherwise specifically provided in the Option Agreement relating to such
Option), immediately prior to the occurrence of such termination and during
such period occurring prior to such termination as the Committee in its sole
discretion shall designate, to exercise such Option in whole or in part, to the
extent such Option was otherwise exercisable at the time such termination
occurs, but subject to any additional provisions that the Committee may, in its
sole discretion, include in any Option Agreement. The Committee shall send
written notice of an event that will result in such a termination to all
Optionees not later than the time at which the Corporation gives notice thereof
to its stockholders.
19.4. ADJUSTMENTS
Adjustments under this Section 19 relating to stock or
securities of the Corporation shall be made by the Committee, 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.
19.5. NO LIMITATIONS ON CORPORATION
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 merge, consolidate, dissolve or liquidate, or to sell or
transfer all or any part of its business or assets.
20. WITHHOLDING
The Corporation or a Subsidiary may be obligated to withhold federal
and local income taxes and Social Security taxes to the extent that an Optionee
realizes ordinary income in connection with the exercise of an Option. The
Corporation or a Subsidiary may withhold amounts needed to cover such taxes
from payments otherwise due and owing to an Optionee, and upon demand the
Optionee will promptly pay to the Corporation or a Subsidiary having such
obligation any
13
<PAGE> 17
additional amounts as may be necessary to satisfy such withholding tax
obligation. Such payment shall be made in cash or cash equivalents.
21. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to remain in the employ of the Corporation or any
Subsidiary, or to interfere in any way with the right and authority of the
Corporation or any Subsidiary either to increase or decrease the compensation
of any individual at any time, or to terminate any employment or other
relationship between any individual and the Corporation or any Subsidiary. The
obligation of the Corporation to pay any benefits pursuant to the Plan shall be
interpreted as a contractual obligation to pay only those amounts described
herein, in the manner and under the conditions prescribed herein. The Plan
shall in no way be interpreted to require the Corporation to transfer any
amounts to a third party trustee or otherwise hold any amounts in trust or
escrow for payment to any participant or beneficiary under the terms of the
Plan.
22. NONEXCLUSIVITY
Neither the adoption of the Plan nor the submission of the
Plan to the stockholders of the Corporation for approval shall be construed as
creating any limitations upon the right and authority of the Board to adopt
such other incentive compensation arrangements (which arrangements may be
applicable either generally to a class or classes of individuals or
specifically to a particular individual or individuals) as the Board in its
discretion determines desirable, including, without limitation, the granting of
stock options otherwise than under the Plan.
23. GOVERNING LAW.
This Plan and all Options to be granted hereunder shall be
governed by the laws of the State of Delaware (but not including the choice of
law rules thereof).
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<PAGE> 18
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
--------------------------------
Casey D. Mahon, Esq.
Secretary
15
<PAGE> 1
EXHIBIT 10.56
McLEOD, INC.
EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. SHARES SUBJECT TO THE PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. INTERPRETATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
4. ELIGIBLE EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
5. PARTICIPATION IN THE PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
6. PAYROLL DEDUCTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
7. PAYROLL DEDUCTION PERIODS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
8. RIGHTS TO PURCHASE CLASS A
COMMON STOCK; PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
9. TIMING OF PURCHASE; PURCHASE LIMITATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
10. ISSUANCE OF STOCK CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
11. WITHHOLDING OF TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
12. ACCOUNT STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
13. PARTICIPATION ADJUSTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
14. CHANGES IN ELECTIONS TO PURCHASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
15. VOLUNTARY TERMINATION OF EMPLOYMENT OR
DISCHARGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
16. RETIREMENT OR SEVERANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
17. LAY-OFF, AUTHORIZED LEAVE OR ABSENCE OR
DISABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
18. DEATH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
19. FAILURE TO MAKE PERIODIC CASH PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
20. TERMINATION OF PARTICIPATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
21. ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
22. APPLICATION OF FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
23. NO RIGHT TO CONTINUED EMPLOYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
24. AMENDMENT OF PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
25. EFFECTIVE DATE; TERM AND TERMINATION OF THE PLAN. . . . . . . . . . . . . . . . . . . . . . 9
26. EFFECT OF CHANGES IN CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(a) Changes in Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(b) Reorganization in Which the Company Is the Surviving
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(c) Reorganization in Which the Company Is Not the Surviving
Corporation or Sale of Assets or Stock . . . . . . . . . . . . . . . . . . . . . . 10
(d) Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(e) No Limitations on Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
27. GOVERNMENTAL REGULATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
28. STOCKHOLDER RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
29. RULE 16B-3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
30. PAYMENT OF PLAN EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
- ii -
<PAGE> 4
McLEOD, INC.
EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors of McLeod, Inc. (the "Company") has adopted
this Employee Stock Purchase Plan (the "Plan") to enable eligible employees of
the Company and its participating Affiliates (as defined below), through
payroll deductions, to purchase shares of the Company's Class A common stock,
par value $0.01 per share (the "Class A Common Stock"). The Plan is for the
benefit of the employees of McLeod, Inc. and any participating Affiliates. The
Plan is intended to benefit the Company by increasing the employees' interest
in the Company's growth and success and encouraging employees to remain in the
employ of the Company or its participating Affiliates. The provisions of the
Plan are set forth below:
1. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 26 below, the aggregate
number of shares of Class A Common Stock that may be made available for
purchase by participating employees under the Plan is 1,000,000. The shares
issuable under the Plan may, in the discretion of the Board of Directors of the
Company (the "Board"), be either authorized but unissued shares or treasury
shares.
2. ADMINISTRATION.
The Plan shall be administered under the direction of the Compensation
Committee of the Board (the "Committee"). No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan.
3. INTERPRETATION.
It is intended that the Plan will meet the requirements for an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code
of 1986 (the "Code"), and it is to be so applied and interpreted. Subject to
the express provisions of the Plan, the Committee shall have authority to
interpret the Plan, to prescribe, amend and rescind rules relating to it, and
to make all other determinations necessary or advisable in administering the
Plan, all of which determinations will be final and binding upon all persons.
4. ELIGIBLE EMPLOYEES.
Any employee of the Company or any of its participating Affiliates may
participate in the Plan, except the following, who are ineligible to
participate: (a) an employee who has been employed by the Company or any of
its participating Affiliates for less than six months as of the beginning of a
Payroll Deduction Period (as defined in Section 7 below); (b) an employee whose
customary employment is for
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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 shares under the Plan, would own
shares of Class A Common Stock (including shares 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. The term "participating
Affiliate" means any company or other trade or business that is a subsidiary of
the Company (determined in accordance with the principles of Sections 424(e)
and (f) of the Code and the regulations thereunder). The Board may at any time
in its sole discretion, if it deems it advisable to do so, terminate the
participation of the employees of a particular participating Affiliate.
5. PARTICIPATION IN THE PLAN.
An eligible employee may become a participating employee in the Plan
by completing an election to participate in the Plan on a form provided by the
Company and submitting that form to the Payroll Department of the Company. The
form will authorize payroll deductions (as provided in Section 6 below) and
authorize the purchase of shares of Class A Common Stock for the employee's
account in accordance with the terms of the Plan. Enrollment will become
effective upon the first day of the first Payroll Deduction Period.
6. PAYROLL DEDUCTIONS.
At the time an eligible employee submits his or her election to
participate in the Plan (as provided in Section 5 above), the employee shall
elect to have deductions made from his or her pay, on each pay day following
his or her enrollment in the Plan, and for as long as he or she shall
participate in the Plan. The deductions will be credited to the participating
employee's account under the Plan. An employee may not during any Payroll
Deduction Period change his or her percentage of payroll deduction for that
Payroll Deduction Period, nor may an employee withdraw any contributed funds,
other than in accordance with Sections 14 through 20 below.
7. PAYROLL DEDUCTION PERIODS.
The Payroll Deductions Periods shall be determined by the Committee.
The first Payroll Deduction Period under the Plan shall commence on the first
day of the first payroll period commencing after July 1, 1996, or, if later, on
the first day of the first payroll period commencing after the closing of a
bona fide, firm commitment underwritten public offering of the Class A Common
Stock of the Company pursuant to a registration statement declared effective
under the Securities Act of 1933, as amended.
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<PAGE> 6
8. RIGHTS TO PURCHASE CLASS A COMMON STOCK; PURCHASE PRICE.
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 of each share of Class A Common Stock
(the "Purchase Price") shall be determined by the Committee; provided, however,
the Purchase Price shall not be less than the lesser of 85 percent of the fair
market value of the Class A Common Stock (i) on the first trading day of the
Payroll Deduction Period or (ii) on the last trading day of such Payroll
Deduction Period; provided, further, that in no event shall the Purchase Price
be less than the par value of the Class A Common Stock. For purposes of the
Plan, "fair market value" means the value of each share of Class A Common Stock
subject to the Plan determined as follows: if on the determination date the
shares of Class A Common Stock are listed on an established national or
regional stock exchange, are admitted to quotation on the National Association
of Securities Dealers Automated Quotation System, or are publicly traded on an
established securities market, the fair market value of the shares of Class A
Common Stock shall be the closing price of the shares of Class A Common 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 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 shares of Class A Common Stock is reported for such trading day, on the
next preceding day on which any sale shall have been reported. If the shares
of Class A Common Stock are not listed on such an exchange, quoted on such
System or traded on such a market, fair market value shall be determined by the
Board in good faith.
9. TIMING OF PURCHASE; PURCHASE LIMITATION.
Unless a participating employee has given prior written notice
terminating such employee's participation in the Plan, or the employee's
participation in the Plan has otherwise been terminated as provided in Sections
15 through 20 below, such employee will be deemed to have exercised
automatically his or her right to purchase Class A Common Stock on the last
trading day of the Payroll Deduction Period (except as provided in Section 14
below) for the number of shares of Class A Common Stock which the accumulated
funds in the employee's account at that time will purchase at the Purchase
Price, subject to the participation adjustment provided for in Section 13 below
and subject to adjustment under Section 26 below. Notwithstanding any other
provision of the Plan, no employee may purchase in any one calendar year under
the Plan and all other "employee stock purchase plans" of the Company and its
participating Affiliates shares of Class A Common Stock having an aggregate
fair market value in excess of $25,000, determined as of the first trading date
of the Payroll Deduction Period as to shares purchased during such period.
Effective upon the last trading day of the Payroll Deduction Period, a
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<PAGE> 7
participating employee will become a stockholder with respect to the shares
purchased during such period, and will thereupon have all dividend, voting and
other ownership rights incident thereto. Notwithstanding the foregoing, no
shares shall be sold pursuant to the Plan unless the Plan is approved by the
Company's stockholders in accordance with Section 25 below.
10. ISSUANCE OF STOCK CERTIFICATES.
On the last trading day of the Payroll Deduction Period, a
participating employee will be credited with the number of shares of Class A
Common Stock purchased for his or her account under the Plan during such
Payroll Deduction Period. Shares purchased under the Plan will be held in the
custody of an agent (the "Agent") appointed by the Board of Directors. The
Agent may hold the shares purchased under the Plan in stock certificates in
nominee names and may commingle shares held in its custody in a single account
or stock certificate without identification as to individual participating
employees. A participating employee may, at any time following his or her
purchase of shares under the Plan, by written notice instruct the Agent to have
all or part of such shares reissued in the participating employee's own name
and have the stock certificate delivered to the employee.
11. WITHHOLDING OF TAXES.
To the extent that a participating employee realizes ordinary income
in connection with a sale or other transfer of any shares of Class A Common
Stock purchased under the Plan, the Company may withhold amounts needed to
cover such taxes from any payments otherwise due and owing to the participating
employee or from shares that would otherwise be issued to the participating
employee hereunder. Any participating employee who sells or otherwise
transfers shares purchased under the Plan within two years after the beginning
of the Payroll Deduction Period in which the shares were purchased must within
30 days of such transfer notify the Payroll Department of the Company in
writing of such transfer.
12. ACCOUNT STATEMENTS.
The Company will cause the Agent to deliver to each participating
employee a statement for each Payroll Deduction Period during which the
employee purchases Class A Common Stock under the Plan, reflecting the amount
of payroll deductions during the Payroll Deduction Period, the number of shares
purchased for the employee's account, the price per share of the shares
purchased for the employee's account and the number of shares held for the
employee's account at the end of the Payroll Deduction Period.
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<PAGE> 8
13. PARTICIPATION ADJUSTMENT.
If in any Payroll Deduction Period the number of unsold shares that
may be made available for purchase under the Plan pursuant to Section 1 above
is insufficient to permit exercise of all rights deemed exercised by all
participating employees pursuant to Section 9 above, a participation adjustment
will be made, and the number of shares purchasable by all participating
employees will be reduced proportionately. Any funds then remaining in a
participating employee's account after such exercise will be refunded to the
employee.
14. CHANGES IN ELECTIONS TO PURCHASE.
(a) A participating employee (other than a participating employee who
is an executive officer of the Company who is subject to Section 16(b) under
the Securities Exchange Act of 1934, as amended, (the "Exchange Act")) may, at
any time prior to the last day of the Payroll Deduction Period, by written
notice to the Company, direct the Company to cease payroll deductions (or, if
the payment for shares is being made through periodic cash payments, notify the
Company that such payments will be terminated), in accordance with the
following alternatives:
(i) The employee's option to purchase shall be reduced to the
number of shares which may be purchased, as of the last day of the Payroll
Deduction Period, with the amount then credited to the employee's account; or
(ii) Withdraw the amount in such employee's account and
terminate such employee's option to purchase.
(b) Any participating employee may increase or decrease his or her
payroll deduction or periodic cash payments, to take effect on the first day of
the next Payroll Deduction Period, by delivering to the Company a new form
regarding election to participate in the Plan under Section 5 above.
15. VOLUNTARY TERMINATION OF EMPLOYMENT OR DISCHARGE.
In the event a participating employee (other than a participating
employee who is an executive officer of the Company who is subject to Section
16(b) under the Exchange Act) voluntarily leaves the employ of the Company or a
participating Affiliate, otherwise than by retirement under a plan of the
Company or a participating Affiliate, or is discharged for cause prior to the
last day of the Payroll Deduction Period, the amount in the employee's account
will be distributed and the employee's option to purchase will terminate. In
the event a participating employee who is subject to Section 16(b) under the
Exchange Act voluntarily leaves the employ of the Company or a participating
Affiliate, otherwise than by retirement under a plan of the Company or a
participating Affiliate, or is discharged for cause prior to the last day of
the Payroll Deduction Period, the employee's option to
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<PAGE> 9
purchase shall be reduced to the number of shares which may be purchased, as of
the last day of the Payroll Deduction Period, with the amount then credited to
the employee's account.
16. RETIREMENT OR SEVERANCE.
In the event a participating employee (other than a participating
employee who is an officer of the Company who is subject to Section 16(b) under
the Exchange Act) who has an option to purchase shares leaves the employ of the
Company or a participating Affiliate because of retirement under a plan of the
Company or a participating Affiliate, or because of termination of the
employee's employment by the Company or a participating Affiliate for any
reason except discharge for cause, the participating employee may elect, within
10 days after the date of such retirement or termination, one of the following
alternatives:
(a) The employee's option to purchase shall be reduced to the number
of shares which may be purchased, as of the last day of the Payroll Deduction
Period, with the amount then credited to the employee's account; or
(b) Withdraw the amount in such employee's account and terminate such
employee's option to purchase.
In the event the participating employee does not make an election
within the aforesaid 10-day period, he or she will be deemed to have elected
subsection 16(b) above; provided, however, that a participating employee who is
an officer of the Company who is subject to Section 16(b) under the Exchange
Act will receive shares of Class A Common Stock pursuant to subsection 16(a).
17. LAY-OFF, AUTHORIZED LEAVE OR ABSENCE OR DISABILITY.
Payroll deductions for shares for which a participating employee has
an option to purchase may be suspended during any period of absence of the
employee from work due to lay-off, authorized leave of absence or disability
or, if the employee so elects, periodic payments for such shares may continue
to be made in cash provided, however, that if such employee is an officer of
the Company who is subject to Section 16(b) under the Exchange Act, such
periodic payments must be continued in cash.
If such employee returns to active service prior to the last day of
the Payroll Deduction Period, the employee's payroll deductions will be resumed
and if said employee did not make periodic cash payments during the employee's
period of absence, the employee shall, by written notice to the Company's
Payroll Department within 10 days after the employee's return to active
service, but not later than the last day of the Payroll Deduction Period,
elect:
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<PAGE> 10
(a) To make up any deficiency in the employee's account resulting
from a suspension of payroll deductions by an immediate cash payment;
(b) Not to make up such deficiency, in which event the number of
shares to be purchased by the employee shall be reduced to the number of whole
shares which may be purchased with the amount, if any, then credited to the
employee's account plus the aggregate amount, if any, of all payroll deductions
to be made thereafter; or
(c) Withdraw the amount in the employee's account and terminate
the employee's option to purchase.
A participating employee on lay-off, authorized leave of absence or
disability on the last day of the Payroll Deduction Period shall deliver
written notice to his or her employer on or before the last day of the Payroll
Deduction Period, electing one of the alternatives provided in the foregoing
clauses (a), (b) and (c) of this Section 17. If any employee fails to deliver
such written notice within 10 days after the employee's return to active
service or by the last day of the Payroll Deduction Period, whichever is
earlier, the employee shall be deemed to have elected subsection 17(c) above.
If the period of a participating employee's lay-off, authorized leave
of absence or disability shall terminate on or before the last day of the
Payroll Deduction Period, and the employee shall not resume active employment
with the Company or a participating Affiliate, the employee shall receive a
distribution in accordance with the provisions of Section 16 of this Plan.
18. DEATH.
In the event of the death of a participating employee while the
employee's option to purchase shares is in effect, the legal representatives of
such employee may, within three months after the employee's death (but no later
than the last day of the Payroll Deduction Period) by written notice to the
Company or participating Affiliate, elect one of the following alternatives:
(a) The employee's option to purchase shall be reduced to the number
of shares which may be purchased, as of the last day of the Payroll Deduction
Period, with the amount then credited to the employee's account; or
(b) Withdraw the amount in such employee's account and terminate such
employee's option to purchase.
In the event the legal representatives of such employee fail to
deliver such written notice to the Company or participating Affiliate within
the prescribed period, the election to purchase shares shall terminate and the
amount, then
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<PAGE> 11
credited to the employee's account shall be paid to such legal representatives;
provided, however, that the estate of a participating employee who is an
officer of the Company who is subject to Section 16(b) under the Exchange Act
will receive shares of Class A Common Stock pursuant to subsection 18(a).
19. FAILURE TO MAKE PERIODIC CASH PAYMENTS.
Under any of the circumstances contemplated by this Plan, where the
purchase of shares is to be made through periodic cash payments in lieu of
payroll deductions, the failure to make any such payments shall reduce, to the
extent of the deficiency in such payments, the number of shares purchasable
under this Plan.
20. TERMINATION OF PARTICIPATION.
A participating employee will be refunded all moneys in his or her
account, and his or her participation in the Plan will be terminated if either
(a) the Board elects to terminate the Plan as provided in Section 25 below, or
(b) the employee ceases to be eligible to participate in the Plan under Section
4 above. As soon as practicable following termination of an employee's
participation in the Plan, the Company will deliver to the employee a check
representing the amount in the employee's account and a stock certificate
representing the number of whole shares held in the employee's account. Once
terminated, participation may not be reinstated for the then current Payroll
Deduction Period, but, if otherwise eligible, the employee may elect to
participate in any subsequent Payroll Deduction Period.
21. ASSIGNMENT.
No participating employee may assign his or her rights to purchase
shares of Class A Common Stock under the Plan, whether voluntarily, by
operation of law or otherwise. Any payment of cash or issuance of shares of
Class A Common Stock under the Plan may be made only to the participating
employee (or, in the event of the employee's death, to the employee's estate).
Once a stock certificate has been issued to the employee or for his or her
account, such certificate may be assigned the same as any other stock
certificate.
22. APPLICATION OF FUNDS.
All funds received or held by the Company under the Plan may be used
for any corporate purpose until applied to the purchase of Class A Common Stock
and/or refunded to participating employees. Participating employees' accounts
will not be segregated.
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<PAGE> 12
23. NO RIGHT TO CONTINUED EMPLOYMENT.
Neither the Plan nor any right to purchase Class A Common Stock under
the Plan confers upon any employee any right to continued employment with the
Company or any of its participating Affiliates, nor will an employee's
participation in the Plan restrict or interfere in any way with the right of
the Company or any of its participating Affiliates to terminate the employee's
employment at any time.
24. AMENDMENT OF PLAN.
The Board may, at any time, amend the Plan in any respect (including
an increase in the percentage specified in Section 8 above used in calculating
the Purchase Price); provided, however, that without approval of the
stockholders of the Company no amendment shall be made (a) increasing the
number of shares specified in Section 1 above that may be made available for
purchase under the Plan (except as provided in Section 26 below), (b) changing
the eligibility requirements for participating in the Plan, or (c) impairing
the vested rights of participating employees.
25. EFFECTIVE DATE; TERM AND TERMINATION OF THE PLAN.
The Plan shall be effective as of the date of adoption by the Board,
which date is set forth below, subject to approval of the Plan by a majority of
the votes present and entitled to vote at a duly held meeting of the
shareholders of the Company at which a quorum representing a majority of all
outstanding voting stock is present, either in person or by proxy; provided,
however, that upon approval of the Plan by the shareholders of the Company as
set forth above, all rights to purchase shares granted under the Plan on or
after the effective date shall be fully effective as if the shareholders of the
Company had approved the Plan on the effective date. If the shareholders fail
to approve the Plan on or before one year after the effective date, the Plan
shall terminate, any rights to purchase shares granted hereunder shall be null
and void and of no effect, and all contributed funds shall be refunded to
participating employees. The Board may terminate the Plan at any time and for
any reason or for no reason, provided that such termination shall not impair
any rights of participating employees that have vested at the time of
termination. In any event, the Plan shall, without further action of the
Board, terminate ten (10) years after the date of adoption of the Plan by the
Board or, if earlier, at such time as all shares of Class A Common Stock that
may be made available for purchase under the Plan pursuant to Section 1 above
have been issued.
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<PAGE> 13
26. EFFECT OF CHANGES IN CAPITALIZATION.
(a) CHANGES IN STOCK.
If the number of outstanding shares of Class A Common Stock is
increased or decreased or the shares of Class A Common Stock are changed into
or exchanged for a different number or kind of shares or other securities of
the Company by reason of any recapitalization, reclassification, stock split,
reverse split, combination of shares, exchange of shares, stock dividend, or
other distribution payable in capital stock, or other increase or decrease in
such shares effected without receipt of consideration by the Company occurring
after the effective date of the Plan, the number and kinds of shares that may
be purchased under the Plan shall be adjusted proportionately and accordingly
by the Company. In addition, the number and kind of shares for which rights
are outstanding shall be similarly adjusted so that the proportionate interest
of a participating employee immediately following such event shall, to the
extent practicable, be the same as immediately prior to such event. Any such
adjustment in outstanding rights shall not change the aggregate Purchase Price
payable by a participating employee with respect to shares subject to such
rights, but shall include a corresponding proportionate adjustment in the
Purchase Price per share.
(b) REORGANIZATION IN WHICH THE COMPANY IS THE SURVIVING
CORPORATION.
Subject to Subsection (c) of this Section 26, if the Company shall be
the surviving corporation in any reorganization, merger or consolidation of the
Company with one or more other corporations, all outstanding rights under the
Plan shall pertain to and apply to the securities to which a holder of the
number of shares of Class A Common Stock subject to such rights would have been
entitled immediately following such reorganization, merger or consolidation,
with a corresponding proportionate adjustment of the Purchase Price per share
so that the aggregate Purchase Price thereafter shall be the same as the
aggregate Purchase Price of the shares subject to such rights immediately prior
to such reorganization, merger or consolidation.
(c) REORGANIZATION IN WHICH THE COMPANY IS NOT THE SURVIVING
CORPORATION OR SALE OF ASSETS OR STOCK.
Upon any dissolution or liquidation of the Company, or upon a merger,
consolidation or reorganization of the Company with one or more other
corporations in which the Company is not the surviving corporation, or upon a
sale of all or substantially all of the assets of the Company to another
corporation, or upon any transaction (including, without limitation, a merger
or reorganization in which the Company is the surviving corporation) approved
by the Board that results in any
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<PAGE> 14
person or entity owning more than 80 percent of the combined voting power of
all classes of stock of the Company, the Plan and all rights outstanding
hereunder shall terminate, except to the extent provision is made in writing in
connection with such transaction for the continuation of the Plan and/or the
assumption of the rights theretofore granted, or for the substitution for such
rights of new rights 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 and rights theretofore
granted shall continue in the manner and under the terms so provided. In the
event of any such termination of the Plan, the Payroll Deduction Period shall
be deemed to have ended on the last trading day prior to such termination, and
in accordance with Section 10 above the rights of each participating employee
then outstanding shall be deemed to be automatically exercised on such last
trading day. The Board shall send written notice of an event that will result
in such a termination to all participating employees not later than the time at
which the Company gives notice thereof to its stockholders.
(d) ADJUSTMENTS.
Adjustments under this Section 26 related to stock or securities of
the Company shall be made by the Committee, whose determination in that respect
shall be final, binding, and conclusive.
(e) NO LIMITATIONS ON COMPANY.
The grant of a right pursuant to the Plan shall not affect or limit in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve or liquidate, or to sell or
transfer all or any part of its business or assets.
27. GOVERNMENTAL REGULATION.
The Company's obligation to issue, sell and deliver shares of Class A
Common Stock pursuant to the Plan is subject to such approval of any
governmental authority and any national securities exchange or other market
quotation system as may be required in connection with the authorization,
issuance or sale of such shares.
28. STOCKHOLDER RIGHTS.
Any dividends paid on shares held by the Company for a participating
employee's account will be transmitted to the employee. The Company will
deliver to each participating employee who purchases shares of Class A Common
Stock under the Plan, as promptly as practicable by mail or otherwise, all
notices of
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<PAGE> 15
meetings, proxy statements, proxies and other materials distributed by the
Company to its stockholders. Any shares of Class A Common Stock held by the
Agent for an employee's account will be voted in accordance with the employee's
duly delivered and signed proxy instructions. There will be no charge to
participating employees in connection with such notices, proxies and other
materials.
29. RULE 16B-3.
Transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or any successor provision under the
Exchange Act. If any provision of the Plan or action by the Board fails to so
comply, it shall be deemed null and void to the extent permitted by law and
deemed advisable by the Board. Moreover, in the event the Plan does not
include a provision required by Rule 16b-3 to be stated herein, such provision
(other than one relating to eligibility requirements, or the price and amount
of awards) shall be deemed automatically to be incorporated by reference into
the Plan.
30. PAYMENT OF PLAN EXPENSES.
The Company will bear all costs of administering and carrying out the
Plan.
* * *
This Plan was duly adopted and approved by the Board of Directors of
the Company by resolution at a meeting held on the 28th of March, 1996.
/s/ CASEY D. MAHON
------------------------------
Casey D. Mahon, Esq.
Secretary of the Company
This Plan was duly approved by the stockholders of the Company at a
meeting of the stockholders held on the 30th of April, 1996.
/s/ CASEY D. MAHON
------------------------------
Casey D. Mahon, Esq.
Secretary of the Company
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<PAGE> 1
EXHIBIT 10.57
INDEMNITY AGREEMENT
BETWEEN
MCLEOD, INC.
AND
---------------------------------------
DATED AS OF
------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. CERTAIN DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1. Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2. Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4. Indemnifiable Event . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5. Reviewing Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.6. Voting Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.7. Special Independent Counsel . . . . . . . . . . . . . . . . . . . . . . 3
2. BASIC INDEMNIFICATION ARRANGEMENT . . . . . . . . . . . . . . . . . . . . . . . . 3
3. CHANGE IN CONTROL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4. INDEMNIFICATION FOR ADDITIONAL EXPENSES. . . . . . . . . . . . . . . . . . . . . . 5
5. LIMITATIONS ON SETTLEMENT AUTHORITY IN SOME CASES . . . . . . . . . . . . . . . . 6
6. PARTIAL INDEMNITY, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7. NO PRESUMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8. NON-EXCLUSIVITY, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9. LIABILITY INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
10. PERIOD OF LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
11. AMENDMENTS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
12. SUBROGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
13. NO DUPLICATION OF PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
14. BINDING EFFECT, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
15. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
16. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
17. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
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<PAGE> 3
INDEMNITY AGREEMENT
This Indemnity Agreement (this "Agreement") is entered into as
______________, between McLeod, Inc., a Delaware corporation (the
"Corporation"), and _____________________ ("Director") [("Officer")] (1)/, a
director of the Corporation.
WHEREAS, both the Corporation and Director recognize the increased
risk of litigation and other claims being asserted against public companies in
today's environment;
WHEREAS, basic protection against undue risk of personal liability of
the Corporation officers and directors is expected to be provided through
insurance coverage providing reasonable protection at reasonable cost, and
Director expects such coverage to be available;
WHEREAS, the Corporation's Amended and Restated Certificate of
Incorporation (the "Certificate") and/or Amended and Restated Bylaws (the
"Bylaws") require the Corporation to indemnify and advance expenses to its
directors and officers to the full extent permitted by law, and Director has
been serving as a director or executive officer of the Corporation in part in
reliance on such provisions;
WHEREAS, in recognition of Director's need for substantial protection
against personal liability in order to insure and enhance Director's continued
service to the Corporation in an effective manner, and Director's reliance on
the aforesaid provisions in the Corporation's Certificate and/or Bylaws, and in
part to provide Director with specific contractual assurance that the
protection promised by such provisions will be available to Director
(regardless of, among other things, any amendment to or revocation of such
provisions of the Certificate and/or Bylaws, any change in the composition of
the Corporation's board of directors or the occurrence of any acquisition
transaction relating to the Corporation); and
WHEREAS, the Corporation wishes to provide in this Agreement for the
effective indemnification of and the advancing of expenses to Director to the
fullest extent (whether partial or complete) permitted by law and as set forth
in this Agreement, and, to the extent insurance is maintained, for the
continued coverage of Director under the Corporation's director and officer
liability insurance policies;
- ----------------------------------
(1)/ Global change of Director to Officer should be made if this Agreement
is to be used for an officer. Hereinafter, all references will be to Director
or director.
<PAGE> 4
NOW THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS
1.1. CHANGE IN CONTROL
A "Change in Control" shall be deemed to have occurred if (i)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the board of directors of the Corporation and any new
director whose election by the board of directors or nomination for election by
the Corporation's stockholders was approved by a vote of at least two-thirds of
the directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof, or (ii) the
stockholders of the Corporation approve a merger or consolidation of the
Corporation with any other corporation, other than a merger or consolidation
which would result in the Voting Securities of the Corporation outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Corporation or such surviving entity outstanding immediately
after such merger or consolidation, or the stockholders of the Corporation
approve a plan of complete liquidation and dissolution of the Corporation or an
agreement for the sale or disposition by the Corporation of all or
substantially all the Corporation's assets; provided, however, that a would-be
Change in Control under (ii) herein which is approved and recommended in
advance by the Corporation's board of directors shall not be deemed a Change in
Control.
1.2. CLAIM
A "Claim" is any threatened, pending or completed action, suit
or proceeding, or any inquiry or investigation (whether conducted by the
Corporation or any other party) that Director in good faith believes might lead
to the institution of any such action, suit or proceeding, whether civil,
criminal, administrative, investigative or other.
1.3. EXPENSES
"Expenses" include attorneys' fees and all other costs,
expenses and obligations paid or incurred by or on behalf of Director (other
than amounts paid or payable directly or indirectly to Director or any person
or entity controlled by Director) in connection with investigating, defending,
being a witness in or participating in (including on appeal), or preparing to
defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
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<PAGE> 5
1.4. INDEMNIFIABLE EVENT
An "Indemnifiable Event" shall be any event or occurrence
related to the fact that Director is or was a director, officer, employee,
agent or fiduciary of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee, trustee, agent or fiduciary
of another corporation, partnership, joint venture, employee benefit plan,
trust or other enterprise, or by reason of anything done or not done by
Director in any such capacity.
1.5. REVIEWING PARTY
A "Reviewing Party" shall be any appropriate person or body
consisting of a member or members of the Corporation's board or directors or
any other person or body selected hereunder (including Special Independent
Counsel, as defined below) who is not a party to the particular Claim for which
Director is seeking indemnification. If there has not been Change in Control,
the Reviewing Party shall be selected by the Corporation's board of directors.
If there has been such a Change in Control, the Reviewing Party shall be
Special Independent Counsel.
1.6. VOTING SECURITIES
"Voting Securities" are any securities of the Corporation
which vote generally in the election of directors.
1.7. SPECIAL INDEPENDENT COUNSEL
"Special Independent Counsel" is counsel selected by Director
and approved by the Corporation (which approval shall not be unreasonably
withheld) and who has not, unless waived by the Corporation and Director,
otherwise performed services for the Corporation or Director within the last
ten years.
2. BASIC INDEMNIFICATION ARRANGEMENT
(a) In the event Director was, is or becomes a party to
or witness or other participant in, or is threatened to be made a party to or
witness or other participant in, a Claim by reason of (or arising in part out
of) an Indemnifiable Event, the Corporation shall indemnify Director to the
fullest extent permitted by law as soon as practicable but in any event no
later than thirty days after written demand is presented to the Corporation,
against any and all Expenses, judgments, fines, penalties and amounts paid or
owing in settlement (including all interest, assessments and other charges paid
or payable in connection with or in respect of such Expenses, judgments, fines,
penalties or amounts paid in settlement) paid or incurred by or on behalf of
Director in connection with such Claim. Director shall
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<PAGE> 6
give the Corporation written notice of all such Claims and the particulars
thereof as soon as practicable.
(b) If so requested by Director, the Corporation shall
advance (within ten business days of such request) any and all Expenses to
Director (an "Expense Advance"). In the event that any person (including,
without limitation, the Corporation) challenges the reasonableness of any
Expense Advance requested by Director, an affidavit provided to the Corporation
by Special Independent Counsel certifying that, in the view of such Special
Independent Counsel, the Expenses in question were reasonably incurred shall
finally and conclusively (but not exclusively) establish the reasonableness of
such Expenses for purposes of determining Director's entitlement to Expense
Advances, but not for purposes of later determining Director's entitlement to
indemnification pursuant to this Agreement at the conclusion of the underlying
action.
(c) Notwithstanding anything in this Agreement to the
contrary, (i) Director shall not be entitled to indemnification pursuant to
this Agreement in connection with any Claim (other than a claim for
indemnification (including, without limitation, indemnification pursuant to
Section 4 of this Agreement), Expense Advances, or expenses advanced pursuant
to Section 4 of this Agreement) initiated by Director against any party (other
than the Corporation or any director of officer of the Corporation) unless such
Claim was authorized by the board of directors of the Corporation, (ii) prior
to a Change in Control, Director shall not be entitled to indemnification
pursuant to this Agreement in connection with any Claim (other than a claim for
indemnification (including, without limitation, indemnification pursuant to
Section 4 of this Agreement), Expense Advances, or expenses advanced pursuant
to Section 4 of this Agreement) initiated by Director against the Corporation
or any director or officer of the Corporation unless the Corporation has joined
in or consented to the initiation of such Claim; (iii) the obligations of the
Corporation under Section 2(a) shall be subject to the condition that the
Reviewing Party shall not have determined in a writing stating the reasons
therefor that Director would not be permitted to be indemnified under
applicable law; and (iv) the obligation of the Corporation to make an Expense
Advance pursuant to Section 2(b) shall be subject to the condition that, if,
when and to the extent that the Reviewing Party determines that Director would
not be permitted to be so indemnified under applicable law, the Corporation
shall be entitled to be reimbursed by Director (who hereby agrees to reimburse
the Corporation) for all such amounts theretofore paid; provided, however, that
if Director has commenced legal proceedings in a court of competent
jurisdiction to secure a determination that Director should be indemnified
under applicable law, any determination made by the Reviewing Party that
Director would not be permitted to be indemnified under applicable law shall
not be binding and Director shall not be required to reimburse the Corporation
for any Expense Advance until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or lapsed).
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<PAGE> 7
(d) If the Reviewing Party determines that Director would
not be permitted to be indemnified in whole or in part under applicable law
(such determination to be made by the Reviewing Party independent of any
position of the Corporation on any aspect of the indemnification, including
without limitation the appropriateness of the amount of any settlement),
Director shall have the right to commence litigation in any court in the State
of Delaware or in the State(s) of Director's residence or employment, having
subject matter jurisdiction thereof, and in which venue is proper, seeking an
initial determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, and the Corporation hereby consents to
service of process and to appear in any such proceeding. The Corporation and
Director hereby agree that Director's remedies at law are inadequate in the
event Director commences litigation to recover indemnification, Expense
Advances, or expenses to be advanced pursuant to Section 4 of this Agreement,
in each case withheld by the Corporation. Any determination by the Reviewing
Party otherwise shall be conclusive and binding on the Corporation and
Director.
3. CHANGE IN CONTROL
If there is a Change in Control of the Corporation, then with
respect to all matters thereafter arising concerning the rights of Director to
indemnity payments and Expense Advances under this Agreement or any other
agreement, or under the Corporation's Certificate and/or Bylaws now or
hereafter in effect, relating to Claims for Indemnifiable Events, the
Corporation shall seek legal advice only from Special Independent Counsel.
Such counsel, among other things, shall render its written opinion to the
Corporation and Director as to whether and to what extent Director would be
permitted to be indemnified under applicable law. The Corporation agrees to
pay the reasonable fees of the Special Independent Counsel referred to above
and to fully indemnify such counsel against any and all expenses (including
attorneys' fees), claims, liabilities and damages arising out of or relating to
this Agreement or its engagement pursuant hereto.
4. INDEMNIFICATION FOR ADDITIONAL EXPENSES.
The Corporation shall indemnify Director against any and all
expenses (including attorneys' fees) and, if requested by Director, shall,
within ten business days of such request, advance such expenses to Director,
which are incurred by or on behalf of Director (other than amounts paid or
payable directly or indirectly to Director or any person or entity controlled
by Director) in connection with any claim asserted against or action brought by
Director for (i) indemnification hereunder or advance payment of Expenses by
the Corporation under this Agreement (or any other agreement or the
Corporation's and/or Bylaws now or hereafter in effect) relating to Claims for
Indemnifiable Events, and/or (ii) recovery under any director and officer
liability insurance policies maintained by the Corporation, regardless of
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<PAGE> 8
whether Director ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. LIMITATIONS ON SETTLEMENT AUTHORITY IN SOME CASES
(a) If no Change in Control has occurred, Director shall
not independently negotiate settlement without first giving the Reviewing Party
and the Corporation twenty business days' notice. Thereafter, Director may
engage in such negotiations and may settle the case unless the Reviewing Party
and trial counsel for the Corporation handling the case (and in cases where
outside counsel is used, such outside counsel) advise Director that they have
investigated the Director's involvement in the event and have determined that
the matter is appropriate and legal for indemnity and all judgments, expenses
and costs will, if lawful, be paid by the Corporation; provided, however, that
such limitation on settlement negotiations shall not apply to actions by or in
the right of the Corporation against Director. The Reviewing Party and such
counsel shall also promptly give Director notice of any subsequent change or
reversal of any such prior determination of the Reviewing Party and such
counsel, stating the reasons for such change or reversal, after which notice
Director may independently negotiate and settle the case.
(b) In any case, the Corporation shall not unreasonably
withhold its consent to any proposed settlement.
6. PARTIAL INDEMNITY, ETC.
If Director is entitled under any provision of this Agreement
to indemnification by the Corporation for some or a portion of Expenses,
judgments, fines, penalties and amounts paid in settlement of a Claim but not,
however, for all of the total amount thereof, the Corporation shall
nevertheless indemnify Director for the portion thereof to which Director is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Director has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, Director shall be indemnified against all Expenses incurred in
connection therewith. In connection with any determination by the Reviewing
Party as to whether Director is entitled to be indemnified hereunder, the
burden of proof shall be on the Corporation to establish that Director is not
so entitled.
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<PAGE> 9
7. NO PRESUMPTION
For purposes of this Agreement, the termination of any claim,
action, suit or proceeding, by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Director did not meet any
particular standard of conduct or have any particular belief or that a court
has determined that indemnification is not permitted by applicable law. The
termination of a suit by settlement shall be presumed to be a disposition
favorable to Director and in the best interests of the Corporation.
8. NON-EXCLUSIVITY, ETC.
The rights of Director hereunder shall be in addition to any
other rights Director may have under the Corporation's Certificate, Bylaws, the
Delaware General Corporation Law or any other law or agreement. To the extent
that a change in applicable law (whether by statute or judicial decision)
permits greater indemnification by agreement than would be afforded currently,
it is the intent of the parties hereto that Director shall enjoy by this
Agreement the greater benefits so afforded by such change.
9. LIABILITY INSURANCE
To the extent the Corporation maintains an insurance policy or
policies providing director and officer liability insurance, Director shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any the Corporation director
or officer.
10. PERIOD OF LIMITATIONS
No legal action shall be brought and no cause of action shall
be asserted by or on behalf of the Corporation or any affiliate of the
Corporation against Director, Director's spouse, heirs, executors or personal
or legal representatives after the expiration of two years from the date of
accrual of such cause of action, and any claim or cause of action of the
Corporation or its affiliate shall be extinguished and deemed released unless
asserted by the timely filing of a legal action within such two-year period;
provided, however, that if any shorter period of limitations is otherwise
applicable to any such cause of action, such shorter period shall govern.
-7-
<PAGE> 10
11. AMENDMENTS, ETC.
No supplement, modification or amendment of this Agreement
shall be binding unless executed in writing by both the parties hereto. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provisions hereof (whether or not similar) nor
shall such waiver constitute a continuing waiver.
12. SUBROGATION
In the event of payment under this Agreement, the Corporation
shall be subrogated to the extent of such payment to all of the rights of
recovery of Director, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Corporation effectively to bring suit
to enforce such rights.
13. NO DUPLICATION OF PAYMENTS
The Corporation shall not be liable under this Agreement to
make any payment in connection with any claim made against Director to the
extent Director has otherwise actually received payment (under any insurance
policy, the Corporation's Certificate, Bylaws or otherwise) of the amounts
otherwise Indemnifiable hereunder.
14. BINDING EFFECT, ETC.
This Agreement shall be binding upon and inure to the benefit
of and be enforceable by the parties hereto and their respective successors
(including any direct or indirect successor by purchase, merger, consolidation
or otherwise to all or substantially all of the business and/or assets of the
Corporation), assigns, spouses, heirs, and personal and legal representatives.
15. TERMINATION
This Agreement may be terminated by either party by giving the
other three months' written notice; provided, however, that the Corporation may
not terminate this Agreement unless the Corporation is concurrently terminating
all like Indemnity Agreements then in force. No termination of this Agreement,
automatic or otherwise, shall nullify any of the rights and obligations of
either Director or the Corporation hereunder in respect of any matter occurring
prior to the effective date of termination.
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<PAGE> 11
16. SEVERABILITY
The provisions of this Agreement shall be severable in the
event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
17. GOVERNING LAW
This Agreement shall be governed by and construed and enforced
in accordance with the laws of the State of Delaware applicable to contracts
made and to be performed in such state, without giving effect to the principles
of conflicts of laws.
McLEOD, INC.
By:
--------------------------------------
Name:
---------------------------
Title:
----------------------------
-----------------------------------------
Name:
---------------------------
Title:
----------------------------
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<PAGE> 1
EXHIBIT 10.58
LICENSE AGREEMENT
Between
PageMart, Inc.
and
MWR Telecom, Inc.
(d/b/a MWR Towers)
April 12, 1996
<PAGE> 2
Master Tower Site License Agreement
Table of Contents
<TABLE>
<S> <C>
1. Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 1
2. Master License Term and Renewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 2
3. Site Supplement Term and Renewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 2
4. Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 3
5. Permitted Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 3
6. Interference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 4
7. Relocation of Licensed Space . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 5
8. Improvements; Utilities; Access; Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 5
9. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 7
10. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 8
11. Limited Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 9
12. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 9
13. Notification of Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 10
14. Environmental Hazards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 11
15. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 11
16. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 12
17. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 12
18. Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 12
19. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 12
20. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 13
21. Interruptions or Delays in Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 13
22. No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 13
23. Covenants and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 13
24. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 14
25. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 14
26. Execution of Other Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 14
27. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 14
INTERFERENCE, FAA/FCC, ASSIGNMENT and TERMINATION RIDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . page 16
EXHIBIT A: SITE SUPPLEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 17
EXHIBIT B: DESCRIPTION OF LICENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 20
EXHIBIT C: FEES AND CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 22
</TABLE>
<PAGE> 3
MASTER TOWER SITE LICENSE AGREEMENT
This Master Tower Site License Agreement ("Master License") is entered
into this 5th day of April, 1996 ("Commencement Date"), by and between MWR
Telecom, Inc. d/b/a MWR Towers , a Delaware corporation , with offices in Cedar
Rapids, Iowa ("Licensor") and, PageMart, Inc., a Delaware corporation , with
offices in Dallas, Texas ("Licensee").
RECITALS
A. Licensor has entered into various agreements with utility
companies ("Company") wherein it has obtained access to certain microwave
communication towers ("Towers") and adjacent land for the purpose of
installing, maintaining and removing communications equipment to provide
communications services and including the sublicensing of such rights ("Company
Tower Agreements").
B. Licensee wishes to sublicense from Licensor on a non-exclusive
basis certain portions of such Towers and adjacent land for the purpose of
locating unmanned radio communications equipment. Each licensed location will
be referred to individually as a "Site" and collectively as "Sites".
In consideration of the above recitals, the mutual covenants and premises in
this Master Lease, the parties agree as follows:
1. PREMISES
1.1 Subject to the following terms and conditions, Licensor grants
Licensee the right to access and use certain space on one or more Towers
together with sufficient space in the adjacent equipment building, equipment
module or land ("Site") as specified on individual Site Supplements.
1.2 Licensor warrants, with respect to each Site Supplement, that
it has a good and marketable leasehold interest or a valid license for access
and use of such Site.
1.3 Each Site location is described in the Site Supplements
attached as Exhibit A, with each Tower location identified separately on
individual pages of Exhibit A. Licensee's use of the Site shall be limited to
the described Site together with Licenses for access described and depicted in
attached Exhibit B, with its separate pages identifying Licenses for access
corresponding to the Sites identified in Exhibit A. Upon receipt of written
communication by Licensee of the desire to add Tower Sites to this Master
License, Licensor shall provide Licensee with the Tower Site Description
(Exhibit A, page 1) to be completed by Licensee. Upon receipt of the completed
document, Licensor shall evaluate the feasibility of utilization of the Site.
Licensor may decline an additional Site Supplement based on its own business
purposes, if there is not adequate space to accommodate Licensee's equipment,
antennas and appurtenances, or pursuant to paragraph 3 of this License. A Site
Supplement shall become effective either upon the date of installation or 30
days after Licensor's written approval for the use of the Site, whichever
occurs first. ("Effective Date").
1
<PAGE> 4
2. MASTER LICENSE TERM AND RENEWAL
The initial term of this Master License is five (5) years, from the
Commencement Date and terminating at Midnight on the last day of the month in
which the fifth annual anniversary of the Commencement Date shall have occurred
("Term"). The Term of this Master License shall automatically be renewed for
three (3) successive five (5) year periods, unless written notice of
non-renewal is delivered at least ninety (90) days prior to the expiration of
the initial Term or any renewal Term.
3. SITE SUPPLEMENT TERM AND RENEWAL
3.1 The Licensor and Licensee's obligations under any Site
Supplement issued pursuant to this Master License are expressly conditioned
upon and subject to the following:
(a) Unless otherwise specified by Licensor, Licensee
shall obtain, at Licensee's expense, all applicable licenses, permits
or other approvals from all local, state of federal government and/or
regulatory entities ("Government Approvals").
(b) Licensee's technical reports must establish to
Licensor's and Company's satisfaction that the Site is capable of
being suitably engineered to accomplish Licensee's intended use of the
Site in compliance with the Authorization Procedures established by
Licensor and Company.
(c) Licensee shall comply with the Operational Procedures
established by Licensor and Company.
3.2 Licensee acknowledges that the access rights granted by any
Site Supplement are subject to any limitations or restrictions on access
imposed upon Licensor (and therefore upon Licensee) by the underlying Company
Tower Agreement relating to a particular Site. Licensee agrees to abide by
such limitations or restrictions.
3.3 Licensee acknowledges that the underlying Company Tower
Agreement or a project segment authorized under such Agreement grants the
Company the right to terminate such underlying Company Tower Agreement under
the following conditions:
(a) if the use of such portion of the Company Utility
Network (as defined in the Company Tower Agreement) is forbidden by
governmental authorities or by property owners pursuant to contract;
(b) The site use interferes or compromises the integrity
of the Company Utility Network, Company Communication Network (as
defined in the Company Tower Agreement) or the operation of the
Company Utility Network;
(c) due to engineering or insurance concerns including
but not limited to electrical interference or maintenance of the
physical/structural integrity of the Towers; or
(d) failure to cure a material breach of the Company
Tower Agreement.
2
<PAGE> 5
In the event of such termination, the relevant Site Supplements shall
terminate concurrently therewith.
3.4 Initial Site Supplements may be requested by Licensee for an
initial period of five (5) years, and for one (1) additional five (5) year
period if the Master License is then in effect. No new Site Supplements shall
issue after the expiration of ten (10) years from the Effective Date of this
Master Lease, unless the term of such Site Supplement does not extend beyond
the Term or renewal Term of the Master License.
3.5 The initial term of each Site Supplement is five (5) years.
Licensee may request renewal of any Site Supplement coterminous with the Term
of the Master License. Licensee may request an extension of the Site Supplement
for an additional period by giving notice of the renewal request in writing at
least six (6) months prior to the expiration of the current Term.
3.6 The renewal of the Master License and related Site Supplements
shall be on the same terms and conditions as set forth in this Master Lease,
except that the rent shall be the greater of the fair market rent for leases of
towers of comparable quality in the area or the current Rent plus a percentage
equal to the percentage increase in the latest published Consumer Price Index
compared to the same index as shown for the historical month of March, 1996.
"Consumer Price Index" shall mean the Consumer Price Index for all Urban
Consumers ("CPI-U"). If the said index ceases to be published, then a
reasonably comparable index shall be used.
4. RENT
4.1 Licensee shall pay Licensor, as rent, at the rates set forth
in Exhibit C ("Rent"), payable in accordance with the terms of the applicable
Site Supplement. Rent shall be due monthly in advance, payable to MWR Towers,
at Licensor's address specified on the invoice. Rent shall be adjusted as
described in Paragraph 3.6 of this Master License.
4.2 Within 30 days of the receipt of the invoice, Licensee agrees
to make payment in full, without deduction or setoff. Payment shall refer to
the invoice number. Licensee agrees that any restrictive endorsements,
releases, or other statements on or accompanying payments accepted by Licensor
shall not be effective. Delinquent payments shall bear interest at the rate of
one and one-half percent (1 1/2%) per month, or portion thereof, but not to
exceed the maximum lawful rate.
4.3 Charges under this Master Lease, including all subsequently
executed Site Supplements, do not include taxes. Licensee agrees to pay any
sales, use, or other taxes (exclusive of taxes on Licensor's net income) that
may be levied on Licensor in connection with the Licensee's attachments on the
Tower and use of the Site, unless Licensee has provided Licensor with a valid
tax exemption certificate.
5. PERMITTED USE
5.1 The Site may be used by Licensee only for installation,
operation, construction, maintenance, repair or replacement of antennas and
other Licensor-approved equipment and facilities used in connection with the
permitted uses of the transmission and reception of radio
3
<PAGE> 6
communications signals ("Communications Facilities or Communications System").
Licensee may (prior to or after the Effective Date) obtain a title report,
perform surveys, soils tests, and other engineering analysis and studies on,
under and over the Site, necessary to determine that Licensee's use of the Site
will be compatible with Licensee's engineering specifications, system design,
operations, Government Approvals and Operational Procedures. All on-site
activities performed prior to Effective Date, such as feasibility testing and
Site suitability assurance, may occur only with the prior written approval of
Licensor, unless otherwise specified in writing by the Licensor. Licensee must
provide a certificate of insurance consistent with the requirements in
Paragraph 11, prior to conducting any on-site activities, such as feasibility
testing and Site suitability assurance.
5.2 Prior to execution of a Site Supplement, Licensee will examine
the Site. Licensee will conduct a feasibility study at Licensee's expense and
assure its review and approval by Licensor. Licensee will determine that the
Site is suitable for Licensee's facilities and intended use. Licensor shall
determine whether a structural analysis will be required in addition to the
feasibility study. Licensor shall also determine to what extent the Tower will
require modification to withstand the additional load brought about by
installation of Licensee's Communications Facilities. The cost of the
structural analysis and the required modifications shall occur at Licensee's
expense. Licensor makes no representations that the Site is suitable for
Licensee's facilities and intended use. Taking possession of the Site by
Licensee is conclusive evidence that Licensee accepts Site AS IS with all
faults.
5.3 Prior to execution of or during the Term of the Master
License, Licensee shall, if requested by Licensor, execute a Non-Disclosure
Agreement which will then be attached to this Master License as Exhibit D.
6. INTERFERENCE
6.1 Licensee shall not use the Site in any way which interferes
with the Licensor's use of the Towers, provision of services to Company's or
Licensor's customers, or tenants or licensees of Company or Licensor. Such
interference shall be deemed a material breach by the interfering party who
shall, upon written notice from Company or Licensor, be responsible for
terminating said interference. In the event any such interference does not
cease promptly, the parties acknowledge that continuing interference may cause
irreparable injury and therefore, the injured party shall have the right, in
addition to any other rights that it may have at law or in equity, to bring an
action to enjoin such interference or to terminate the Site Supplement for the
affected location immediately upon written notice.
6.2 Licensee and Licensor agree that due to the nature of
Licensor's business some electromagnetic interference may be generated by
Licensee's equipment or within the building housing Licensee's equipment. In
the event this electromagnetic interference causes other Licensee's equipment
to malfunction, Licensor shall immediately notify Licensee in writing at which
time Licensee shall make an effort to eliminate, reduce or filter out the
interference. In the event Licensor is unable to eliminate the interference,
or reduce it to a level acceptable to Licensor, within a period of thirty (30)
days then Licensor may cancel the applicable Site Supplement. If the Licensee
causes interference that cannot be eliminated, the Licensee shall be
responsible for one year's annual, rent.
4
<PAGE> 7
7. RELOCATION OF LICENSED SPACE
Licensor reserves the right to change the location of Licensee's
antennas or other equipment upon thirty (30) days written notice to Licensee.
Upon determination by Licensor that Licensee's Communications Facilities must
be relocated, Licensee will, in good faith, relocate Licensee's Communications
Facilities to space mutually acceptable to Licensor and Licensee. If agreement
cannot be reached, Licensor shall determine the relocated space to be used.
Licensor, at its own expense, will relocate to the extent necessary, the
antenna, cabling and any equipment that was installed by or on behalf of
Licensee; however, such relocation will not adversely affect the effectiveness
of Licensee's Communication Facilities at the Site.
8. IMPROVEMENTS; UTILITIES; ACCESS; INSPECTION
8.1 Upon written approval of a Site Supplement by Licensor,
Licensee shall have the right, at its expense, to construct, maintain, install,
relocate and remove improvements, personal property and facilities subject to
the terms and conditions of this Master License. Licensor's written approval to
the Site plans, specifications for such construction and other improvements,
and the contractor performing such work shall be required prior to commencement
of such work.
a. Licensee shall provide in writing the names, addresses and
telephone numbers of all persons who will perform work on behalf of
Licensee at the Site. Licensor shall have the right to inspect
identification of any of Licensee's personnel at any time. Licensor
shall have the right to refuse access to any person who refuses to
provide identification upon request or whose name does not appear on
the personnel list provided by Licensee. Licensor reserves the right
to refuse admittance to any of Licensee's personnel. Where permitted
by the underlying Company Tower Agreement (Paragraph A), keys to the
Site shall be issued to the Licensee for Site access.
b. Licensee shall use for construction, maintenance,
installation, relocation and removal only those contractors for which
Licensor has given written approval. Upon written approval of
Licensor, Licensee shall have the right to replace or upgrade antennas
or equipment at any time during the term of a Site Supplement.
8.2 The antennas, cabling and tenant-installed equipment shall
remain the exclusive personal property of Licensee and will never be considered
fixtures to the real estate. Upon written approval of Licensor, Licensee shall
have the right to remove the antennas, cabling and equipment upon termination
of a Site Supplement. All removal work shall be performed at Licensee's
expense, and shall be completed within 90 days of termination of a Site
Supplement. If removal is not completed within said 90 days, such removal may
be undertaken by Licensor at Licensee's expense, or upon Licensor's election,
such property shall be deemed abandoned, the title to such property shall be
deemed to be in Licensor, and Licensee agrees to execute an appropriate bill of
sale.
8.3 Licensee, at its expense, may use any and all reasonably
appropriate means of restricting access to Licensee's equipment and/or module,
upon written approval of Licensor.
5
<PAGE> 8
8.4 Each antenna must be identified by a metal tag fastened
securely to its bracket on the Tower and each transmission line shall be tagged
at the point of entry into the equipment shelter. Each tag must clearly
identify the name of the Licensee.
8.5 Licensee must, at its sole expense, comply with all laws,
orders, ordinances, regulations and directives of applicable federal, state,
county and municipal authorities or regulatory agencies, including without
limitation, the Federal Communications Commission (FCC).
8.6 Unless otherwise specified by the Licensor, Licensee shall, at
Licensee's expense, keep and maintain the Site and all building(s) and
improvements utilized by Licensee now or hereafter located thereon in a
structurally safe and sound condition and in good repair during the term of a
Site Supplement. If Licensee does not make such repairs within 30 days after
receipt of notice from Licensor requesting such repair and such repairs are
required, then Licensor may, at its option, make the repairs. Licensee shall
pay Licensor on demand Licensor's actual costs in making the repair plus
Licensor's overhead. If emergency repairs are needed to protect persons,
property, or to allow the use of the Towers, Licensee must immediately correct
the safety or use problem, even if a full repair cannot be made at that time or
Licensor may make such repairs at Licensee's expense. Upon termination of the
Site Supplement, the Site shall be returned to Licensor in as good or better
condition, normal wear and tear excepted. Licensee shall be responsible for
the actual costs to return Site to good, usable condition.
8.7 Licensor covenants that it will keep the Tower in good repair
as required by federal law, including but not limited to the Telecommunications
Authorization Act of 1992, 102 P.L. 538, 106 Stat. 3533 (1992) and amendments
to Sections 303(g) and 503(b)(5) of the Communications Act of 1934. Licensor
shall also comply with all rules and regulations promulgated by the Federal
Communications Commission (FCC) and the Federal Aviation Agency (FAA) with
regard to the lighting, marking, painting of towers or other requirements, as
well as local, state and other federal laws. In the event that any fines are
imposed due to Licensor's failure to adhere to FCC/FAA requirements, Licensor
shall pay such fines,
8.8 Licensee shall be responsible for all costs of providing
utility services to the Sites.
(a) In order to control the quality of electrical service
provided, Licensor reserves the right of first refusal to provide
emergency power to each Site.
(b) In order to control the quality of telecommunications
transport to and from the Site, Licensor hereby reserves the right of
first refusal to provide interconnection and transport services to
each Communications Facility on the Site, at a cost competitive with
the prevailing fair market value of comparable service.
8.9 Licensee shall cause all construction to occur lien-free. If
any lien is filed against the Site as a result of the acts or omissions of
Licensee, or Licensee's employees, agents, or contractors, Licensee must
discharge the lien in a manner satisfactory to Licensor within 30 days after
Licensee receives written notice from any party that the lien has been filed.
If Licensee falls to discharge any lien within such period, then, in addition
to any other right or
6
<PAGE> 9
remedy of Licensor, Licensor may, at its election, discharge the lien by either
paying the amount claimed to be due or obtaining the discharge by deposit with
a court. Licensee must pay on demand any amount paid by Licensor for the
discharge or satisfaction of any lien and all reasonable attorneys' fees and
other legal expenses of Licensor incurred in defending, any such action or in
obtaining, the discharge of such lien, together with all necessary
disbursements in connection therewith.
8.10 As partial consideration for Rent paid under each Site
Supplement, Licensor hereby grants Licensee a license for ingress, egress, and
access (including access described in Paragraph 1) to the Site adequate to
service the Site, antennas and other equipment, for the Term of the applicable
Site Supplement.
8.11 Licensor and its agents may inspect or observe at any time any
work while in progress or after completion to ascertain whether the work is in
accordance with the Operational Procedures and the requirements of this Master
License and the applicable Site Supplement, and applicable laws and
regulations. Licensor may require Licensee to correct any faulty work. Such
inspection and requirement for correction shall not relieve Licensee of full
responsibility for the proper performance of the work.
9. TERMINATION
Except as otherwise provided herein, this Master License or a Site
Supplement may be terminated as follows:
9.1 Upon thirty (30) days' written notice by Licensor if Licensee
fails to cure a default for payment of amounts due under this Master License or
any Site Supplement within that 30-day period;
9.2 Upon thirty (30) days' written notice by either party if the
other party defaults or violates any material term or condition of this Master
License or any Site Supplement and fails to cure such default within that
30-day period, or such longer period as may be required to diligently complete
a cure commenced within that 30-day period;
9.3 If any petition is filed by or against Licensee, under any
section or chapter of the present or any future federal Bankruptcy Code or
under any similar law or statute of the United States or any state thereof, and
such petition is not dismissed within 90 days after the filing thereof, or
Licensee is adjudged bankrupt or insolvent in proceedings filed under any
section or chapter of the present or any future federal Bankruptcy Code or
under any similar law or statue of the United Sates or any state thereof, if a
receiver, custodian, or trustee is appointed for Licensee and such appointment
is not vacated within 60 days of the date of the appointment; or if Licensee
becomes insolvent or makes a transfer in fraud of creditors.
9.4 If Licensee, after the Effective Date, having made a good
faith effort, fails to obtain any license, permit or Governmental Approval
necessary for the construction and/or operation of the antennas and other
equipment of Licensee's business, Licensor shall retain the balance of the
remaining annual rent payment, as specified in Paragraph 4. Licensee shall also
reimburse Licensor for all actual and other preparatory expenses incurred.
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<PAGE> 10
9.5 Upon notice that any previously issued certificate permit,
license or approval is canceled, expires, lapses, or is otherwise withdrawn or
terminated by the authorizing entity.
9.6 Upon twenty-four (24) month's written notice by Licensor;
9.7 Immediately upon written notice if the Site or the antennae or
equipment are destroyed, damaged or rendered inoperative through no fault of
Licensee, so as in Licensee's reasonable judgment, to substantially and
adversely affect the effective use of the Site. In such event, all rights and
obligations of the parties shall cease as of the date of the damage,
destruction or inoperability and Licensee shall be entitled to any Rent prepaid
by Licensee. If Licensee elects to continue the affected Site Supplement, all
Rent shall abate until the Site and/or antennas and other equipment are
restored to working condition.
9.8 Upon lawful condemnation of the Site by an entity having the
power of eminent domain. If there is a condemnation of the Site, including
without limitation a transfer of the Site by consensual deed in lieu of
condemnation, then the Site Supplement for the condemned Site will terminate
upon transfer of title to the condemning authority, without further liability
to either party under this Master Lease. Licensee is entitled to pursue a
separate condemnation award for the Communications Facility from the condemning
authority.
9.9 Licensor has the right to immediately terminate a Site
Supplement and all of Licensee's rights to the Site in accordance with
Paragraph 6 (interference).
10. INSURANCE
10.1 Prior to work commencing, including feasibility testing and
Site suitability assurance described in Paragraph 5(a) and (b) above, Licensee
shall provide proof of insurance, as outlined below, and shall maintain the
coverages specified during the full term of this Master License and any Site
Supplement and for 180 days after its termination for any reason:
(a) Comprehensive General Liability insurance (including
Premises-Operations, Products and Completed Operations, Contractual,
Broad Form Property Damage, Independent Contractors, and Personal
Injury) with the following minimum limits:
(i) Combined Single Limit of $2 million each
occurrence
(ii) Bodily Injury and Property Damage of $2
million general aggregate and $2 million products and
completed operations aggregate.
(b) Workers' Compensation insurance with statutory limits
and Employers Liability insurance with limits of not less than
$500,000.00.
10.2 Licensee shall furnish Licensor with a certificate from an
insurance carrier acceptable to Licensor and Company stating that policies of
insurance have been issued by it to Licensee providing for the insurance
coverage listed above and that such policies are in force. Such certificates
shall state that the insurance carrier will give the Licensor 30 days' prior
written notice of any cancellation or material changes in such policies.
Failure to
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<PAGE> 11
maintain such insurance at any time shall constitute a default of this Master
License but shall not relieve Licensee from any liabilities assumed under this
License. Termination of this Master License for any reasons whatsoever shall
not affect any obligation with respect to work performed prior to such
termination, or the indemnity or insurance provisions contained in this Master
License.
10.3 Lessee will not do or permit to be done in or about the Site,
nor bring or keep or permit to be brought to the Site, anything that:
(a) is prohibited by any insurance policy carried by Licensor
covering the Site, any improvements thereon; or
(b) will increase the existing premiums for any such policy
beyond that contemplated for the addition of the Communications
Facility.
11. LIMITED LIABILITY
11.1 Licensee agrees to release and hold Licensor harmless from any
and all claims arising from the installation, construction, use, maintenance,
repair, relocation or removal of the antennas and other equipment or in any way
related to this Master Lease or any Site Supplement issued under this Master
Lease, except for claims arising from the gross negligence or willful
misconduct of Licensor, its employees, or agents.
11.2 Neither party shall be liable to the other party for the other
party's consequential or indirect damages, including, but not limited to,
exemplary or punitive damages, loss of profits or revenue, whether arising out
of this transaction or breach of this Master License or any Site Supplement
issued under this Master License, out of Tort (including negligence), strict
liability, contract (including warranty) or otherwise.
12. INDEMNIFICATION
12.1 Licensee, on behalf of itself and for its subsidiaries,
successors, assigns, licensees, sub-licensees, contractors and subcontractors,
hereby releases Licensor and Company, their subsidiaries, successors and
assigns, and agrees to defend, indemnify and save harmless same from any and
all claims, demands or causes of action for bodily injuries, property damage,
or loss of life or property, including claims of third parties and all
reasonable costs and expenses, (including reasonable attorneys' and experts'
fees), incurred in connection with actions arising out of or in any way
connected with its activities, including, but not limited to, the design,
engineering, installation, construction, use, operation, maintenance, repair,
relocation, removal of its materials or Communications Facilities, defect or
failure of the licensed Sites or which occur by virtue of the above activities
or access to the licensed Sites, any defect failure, or malfunction of any
facilities or materials whether furnished by Licensee or Licensor, or presence
on the Site, except those claims, demands or causes of action for bodily
injuries, property damage or loss of life or property caused or occasioned
solely by the gross negligence or willful misconduct of Licensor, Company, or
their agents, officers, employees, subsidiaries, successors and assigns.
9
<PAGE> 12
12.2 Without limiting the foregoing, Licensee assumes all risk of
and agrees to relieve Licensor of any and all liability for loss or damage (and
the consequences of loss or damage) to any property installed by Licensee on
the Site and any other financial loss sustained by Licensee, whether caused by
fire, water or other perils.
12.3 Without limiting the foregoing, Licensee will indemnify,
defend, and hold harmless Licensor and Licensor's agents, offices and
employees, from any and all claims asserted by customers of Licensee in any way
arising out of or in connection with this Master License or any Site Supplement
or Licensee's Communications System, except that arising out of the gross
negligence or willful misconduct of Licensor or Licensor's agents, officers or
employees.
12.4 To the extent not prohibited by law, Licensee will release,
indemnify, defend, and hold Licensor (and its affiliates and personnel)
harmless against all losses, costs (including reasonable attorneys' fees),
damages, expenses, claims, demands, or liabilities arising out of or caused by,
or alleged to have arisen out of or been caused by any failure by Licensee to
satisfy all claims for labor, equipment, materials and other obligation
relating to the performance of the work under this Master License or any Site
Supplement. 12.5 Licensee will indemnify Licensor for any taxes levied upon
Licensor resulting from Licensee's use of the Site or due to Licensee's
equipment or facilities on the Site.
12.5 Licensee will indemnify Licensor for any taxes levied upon
Licensor resulting from Licensee's use of the Site or due to Licensee's
equipment or facilities on the Site.
12.6 Licensee shall give Licensor prompt notice of any asserted
claims or actions indemnified against, shall cooperate with Licensor in the
defense of any such claims or actions and shall not settle any claims or
actions without the prior consent of Licensor, which consent shall not be
unreasonably withheld or delayed.
12.7 Neither party shall settle separately any claim, demand, suit
or action arising out of this transaction or in connection with the rights and
responsibilities which are the subject of this Master License any Site
Supplement issued under this Master License with a third party without giving
notice and consulting with the other party.
12.8 The obligations of the respective parties under this Article
herein shall survive the termination of this Agreement, including any
extensions thereto, with respect to any occurrences arising out of activities
undertaken within the term of this Master License or any Site Supplement issued
under this Master License.
13. NOTIFICATION OF DAMAGES
Licensee shall immediately notify Licensor of any damages caused by
Licensee, its subsidiaries, successors, assigns, contractor(s) or
subcontractor(s) to the Licensor or Company facilities or any claims against
Licensee for property damage, bodily injury or death arising directly or
indirectly out of the Licensee's use of the licensed Site, or facilities of
third party.
10
<PAGE> 13
14. ENVIRONMENTAL HAZARDS
14.1 Licensee will not bring to, transport across, or dispose of
any Environmental Hazards on any particular Site without Licensor's prior
written approval, which approval shall not unduly be withheld except Licensee
may keep on the licensed Sites substances used in back up power units (such as
batteries and diesel generators) commonly used in the wireless
telecommunications industry. Licensee's use of any approved substances
constituting Environmental Hazards, must comply with all applicable laws,
ordinances, and regulations governing said use.
14.2 The term "Environmental Hazards" means hazardous substances,
hazardous wastes, pollutants, asbestos, polychlorinated biphenyl (PCB),
petroleum or other fuels (including crude oil or any fraction action or
derivative thereof) and underground storage tanks. The term "hazardous
substances" shall be as defined in the Comprehensive Environmental Response,
Compensation, and Liability Act, and any regulations promulgated pursuant
thereto. The term "pollutants" shall be as defined in the Clean Water Act, and
any regulation promulgated pursuant thereto. This Article provision shall
survive termination of the Master License and any particular Site Supplement.
15. ASSIGNMENT
15.1 Licensor agrees that Licensee may assign, sublet or otherwise
transfer any of its rights, benefits, liabilities and obligations under this
Master License and all Site Supplements, only with the prior, written consent
of the Licensor and only to any person or business entity which is licensed by
the FCC to operate a wireless communications business., Licensee shall provide
written notification of its intent to assign at least one hundred and twenty
(120) days in advance. Upon written notification of Licensee to Licensor of
any such action and the assignee's written assumption of all terms and
conditions of this Master License and all Site Supplements, Licensee shall be
relieved of all future performance, liabilities and obligations under this
Master License and all Site Supplement as of the effective date of the
assignment.
15.2 Licensor may assign, sublet or otherwise transfer any of its
rights, benefits, liabilities and obligations under this Master License and any
Site Supplement, only with the prior, written consent of the Licensee, except
Licensor shall have the right by written notification to Licensee to assign,
convey or otherwise transfer its rights, title, interest and obligations under
this Master License and all Site Supplements to any entity controlled by
Licensor, controlling or under common control or any entity into which Licensor
may be merged, consolidated or which purchases all or substantially all of the
assets of Licensor. Upon written notification of Licensor to Licensee of any
such action and the assignee's written assumption of all terms and conditions
of this Master License and all Site Supplements, Licensor shall be relieved of
all future performance, liabilities and obligations under this Master License
and any Site Supplement as of the effective date of the assignment.
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<PAGE> 14
16. TAXES
Licensee shall pay any personal property taxes assessed on, or any
portion of such taxes attributable to the Communications Facilities or
Communications System. Licensor shall pay when due all real property taxes and
all other fees and assessments attributable to the Site. However, Licensee
shall pay, as additional rent, any increase in real property taxes levied
against the Site (excluding any additional taxes that relate to the period
prior to the Effective Date,) which is directly attributable to Licensee's use
of the Site, and Licensor agrees to furnish proof of such increase to Licensee,
upon Licensee's request.
17. CONFIDENTIALITY
The parties shall keep confidential the terms and conditions of this
Master License and any Site Supplement, except as reasonably necessary for
performance thereunder and except to the extent disclosure may be required by
applicable laws or regulations, in which latter case, the party required to
make such disclosure shall promptly inform the other party prior to such
disclosure to enable that party to make known any objections it may have to
such disclosure.
18. DISPUTE RESOLUTION
In the event any dispute or controversy arising out of or relating to
this Master Lease or any Site Supplement, the parties agree to exercise their
best efforts to resolve the dispute as soon as possible. The parties shall
without delay continue to perform their respective obligations under this
Master License which are not affected by the dispute. To invoke the dispute
resolution process set forth in this paragraph, the invoking party shall give
to the other party written notice of its decision to do so, including a
description of the issues subject to the dispute and a proposed resolution
thereof. Designated representatives of both parties shall attempt to resolve the
dispute within five (5) working days after such notice. If those designated
representatives cannot resolve the dispute, the parties shall meet at Company's
office and describe the dispute and their respective proposals for resolution
to the Chief Executive Officer of Licensor and the Chief Executive Officer of
Licensee, who shall act in good faith to resolve the dispute. If the dispute
is not resolved within ten (10) calendar days after such meeting, the dispute
shall be settled by arbitration in accordance with paragraph 19 of this Master
License.
19. ARBITRATION
If a dispute is not resolved pursuant to Paragraph 18 of this Master
Lease, the dispute shall be resolved by binding arbitration in accordance with
the then current Commercial Arbitration Rules of the American Arbitration
Association. The parties shall endeavor to select a mutually acceptable
arbitrator knowledgeable about issues relating to the subject matter of this
Master License. In the event the parties are unable to agree to such a
selection, each party will select an arbitrator and the arbitrators in turn
shall select a third arbitrator.
The arbitrator(s) shall not have the authority, power or right to
alter, change, amend, modify, add or subtract from any provision of this
Agreement or to award punitive damages. The
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<PAGE> 15
arbitrator shall have the power to issue mandatory orders and restraining
orders in connection with the arbitration. The award rendered by the
arbitrator shall be final and binding on the parties and judgment may be
entered thereon in any court having jurisdiction. The agreement to arbitration
shall be specifically enforceable under the prevailing arbitration law. During
the continuance of any arbitration proceeding, the party shall continue to
perform their respective obligations under this Agreement.
20. GOVERNING LAW
This Master License or any Site Supplement and the performance thereof
shall be governed, interpreted, construed and regulated by the laws of the
State of Iowa.
21. INTERRUPTIONS OR DELAYS IN SERVICE
If either party is wholly or partially prevented from meeting its
obligations under this Master License reason of or through strikes, stoppage of
labor, riots, fire, flood, invasion, insurrection, accident, the order of any
court, judge, or civil authority, act of God, or any cause reasonably beyond
its control and not attributable to its neglect ("Force Majeure"), then such
party's obligations shall be temporarily suspended. However, such party shall
act in good faith and as promptly as possible in removing such interruption or
suspension, or to find a reasonable alternative to meet its obligations under
this Master Lease.
22. NO WAIVER
No delay or omission by either party in the exercise of any right
under this Master License shall be construed as a waiver of such right, unless
such waiver appears expressly in a writing executed by the party to be charged
with such waiver. An indulgence by either party of one or more defaults under
this Master License by the other party shall not be construed as a willingness
to indulge any other default, unless such willingness appears expressly in a
writing executed by the party to be charged with having indicated such
willingness. Absent a writing as required under this provision, neither party
shall be estopped from enforcing this Master Lease precisely as written.
23. COVENANTS AND WARRANTIES
23.1 Each party, represents and warrants to the other party that:
(a) it has full right, power and authority to make this
Master License and to enter into the Site Supplements;
(b) the making of this Master License and the performance
thereof will not violate any laws, ordinance, restrictive covenants,
or other agreements under which said party is bound;
(c) that said party is a duly organized and existing
legal entity recognized by the State of Iowa;
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<PAGE> 16
(d) the party, is qualified to do business in any state
in which the Sites are located; and
(e) all persons signing or behalf of such party were
authorized to do so by appropriate corporate, partnership or other
applicable action.
24. NOTICES
All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed given if personally delivered or mailed
via certified mail-return receipt requested, or sent by overnight carrier to
the following addresses:
If to Licensor, to; If to Licensee, to:
MWR Towers PageMart, Inc.
General Manager Property Manager
Town Centre, Suite 500 6688 N. Central Expressway
221 Third Avenue S.E. Suite 800
Cedar Rapids, IA 52401 Dallas, TX 75206
25. ENTIRE AGREEMENT
25.1 The Exhibits referred to in this Master License are
incorporated into and made a part of this Master License by this reference.
25.2 The terms and conditions contained in this Master License
supersede all prior oral or written understandings between the parties and
constitute the entire agreement between them concerning the subject matter of
this Master License or any Site Supplement.
25.3 There are no understandings or representations, express or
implied, not expressly set forth in this Master License or any Site Supplement.
25.4 This Master License or any Site Supplement shall not be
modified or amended except by a writing signed by the authorized
representatives of the parties.
26. EXECUTION OF OTHER INSTRUMENTS
The parties agree to execute, acknowledge and deliver to the other
such instruments Licensor's lender or Licensee's lender may reasonably request
from time to time.
27. MISCELLANEOUS
27.1 Each party agrees to cooperate with the other in executing any
documents (including a Memorandum of Lease) necessary to protect its rights or
use of the Site. The Memorandum of License which may be recorded, in place of
this Master License, by either party. Upon termination of this Master License
for any reason, Licensee will record a notice of termination of the Master
License if a Memorandum of License was previously recorded.
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<PAGE> 17
27.2 If any provision of this Master License is found by any
arbitrator or court of competent Jurisdiction to be invalid or unenforceable,
then the parties hereby waive such provision to the extent that it is found to
be invalid or unenforceable and to the extent that to do so would not deprive
one of the parties of the substantial benefit of its bargain. Such provision,
to the extent allowable by law and the preceding sentence, shall not be voided
or canceled, but instead will be modified by such arbitrator or court so that
it becomes enforceable with all of the other terms of this Master License
continuing in full force and effect.
MWR TELECOM, INC.
doing business as
MWR TOWERS PAGEMART, INC.
By: /s/ KIRK KAALBERG By: /s/ HOMER L. HADDLESTON
--------------------------- ---------------------------
Printed Name: Kirk Kaalberg Printed Name:
-----------------
Its: Executive Vice President Its:
--------------------------
Date: 4/24/96 Date:
------------------------- -------------------------
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<PAGE> 18
EXHIBIT C:
FEES AND CHARGES
SITE NUMBER: IA-S1-57 SITE NAME: Mount Pleasant, IA.
------------------- ---------------------------------------
LICENSEE: PageMart, Inc.
-----------------------------------------------------------------------
<TABLE>
<S> <C>
ANTENNA FEE:
- ------------
* Whip: ($1.00/mo.) x (height on Tower in feet)
$1.00 x 300 feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300.00/mo.
* Dish: ($1.00/mo.) x (diameter in feet) x (height on Tower in feet)
$1.00 x 3.28 feet diameter x 8 feet up on tower . . . . . . . . . . . . . . . . . . . $26.00/mo.
* Other: ($1.00/mo.) x (height on Tower in feet) . . . . . . . . . . . . . . . . . . . . . . . . $0.00/mo.
FLOOR SPACE RENTAL:
- -------------------
* Shelter space: ($3.00/mo.) x (total square feet)
$3.00 x 4 square feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.00/mo.
LAND LEASE:
- -----------
* Parcel lease: ($1.00/mo.) x (total square feet) . . . . . . . . . . . . . . . . . . . . . . . $0.00/mo.
TOTAL MONTHLY RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $338.00/MO.
- ------------------
</TABLE>
OTHER PROVISIONS:
MINIMUM ANNUAL FEE:
* Minimum rental fee = $3,600.00 per year
POWER FEE:
* AC: $0.16 per kwh; DC: $0.48 per kwh.
An AC power charge will only be applied if a separate meter cannot
be supplied
ESCORT SERVICE:
* Normal work hours (8:00 A.M. through 5:00 P.M.) = $65.00 per hour.
* After work hours = $100.00 per hour.
An Escort Service charge will only be applied if separate access
cannot be provided
ESCALATION SCHEDULE:
* A 4.5% increase (inflation) will be applied yearly starting from
the second year throughout the term of the contract.
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EXHIBIT C:
FEES AND CHARGES
SITE NUMBER: IA-S2-33 SITE NAME: Fort Madison, IA.
------------------- ---------------------------------------
LICENSEE: PageMart, Inc.
-----------------------------------------------------------------------
<TABLE>
<S> <C>
ANTENNA FEE:
- ------------
* Whip: ($1.00/mo.) x (height on Tower in feet)
$1.00 x 299 feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $299.00/mo.
* Dish: ($1.00/mo.) x (diameter in feet) x (height on Tower in feet)
$1.00 x 3.28 feet diameter x 8 feet up on tower . . . . . . . . . . . . . . . . . . . . . . $26.00/mo.
* Other: ($1.00/mo.) x (height on Tower in feet) . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.00/mo.
FLOOR SPACE RENTAL:
- -------------------
* Shelter space: ($3.00/mo.) x (total square feet)
$3.00 x 4 square feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.00/mo.
LAND LEASE:
- -----------
* Parcel lease: ($1.00/mo.) x (total square feet) . . . . . . . . . . . . . . . . . . . . . . . . . . $0.00/mo.
TOTAL MONTHLY RENT: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $337.00/MO.
- -------------------
</TABLE>
OTHER PROVISIONS:
MINIMUM ANNUAL FEE:
* Minimum rental fee = $3,600.00 per year
POWER FEE:
* AC: $0.16 per kwh; DC: $0.48 per kwh.
An AC power charge will only be applied if a separate meter cannot
be supplied
ESCORT SERVICE:
* Normal work hours (8:00 A.M. through 5:00 P.M.) = $65.00 per hour.
* After work hours = $100.00 per hour.
An Escort Service charge will only be applied if separate access
cannot be provided
ESCALATION SCHEDULE:
* A 4.5% increase (inflation) will be applied yearly starting from
the second year throughout the term of the contract.
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<PAGE> 20
The nonrecurring charge estimate, the first year's annual fee, and the final
payment for the nonrecurring charge shall be sent to:
MWR Towers
Attn: Accounts Receivable
Town Centre, Suite 500
221 Third Avenue S.E.
Cedar Rapids, IA 52401
All other payments shall be made to MWR Towers, and shall be sent to the
address indicated on the bill, or if an address is not indicated on a bill,
payment shall be sent to the address indicated above or such other addresses as
may be designated from time to time by MWR Towers
MWR TELECOM, INC.
doing business as
MWR TOWERS PAGEMART, INC.
By: /s/ KIRK KAALBERG By: /s/ HOMER L. HUDDLESTON
------------------------------- -------------------------------
Printed Name: Kirk Kaalberg Printed Name:
---------------------
Its: Executive Vice President Its:
------------------------------
Date: 4/24/96 Date:
----------------------------- -----------------------------
24
<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 May 29, 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 30, 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 30, 1996
