<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1996
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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>
JOSEPH G. CONNOLLY, JR., ESQ.
NANCY J. KELLNER, 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>
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- -----------------------------------------------------------------------------------------------------------
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(1) PRICE(1) FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
$.01 par value..................... 6,900,000 $32.50 $224,250,000 $67,955
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
OCTOBER , 1996
PROSPECTUS
6,000,000 SHARES
MCLEOD, INC. [MCLEOD LOGO]
CLASS A COMMON STOCK
($.01 PAR VALUE)
Of the 6,000,000 shares of Class A Common Stock, $.01 par value per share (the
"Class A Common Stock"), offered hereby (the "Offering"), 5,471,000 shares are
being sold by McLeod, Inc. (the "Company") and 529,000 shares are being sold by
certain stockholders of the Company (the "Selling Stockholders"). See "Principal
and Selling Stockholders." The Company will not receive any of the proceeds from
the sale of shares of Class A Common Stock by the Selling Stockholders.
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 is quoted on the Nasdaq National Market under the
symbol "MCLD." On October 7, 1996, the last reported sale price of the Class A
Common Stock on the Nasdaq National Market was $32.50 per share. See "Price
Range of Class A Common Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 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>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2)
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
Total(3).................... $ $ $ $
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at
$1,000,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 900,000 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 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 of Class A Common Stock
offered hereby 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> 3
[MCLEOD LOGO]
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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
SEE "UNDERWRITING."
<PAGE> 4
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
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 telecommunications services to
small and medium-sized businesses and, since June 1996, residential customers,
primarily in Iowa and Illinois. The Company derives its telecommunications
revenue from (i) the sale of "bundled" local, long distance and other
telecommunications services to end users, (ii) telecommunications network
maintenance services, (iii) competitive access services, including special
access and private line services, and (iv) ancillary services, including direct
marketing and telemarketing services and the sale of advertising space in
telephone directories. As of June 30, 1996, the Company served over 11,550
telecommunications customers in 54 cities and towns.
The Company offers "one-stop" integrated telecommunications services,
including local, long distance, voice mail, paging and Internet access services,
tailored to the customer's specific needs. For business customers, this approach
simplifies telecommunications procurement and management and makes available
customized services, such as "least-cost" long distance pricing and enhanced
calling features, that might not otherwise be directly available to such
customers on a cost-effective basis. For residential customers, this approach
provides integrated local, long distance and other telecommunications services,
flat-rate long distance pricing and enhanced calling features as part of the
Company's basic PrimeLine(R) residential service. The Company also operates a
competitive access provider that offers a variety of special access and private
line services to 75 large businesses, institutional customers and interexchange
carriers. In addition, the Company provides network maintenance services for the
State of Iowa's fiber optic network. See "Business -- Current Products and
Services."
The Company believes it is the first telecommunications provider in most of
its current markets to offer "bundled" local, long distance and other
telecommunications 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, known
as Raterizer(R), each business 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 business customers, and, in
certain cases, rates specifically identified by a business customer and agreed
to by the Company. The Company also provides paging and Internet access
services. See "Business -- Current Products and Services."
1
<PAGE> 5
Since the Company completed its initial public offering of Class A Common
Stock in June 1996, it has actively pursued its strategy of increasing market
penetration and expanding into new markets in the following ways: (i) in June
1996, the Company began offering to residential customers in Cedar Rapids, Iowa
and Iowa City, Iowa an integrated package of telecommunications services,
marketed under the name PrimeLine(R), that includes local and long distance
service, voice mail, paging, Internet access and travel card services;
PrimeLine(R) services are expected to be available in other residential markets
in the near future; (ii) the Company has positioned itself to enter the
Minnesota and Wisconsin markets in late 1996 in addition to the Iowa and
Illinois markets currently served; (iii) in July 1996, the Company acquired
Ruffalo, Cody & Associates, Inc. ("Ruffalo, Cody"), which specializes in direct
marketing and telemarketing services, to enhance the Company's marketing of its
telecommunications services; (iv) in September 1996, the Company acquired
Telecom*USA Publishing Group, Inc. ("Telecom*USA Publishing"), which publishes
and distributes "white page" and "yellow page" telephone directories in fifteen
states in the midwestern and Rocky Mountain regions of the United States, to
increase the Company's penetration of its current markets and to accelerate its
entry into new markets; (v) the Company has constructed approximately 1,000 new
route miles of fiber optic network at a cost of approximately $22.9 million; and
(vi) the Company is bidding for certain personal communications services ("PCS")
licenses as part of its strategy to increase the range of services provided to
customers in its target markets.
BUSINESS STRATEGY
The Company's objective is to become a leading provider of integrated
telecommunications services in Iowa, Illinois, Nebraska, Minnesota, Wisconsin,
South Dakota, North Dakota, Colorado, Wyoming, Montana, Utah and Idaho. The
Company intends to increase its penetration of its current 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 September 30, 1996 it had a market share of
approximately 20.1% of business local telephone lines in its Iowa markets (based
on 1994 market data) and a market share of approximately 12.3% 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). There can be no assurance that the Company will attain
similar market share in other markets.
The principal elements of the Company's business strategy include:
PROVIDE INTEGRATED TELECOMMUNICATIONS SERVICES. The Company believes that
there is substantial demand among business and residential customers in its
target markets for an integrated package of telecommunications services that
meets all of the customer's telecommunications needs. The Company believes that,
by bundling a variety of telecommunications services, it will position itself to
become an industry leader in offering "one-stop" integrated telecommunications
services, to penetrate rapidly its target markets and to build customer loyalty.
BUILD MARKET SHARE THROUGH BRANDING 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'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, voice
mail, paging, Internet access 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 has been successful in obtaining
long-term commitments from its business customers and responding rapidly and
creatively to customer needs. See "Business -- Current Products and Services"
and "Business -- Sales and Marketing."
FOCUS ON SMALL AND MID-SIZED MARKETS. The Company principally targets
small and mid-sized markets (cities and towns with a population between 8,000
and 350,000) in its service areas. The
2
<PAGE> 6
Company estimates that its current and planned target markets have a combined
population of approximately 9.5 million. The Company strives to be the first to
market integrated telecommunications services in its principal markets and
expects that intense competition in bundled telecommunications services will be
slower to develop in these markets than in larger markets.
EXPAND ITS FIBER OPTIC NETWORK. The Company is constructing a
state-of-the-art digital fiber optic telecommunications network designed to
serve markets in Iowa. In the future, the Company expects to expand its fiber
optic network to include additional markets. The Company's decision to expand
its fiber optic network will be 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).
The Company currently owns approximately 1,700 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. See "Business -- Network Facilities."
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 three years. 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 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."
EXPLORE POTENTIAL ACQUISITIONS AND STRATEGIC ALLIANCES. The Company
believes that its strategic alliances with two utilities in its current markets
provide it with access to rights-of-way and other resources on favorable terms.
The Company believes that its recent acquisitions of Ruffalo, Cody and
Telecom*USA Publishing will increase the Company's penetration of its current
markets and accelerate its entry into new markets. As part of its expansion
strategy, the Company contemplates additional acquisitions, joint ventures and
strategic alliances with businesses that are related or complementary to its
current operations. The Company believes that the addition of such related or
complementary businesses will help it to expand its operations into its target
markets. As a result, the Company plans to consider acquisitions, joint ventures
and strategic alliances in areas such as wireless services, directory
publishing, network construction and infrastructure and Internet access. In
undertaking these transactions, the Company may use proceeds from the Offering,
credit facilities and other borrowings, and additional debt and equity
issuances.
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 regions. Eight of the
11 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
3
<PAGE> 7
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."
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.
RECENT DEVELOPMENTS
On September 20, 1996, the Company acquired Telecom*USA Publishing for
approximately $74.1 million in cash and an additional amount currently estimated
to be approximately $1.6 million to be paid to certain employees of Telecom*USA
Publishing as part of an incentive plan. At the time of the acquisition,
Telecom*USA Publishing had outstanding debt of approximately $6.6 million.
Telecom*USA Publishing publishes and distributes "white page" and "yellow page"
telephone directories in fifteen states in the midwestern and Rocky Mountain
regions of the United States. In fiscal year 1996, Telecom*USA Publishing
published and distributed over 7 million directories and had revenues of $52.1
million. The Company believes that the acquisition of Telecom*USA Publishing
furthers the Company's business plan in several ways. First, it gives the
Company an immediate presence in states where it is initiating service
(Minnesota and Wisconsin) and also in states where it does not yet provide
service but expects to do so in the future (such as Colorado, Wyoming, Montana,
Utah and Idaho). Second, the Company believes that the acquisition will increase
the Company's penetration of its current markets and accelerate its entry into
new markets. The directories published by Telecom*USA Publishing will serve as
"direct mail" advertising for the Company's telecommunications products. The
directories will contain detailed product descriptions and step-by-step
instructions on the use of the Company's telecommunications products. The
Company believes that telephone directories are commonly used sources of
information that potentially provide the Company with a long-term marketing
presence in millions of households and businesses that receive a Telecom*USA
Publishing directory. By using the directories to market its products, the
Company can reach more customers than would be possible if the acquisition had
not occurred. Third, the Company believes that combining the directories'
distinctive black-and-gold motif with the McLeod name will create in all of the
Company's markets the brand awareness that the McLeod name now enjoys in Iowa.
On July 15, 1996, the Company acquired Ruffalo, Cody for an aggregate of
approximately $4.8 million in cash, 361,420 shares of Class A Common Stock, and
options to purchase 158,009 shares of Class A Common Stock. An additional
$50,782 in cash and 113,387 shares of Class A Common Stock were placed into
escrow and will be delivered to certain of the shareholders of Ruffalo, Cody
over a period of 18 months, contingent upon the fulfillment of certain
conditions relating to Ruffalo, Cody's ongoing revenues. Ruffalo, Cody
specializes in direct marketing and telemarketing services, including
telecommunications sales. The Company believes that, as with the acquisition of
Telecom*USA Publishing, the acquisition of Ruffalo, Cody has great strategic
significance for the Company. The Company plans to use Ruffalo, Cody's
information database to identify attractive sales opportunities and to pursue
those opportunities through a variety of methods, including calls from Ruffalo,
Cody's telemarketing personnel. See "Risk Factors -- Risks Associated with
Acquisitions," "Business -- Recent Transactions" and "Business -- Sales and
Marketing."
4
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered by the
Company.................................... 5,471,000 shares
Class A Common Stock offered by the Selling
Stockholders............................... 529,000 shares
Total Class A Common Stock offered hereby.... 6,000,000 shares
Common Stock outstanding after the
Offering(1)................................ 36,439,390 shares of Class A Common Stock
15,625,929 shares of Class B Common Stock
Use of Proceeds.............................. The net proceeds to the Company from the
Offering will be used to fund certain
development and construction costs of the
Company's fiber optic network; market
expansion activities of the Company's
telecommunications business; potential
acquisitions, joint ventures and strategic
alliances; the acquisition of PCS licenses
and related development, construction and
operations; construction of the Company's
network operations center and corporate
headquarters; and for additional working
capital and general corporate purposes,
including funding operating deficits and net
losses. 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. See "Price Range of Class
A Common Stock and Dividend Policy."
</TABLE>
- ---------------
(1) Based on the number of shares of Class A Common Stock and Class B Common
Stock outstanding as of September 30, 1996 and the consummation of the
Offering. Assumes the issuance of 124,530 shares of Class A Common Stock
pursuant to the exercise of options by certain Selling Stockholders
anticipated to occur immediately prior to the date of this Prospectus.
Excludes (a) 7,535,579 shares of Class A Common Stock issuable upon exercise
of stock options granted to directors, officers and employees of the Company
and (b) 1,300,688 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 support by such stockholder of certain
portions of a bank credit facility maintained by the Company from May 1994
until June 1996 (the "Credit Facility"). See "Management -- Stock Option
Plans."
RISK FACTORS
POTENTIAL INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN FACTORS RELATING TO
AN INVESTMENT IN THE CLASS A COMMON STOCK. SEE "RISK FACTORS."
5
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT PER SHARE 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 acquisitions by the
Company of MWR Telecom, Inc. ("MWR"), Ruffalo, Cody and Telecom*USA Publishing
on April 28, 1995, July 15, 1996 and September 20, 1996, respectively, using
the purchase method of accounting, assuming, for purposes of the pro forma
statement of operations data, that such acquisitions were consummated at the
beginning of the periods presented. The unaudited pro forma information should
be read in conjunction with the Financial Statements of MWR, Ruffalo, Cody and
Telecom*USA Publishing and the Notes thereto included elsewhere in this
Prospectus. The financial and operating data presented below are derived from
the records of the Company, MWR, Ruffalo, Cody and Telecom*USA Publishing.
<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>
OPERATIONS STATEMENT DATA:
Revenue..................................... $ -- $ 250 $ 1,550 $ 8,014 $ 28,998
---- ----- ------- -------- --------
OPERATING EXPENSES:
Cost of service........................... -- 262 1,528 6,212 19,667
Selling, general and administrative....... 56 219 2,390 12,373 18,054
Depreciation and amortization............. 2 6 235 772 1,835
---- ----- ------- -------- --------
Total operating expenses............... 58 487 4,153 19,357 39,556
---- ----- ------- -------- --------
Operating loss.............................. (58) (237) (2,603) (11,343) (10,558)
Interest income (expense), net.............. -- -- 163 (73) (771)
Other non-operating expenses................ -- -- -- -- --
Income taxes................................ -- -- -- -- --
---- ----- ------- -------- --------
Net loss.................................... $ (58) $(237) $(2,440) $(11,416) $(11,329)
==== ===== ======= ======== ========
Loss per common and common equivalent
share..................................... $ -- $(.02) $ (.08) $ (.31) $ (.31)
==== ===== ======= ======== ========
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
PRO FORMA PRO FORMA
1995(4)(5) 1995 1996 1996(6)
---------- -------------- ------------- ---------
<S> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue..................................... $ 86,476 $ 11,419 $ 26,406 $64,946
-------- -------- -------- -------
OPERATING EXPENSES:
Cost of service........................... 47,461 7,628 18,724 36,372
Selling, general and administrative....... 45,605 8,290 13,976 31,836
Depreciation and amortization............. 8,018 763 2,573 5,725
-------- -------- -------- -------
Total operating expenses............... 101,084 16,681 35,273 73,933
-------- -------- -------- -------
Operating loss.............................. (14,608) (5,262) (8,867) (8,987)
Interest income (expense), net.............. (1,049) (460) (16) (139)
Other non-operating expenses................ (997) -- -- (483)
Income taxes................................ -- -- -- --
-------- -------- -------- -------
Net loss.................................... $(16,654) $ (5,722) $ (8,883) $(9,609)
======== ======== ======== =======
Loss per common and common equivalent
share..................................... $ (0.45) $ (.15) $ (.23) $ (0.25)
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1991 1992 1993 1994 1995(2)(7)
------------ ----- ------ ------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.............................. $ 2 $ 544 $ 7,077 $ 4,862 $ 9,624
Working capital (deficit)................... $ (72) $(440) $ 5,962 $ 1,659 $ (92)
Property and equipment, net................. -- $ 135 $ 1,958 $ 4,716 $ 15,078
Total assets................................ $ 21 $ 694 $ 9,051 $ 10,687 $ 28,986
Long-term debt.............................. -- -- -- $ 3,500 $ 3,600
Stockholders' equity (deficit).............. $ (53) $(290) $ 7,936 $ 3,291 $ 14,958
<CAPTION>
JUNE 30, 1996
---------------------------------------------
ACTUAL AS ADJUSTED(8) PRO FORMA(9)
---------- -------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.............................. $249,528 $415,228 $ 365,771
Working capital (deficit)................... $229,920 $395,620 $ 324,365
Property and equipment, net................. $ 35,223 $ 35,223 $ 40,140
Total assets................................ $289,299 $454,999 $ 492,348
Long-term debt.............................. -- -- $ 2,959
Stockholders' equity (deficit).............. $265,929 $431,629 $ 443,875
</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............................... -- $ 138 $ 2,052 $ 3,393 $ 14,697
EBITDA (10)................................. $ (56) $(231) $ (2,368) $ (10,571) $ (8,723)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
PRO FORMA PRO FORMA
1995(4)(5) 1995 1996 1996(6)
---------- -------------- ------------- ---------
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures, including acquisition
of business............................... $ 17,489 $ 8,822 $ 21,337 $22,534
EBITDA (10)................................. $ (6,590) $ (4,499) $ (6,294) $(3,262)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- JUNE 30,
1994 1995 1996
--------------- ------ ------
<S> <C> <C> <C>
OTHER OPERATING DATA:
Local lines................................. 17,112 35,795 47,699
Number of telecommunications customers...... 5,137 8,776 11,556
Markets served.............................. 26 50 54
Route miles................................. 8 218 832
Employees................................... 302 419 603
</TABLE>
(Footnotes on following page)
6
<PAGE> 10
- ---------------
(1) The Company was organized on June 6, 1991.
(2) The acquisition of MWR in April 1995 affects the comparability of the
historical data presented for 1995 to the historical data for prior periods
shown.
(3) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(4) The acquisitions of MWR, Ruffalo, Cody and Telecom*USA Publishing in April
1995, July 1996 and September 1996, respectively, affect the comparability
of the pro forma data presented for 1995 to the data for prior periods
shown.
(5) Includes operations of MWR, Ruffalo, Cody and Telecom*USA Publishing from
January 1, 1995 to December 31, 1995 and certain adjustments attributable
to the acquisitions of MWR, Ruffalo, Cody and Telecom*USA Publishing by the
Company.
(6) Includes operations of Ruffalo, Cody and Telecom*USA Publishing from
January 1, 1996 to June 30, 1996 and certain adjustments attributable
to the acquisitions of Ruffalo, Cody and Telecom*USA Publishing by the
Company.
(7) Includes MWR, which was acquired by the Company on April 28, 1995.
(8) Adjusted to reflect the application of the estimated net proceeds to the
Company from the sale of the Class A Common Stock offered hereby.
(9) Adjusted to reflect the application of the estimated net proceeds to the
Company from the sale of the Class A Common Stock offered hereby. Includes
Ruffalo, Cody and Telecom*USA Publishing, which were acquired by the
Company on July 15, 1996 and September 20, 1996, respectively.
(10) EBITDA consists of operating loss before depreciation and amortization. The
Company has included EBITDA data because it is a measure commonly used in
the industry. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered an
alternative to net income as a measure of performance or to cash flows as a
measure of liquidity.
7
<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 six months ended June 30, 1996 were approximately $2.4
million, $11.4 million, $11.3 million and $8.9 million, respectively. At June
30, 1996, the Company had an accumulated deficit of $34.4 million. 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, facilities, network and services
will require significant capital expenditures. As of September 30, 1996, the
Company estimates that its aggregate capital requirements for the remainder of
1996, 1997 and 1998 will be approximately $ million. The Company's estimated
capital requirements include the estimated cost of (i) developing and
constructing its fiber optic network, (ii) market expansion activities, (iii)
constructing its network operations center and corporate headquarters, and (iv)
obtaining PCS licenses and related capital expenditures, including those
licenses described below for which the Company currently has bids outstanding.
These capital requirements are expected to be funded, in large part, out of the
net proceeds from the Offering and the net proceeds remaining from the Company's
initial public offering of Class A Common Stock (estimated to be $122 million as
of September 30, 1996), and lease payments to the Company for portions of the
Company's networks.
The Company may require additional capital in the future for business
activities related to those specified above and also for acquisitions, joint
ventures and strategic alliances, as well as to fund operating deficits and net
losses. These activities could require significant additional capital not
included in the foregoing estimated aggregate capital requirements of $
million.
The Company is currently bidding for certain PCS licenses being auctioned
by the FCC and expects to explore alternatives to permit it to provide other
wireless services, which may require substantial additional capital. As of
September 30, 1996, the Company had submitted bids totaling approximately $21.8
million for "D" and "E" block frequency licenses covering areas of Iowa,
Illinois, Nebraska and Minnesota in the FCC's auctions of PCS licenses. If the
Company is successful in obtaining PCS licenses, it will be required to make
significant expenditures to develop, construct and operate a PCS system.
The Company expects to meet its additional capital needs with the proceeds
from credit facilities and other borrowings, and additional debt and equity
issuances. The Company currently plans to obtain one or more lines of credit,
although no such lines of credit have yet been negotiated.
8
<PAGE> 12
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
satellite carriers and private networks owned by large end users. In addition,
the Company competes with the Regional Bell Operating Companies and other local
exchange carriers, numerous direct marketers and telemarketers, 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. For example, the national long distance carrier WorldCom, Inc.
("WorldCom") recently announced its agreement to acquire MFS Communications
Company, Inc., a competitive access provider. The ability of these or other
competitors of the Company to enter into strategic alliances could put the
Company at a significant disadvantage.
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 small telecommunication 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 in Iowa on both a resale and
facilities-based basis. On July 26, 1996, the Iowa Utilities Board approved
AT&T's application, subject to certain additional filing requirements.
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
9
<PAGE> 13
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 for sales to business customers and
telemarketing for sales to residential customers) 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.
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 certain of the states served by U S WEST where the
Company is doing business or currently plans to do business. The Company bases
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 the Company believes 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
10
<PAGE> 14
telecommunications services, and Section 251(c)(4)(A) of the Telecommunications
Act, which the Company believes 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, Nebraska, South Dakota, North Dakota
and Colorado, which the Company believes 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 withdrew its complaint before
the Iowa Utilities Board. Because MCI, AT&T and others also challenged U S
WEST's action, the Iowa Utilities Board continued to review the U S WEST Centrex
Action and on June 14, 1996 issued an order rejecting U S WEST's filing. The
order of the Iowa Utilities Board was appealed by U S WEST to the Iowa District
Court for Polk County on July 12, 1996. The appeal remains pending.
In Nebraska and North Dakota, complaints filed by the Company with respect
to the U S WEST Centrex Action are awaiting decision by the public utilities
commissions in those states. In Minnesota, U S WEST's initial filing was
rejected on procedural grounds by the Public Utilities Commission. 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. The Minnesota Public
Utilities Commission is expected to render a ruling in the proceeding by
December 20, 1996. In South Dakota, the Public Utilities Commission rejected the
U S WEST Centrex Action on August 22, 1996. U S WEST has appealed the
unfavorable decision of the Public Utilities Commission in South Dakota state
court and has been granted a stay of the decision pending appeal. The Company
anticipates that U S WEST will appeal other unfavorable decisions by public
utilities commissions in other states with respect to the U S WEST Centrex
Action.
There can be no assurance that the Company will succeed in its legal
challenges to the U S WEST Centrex 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."
REFUSAL OF U S WEST TO IMPROVE ITS PROCESSING OF SERVICE ORDERS
As a result of its use of the Centrex product, the Company depends upon U S
WEST to process service orders placed by the Company to transfer new customers
to the Company's local service. U S WEST has imposed a limit of processing one
new local service order of the Company per hour for each U S WEST central
office. Furthermore, according to the Company's records, U S WEST commits an
error on one of every three lines ordered by the Company, thereby further
delaying the transition of new customers to the Company's local service. The
Company has repeatedly requested that U S WEST increase its local service order
processing rate and improve the accuracy of such processing. U S WEST has
refused to change its service order processing practices.
11
<PAGE> 15
On July 12, 1996, the Company filed a complaint with the Iowa Utilities
Board against U S WEST in connection with such actions. At a hearing held to
consider the complaint, U S WEST acknowledged that it had not dedicated
resources to improve its processing of the Company's service orders to switch
new customers to the Company's local service because of its desire to limit
Centrex service. See "-- Dependence on Regional Bell Operating Companies; U S
WEST Centrex Action." On October 2, 1996, the Iowa Utilities Board determined
that U S WEST's limitation on the processing of service orders constituted an
unlawful discriminatory practice under Iowa law. There can be no assurance,
however, that the decision of the Iowa Utilities Board will adequately resolve
the service order problems or that such problems will not impair the Company's
ability to expand or to attract new customers, which could have a material
adverse effect on the Company.
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. 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
12
<PAGE> 16
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 call detail records. Since implementing the protocol
changes, U S WEST has furnished the Company with approximately 99% of the
requisite call detail records for March through September 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 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 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., WirelessCo, L.P. d/b/a Sprint
Spectrum, 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.
The Company does not currently offer PCS or cellular services. The Company
is, however, currently bidding for "D" and "E" block frequency licenses covering
areas of Iowa, Illinois, Nebraska and Minnesota in the FCC's auctions of PCS
licenses. As of September 30, 1996, the Company had submitted bids totaling
approximately $21.8 million for such licenses. If the Company is successful in
obtaining PCS licenses, it will be required to make significant expenditures to
develop, construct and operate a PCS system. There can be no assurance that the
Company will be
13
<PAGE> 17
successful in acquiring any PCS licenses. Nevertheless, 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. However, except for its
participation in the FCC auction of PCS licenses, 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."
PCS SYSTEM IMPLEMENTATION RISKS
The Company's proposed investment in the ownership, development,
construction and operation of a PCS system involves a high degree of risk. In
the event the Company is successful in acquiring one or more PCS licenses, and
in the absence of FCC mandated technology protocols, the Company would be
required to choose from among several competing and potentially incompatible
technologies in order to build and operate a PCS system. Currently, PCS
providers must select a digital protocol for their PCS systems. The selection of
a particular digital protocol technology could adversely affect the ability of
the Company to successfully offer PCS service. For example, in order for the
Company's potential PCS subscribers to roam in markets served by other PCS
licensees, at least one of the other PCS licensees must utilize a digital
protocol technology that is compatible with that of the Company. To the extent
that PCS providers outside the Company's potential PCS service area use an
incompatible technology, the Company's PCS business would be adversely affected.
The Company does not own or operate any facilities for providing wireless
telecommunication services to the public. The successful implementation of a PCS
system would require the Company to develop such facilities. The Company would
need to, among other things, lease or acquire sites for the Company's base
stations, construct the base stations, install the necessary equipment and
conduct system testing. Each stage of implementing PCS service involves various
risks and contingencies, many of which are not in the Company's control. In the
event the Company encountered delays or other problems, the Company's plans for
providing PCS services could be adversely affected.
If the Company is successful in acquiring one or more PCS licenses, the
Company will be required to abide by various FCC rules governing PCS license
holders, such as rules limiting the percentage of the Company's capital stock
that may be owned, directly or indirectly, or voted by non-U.S. citizens, by a
foreign government or by a foreign corporation to 20%, except in extraordinary
circumstances. See "-- Regulation." Failure on the part of the Company to abide
by the FCC rules could lead to the Company being fined or losing its PCS
licenses. Furthermore, certain of the FCC rules would require the Company to
meet certain buildout and population coverage requirements. Such requirements
may limit the markets in which the Company could implement PCS service.
Finally, the ownership, development, construction and operation of a PCS
system is expected to impose significant demands on the Company's management,
operational and financial resources. There can be no assurance that the Company
will be able to successfully manage the implementation and operation of a PCS
system. Any failure to effectively manage the implementation and operation of
any future PCS system (including implementing adequate systems, procedures and
controls in a timely manner) could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Wireless Services."
14
<PAGE> 18
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 had been pledged as security for the
Credit Facility. As a result of the termination of the Credit Facility, the
Company is currently changing both policies to designate the Company as the
beneficiary.
There can be no assurance that the employment, confidentiality and
non-competition 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. In
most states, McLeod Telemanagement also is required to obtain certification from
the relevant state public utilities commission prior to the initiation of
intrastate or interstate interexchange 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 receiving
certification or maintaining such tariffing. McLeod Telemanagement also has
obtained authority from the FCC to provide international services. The FCC's
rules applicable to the provision of international services may, under certain
conditions, limit the size of investments in the Company by foreign
telecommunications carriers. The Company does not currently hold any common
carrier radio licenses issued by the FCC, although it may obtain or acquire
radio licenses in the future in connection with the provision of wireless
services. The Telecommunications Act limits the ownership of non-U.S. citizens,
foreign governments, and corporations organized under the laws of a foreign
country in radio licensees. The Company, through its wholly owned subsidiary
MWR, 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
15
<PAGE> 19
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."
The Company, through its wholly owned subsidiary Ruffalo, Cody, is also
subject to certain federal and state regulatory requirements due to its direct
marketing, telemarketing and fund-raising activities, including, in certain
states, bonding requirements. There can be no assurance that any failure on the
part of Ruffalo, Cody to abide by applicable direct marketing, telemarketing and
fund-raising rules would not have a material adverse effect on the Company. See
"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 $2.3
million and $3 million, respectively, or 20% and 11% of the Company's total
revenues during the six months ended June 30, 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. Implementation of the
Company's current and future expansion plans will also depend on factors such
as: (i) the availability of financing and regulatory approvals; (ii) the number
of potential customers in a target market; (iii) the existence of strategic
alliances or relationships; (iv) technological, regulatory or other developments
in the Company's business; (v) changes in the competitive climate in which the
Company operates; and (vi) the emergence of future opportunities. There can be
no assurances that the Company will be able to expand its existing network or
services. Furthermore, the Company's ability to manage its expansion effectively
also will require it to continue to implement and improve its operating,
financial and accounting systems and to expand, train and manage its employee
base. The inability to manage its planned expansion effectively could have a
material adverse effect on the Company. Finally, if the Company's challenges to
the U S WEST Centrex Action fail and no favorable settlement agreement is
reached, there could be a material adverse effect on the Company's planned
expansions and business prospects. See "-- Dependence on Regional Bell Operating
Companies; U S WEST Centrex Action" and "Business -- Legal Proceedings."
16
<PAGE> 20
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company has recently acquired
Ruffalo, Cody and Telecom*USA Publishing and will continue to evaluate
additional strategic acquisitions principally relating to its current
operations. Such transactions commonly involve certain risks including,
among others: the difficulty of assimilating the acquired operations and
personnel; the potential disruption of the Company's ongoing business; the
possible inability of management to maximize the financial and strategic
position of the Company through the successful incorporation of acquired
assets and rights into the Company's service offerings and the maintenance
of uniform standards, controls, procedures and policies; the risks of
entering markets in which the Company has little or no direct prior experience;
and the potential impairment of relationships with employees or customers as a
result of changes in management. For example, over 40% of Ruffalo, Cody's
revenues in 1995 were derived from an agreement with a major long distance
carrier to provide telemarketing services. Both Ruffalo, Cody and the major
long distance carrier can terminate this agreement after giving notice to the
other party. The major long distance carrier has informed the Company that it
intends to terminate this agreement effective December 31, 1996. Upon
termination of this agreement, the Company intends to redirect resources
towards selling the Company's local and long distance telecommunications
services. There can be no assurance that the Company will be successful in
overcoming these risks or any other problems encountered in connection with the
acquisitions of Ruffalo, Cody and Telecom*USA Publishing or other future
transactions. In addition, any such transactions could materially adversely
affect the Company's operating results due to dilutive issuances of equity
securities, the incurrence of additional debt and the amortization of expenses
related to goodwill and other intangible assets, if any. Except as described in
this Prospectus, the Company has no definitive agreement with respect to any
material acquisition, although from time to time it has discussions with other
companies and assesses acquisition opportunities on an on-going basis. See
"Business -- Recent Transactions."
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
17
<PAGE> 21
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
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 "Price Range of Class A Common Stock and Dividend Policy."
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 29% of
the outstanding Class A Common Stock and all of the Class B Common Stock, which
will represent approximately 39% 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 50%
of the Class A Common Stock and voting power of the Company. IES, MidAmerican
and Mr. and Mrs. McLeod also have entered into a voting agreement with respect
to the election of directors. Accordingly, upon completion of the Offering, such
stockholders will collectively be able to control the management policy of the
Company and all fundamental corporate actions, including mergers, substantial
acquisitions and dispositions, and election of the Board of Directors of the
Company (the "Board"). 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 -- Investor Agreement," "Principal and Selling
Stockholders" and "Description of Capital Stock."
VARIABILITY OF OPERATING RESULTS
As a result of the significant expenses associated with the construction
and expansion of its network and services, including, without limitation, the
possible acquisition of PCS licenses, 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."
VOLATILITY OF STOCK PRICE
Since the Class A Common Stock has been publicly traded, the market price
of the Class A Common Stock has fluctuated over a wide range and may continue to
do so in the future. See "Price Range of Class A Common Stock and Dividend
Policy." In the future, the market price of the Class A Common Stock could be
subject to significant fluctuations in response to various factors and events,
including, among other things: the depth and liquidity of the trading market of
the Class A Common Stock; quarterly variations in the Company's actual or
anticipated operating results or growth rates; changes in estimates by analysts;
market conditions in the industry; announcements by competitors; regulatory
actions; and general economic conditions. In addition, the stock market has from
time to time experienced significant price and volume fluctuations, which have
particularly affected the market prices of the stocks of high growth companies,
and which may be unrelated to the operating performance of particular companies.
As a result of the foregoing, there can be no assurance that the price of the
Class A Common Stock will not continue to fluctuate or will not decline below
the price to the public set forth on the cover of this Prospectus.
18
<PAGE> 22
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have approximately
52,065,319 shares of Common Stock outstanding, including 5,471,000 shares of
Class A Common Stock offered hereby and 32,455,005 "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
32,455,005 restricted shares, 22,070,187 shares of Common Stock generally are
currently eligible for sale under Rule 144 as currently in effect, and
10,384,818 shares of Common Stock generally will be eligible for sale under Rule
144 as currently in effect beginning in January 1997 through July 1998.
The Company, its directors and officers, the Selling Stockholders 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 of 120 days after the date of this Prospectus, without the prior
written consent of Salomon Brothers Inc, 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 June 10, 1996, the date of the Company's initial public offering
of the Class A Common Stock, they will not sell or otherwise dispose of any
equity securities of the Company without the consent of the Board. See
"Management -- Investor Agreement."
At September 30, 1996, the Company had reserved 11,738,945 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 7,660,109 shares of Class A Common
Stock are currently outstanding and unexercised under the Company's stock option
plans. The Company has registered the shares of Class A Common Stock reserved
for issuance under the Company's stock purchase plan and stock option plans. See
"Management -- Stock Option Plans" and "Management -- The Employee Stock
Purchase Plan." In addition, options to purchase 1,300,688 shares of Class B
Common Stock, which were granted to IES in connection with its guarantee and/or
support of certain portions of the Credit Facility, were outstanding as of
September 30, 1996.
Future 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. Several of the Company's principal
stockholders hold a significant portion of the Company's Class A Common Stock,
and a decision by one or more of these stockholders to sell their shares could
adversely affect the market price of the Class A Common Stock. See "Principal
and Selling Stockholders" and "Shares Eligible for Future Sale."
19
<PAGE> 23
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $165.7 million, after deducting the underwriting discount and
estimated offering expenses payable by the Company. The Company will not receive
any of the proceeds from the sale of shares of Class A Common Stock by the
Selling Stockholders. The Company intends to use the net proceeds of the
Offering as follows: (i) to fund development and construction costs of the
Company's fiber optic network; (ii) to fund market expansion activities as well
as potential acquisitions, joint ventures and strategic alliances; (iii) to bid
for PCS licenses and fund related development, construction and operating costs;
(iv) to fund the construction of the Company's network operations center and
corporate headquarters; and (v) for additional working capital and other general
corporate purposes, including funding operating deficits and net losses. The
Company currently intends to allocate substantial proceeds to each of the
foregoing categories. However, the precise allocation of funds among these uses
will depend on future technological, regulatory and other developments in or
affecting the Company's business, the competitive climate in which it operates
and the emergence of future opportunities.
As part of its business strategy, the Company intends to continue to
evaluate potential acquisitions, joint ventures and strategic alliances in areas
such as wireless services, directory publishing, network construction and
infrastructure and Internet access. Except as described elsewhere in this
Prospectus, the Company has no definitive agreement with respect to any material
acquisition, although from time to time it has discussions with other companies
and assesses acquisition opportunities on an on-going basis. A portion of the
proceeds of the Offering, as well as additional sources of capital such as
credit facilities and other borrowings, and additional debt and equity
issuances, may be used to fund any such acquisitions, joint ventures and
strategic alliances. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Recent Transactions."
Prior to the application of the net proceeds to the Company from the
Offering as described above, such funds will be invested in short-term,
investment grade securities.
PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY
The Company completed its initial public offering of Class A Common Stock
on June 10, 1996, at a price per share of Class A Common Stock of $20.00. Since
that date, the Class A Common Stock has been quoted on the Nasdaq National
Market under the symbol "MCLD." The following table sets forth for the periods
indicated the high and low sales price per share of the Class A Common Stock as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1996 HIGH LOW
----------------------------------------------------------- ------- -------
<S> <C> <C>
Second Quarter (from June 10, 1996)........................ $ 26.75 $ 22.25
Third Quarter.............................................. $ 39.50 $ 23.50
Fourth Quarter (through October 7, 1996)................... $ 33.00 $ 30.50
</TABLE>
On October 7, 1996, the last reported sale price of the Class A Common
Stock on the Nasdaq National Market was $32.50 per share. On October 7, 1996,
there were 366 holders of record of the Class A Common Stock.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying dividends in the foreseeable future. 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 in financing agreements
and such other factors as the Board may deem relevant. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
20
<PAGE> 24
CAPITALIZATION
The following table sets forth, as of June 30, 1996, the actual
capitalization of the Company and the capitalization of the Company as adjusted
for the Offering, including application of the net proceeds to the Company
therefrom as set forth under "Use of Proceeds." 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>
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt..................................................... $ -- $ --
-------- --------
Long-term debt...................................................... -- --
-------- --------
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; 30,210,519 shares issued and outstanding and
35,806,049 shares, as adjusted for the Offering................ 302 358
Class B Common Stock, convertible, $.01 par value, 22,000,000
shares authorized; 15,625,929 shares
issued and outstanding......................................... 156 156
Additional paid-in capital........................................ 299,833 465,477
Accumulated deficit............................................... (34,362) (34,362)
-------- --------
Total stockholders' equity................................ 265,929 431,629
-------- --------
Total capitalization...................................... $ 265,929 $ 431,629
======== ========
</TABLE>
21
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
The following table sets forth selected consolidated financial data 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. 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 six month periods ended
June 30, 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.
The unaudited pro forma information reflects the acquisitions by the Company
of MWR, Ruffalo, Cody and Telecom*USA Publishing on April 28, 1995, July 15,
1996 and September 20, 1996, respectively, using the purchase method of
accounting, assuming, for purposes of the pro forma statement of operations
data, that such acquisitions were consummated at the beginning of the periods
presented. The unaudited pro forma information should be read in conjunction
with the Financial Statements of MWR, Ruffalo, Cody and Telecom*USA Publishing
and the Notes thereto included elsewhere in this Prospectus. The financial and
operating data presented below are derived from the records of the Company,
MWR, Ruffalo, Cody and Telecom*USA Publishing.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1991 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------------------
1991(1) 1992 1993 1994
--------------- ------ ------ -------
<S> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue................................................ $ -- $ 250 $ 1,550 $ 8,014
------- ------- ------- --------
Operating expenses:
Cost of service...................................... -- 262 1,528 6,212
Selling, general and administrative.................. 56 219 2,390 12,373
Depreciation and amortization........................ 2 6 235 772
------- ------- ------- --------
Total operating expenses.......................... 58 487 4,153 19,357
------- ------- ------- --------
Operating loss......................................... (58) (237) (2,603) (11,343)
Interest income (expense), net......................... -- -- 163 (73)
Other non-operating expenses........................... -- -- -- --
Income taxes........................................... -- -- -- --
------- ------- ------- --------
Net loss............................................... $ (58) $ (237) $(2,440) $(11,416)
======= ======= ======= ========
Loss per common and common equivalent share............ $ -- $ (.02) $ (.08) $ (.31)
======= ======= ======= ========
Weighted average common and common equivalent shares
outstanding.......................................... 14,925 14,925 29,655 36,370
======= ======= ======= ========
<CAPTION> YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------ ---------------------------------
PRO FORMA PRO FORMA
1995(2)(3) 1995(4)(5) 1995 1996 1996(6)
---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue................................................ $ 28,998 $ 86,476 $11,419 $ 26,406 $64,946
------- -------- ------- ------- --------
Operating expenses:
Cost of service...................................... 19,667 47,461 7,628 18,724 36,372
Selling, general and administrative.................. 18,054 45,605 8,290 13,976 31,836
Depreciation and amortization........................ 1,835 8,018 763 2,573 5,725
------- -------- ------- ------- --------
Total operating expenses.......................... 39,556 101,084 16,681 35,273 73,933
------- -------- ------- ------- --------
Operating loss......................................... (10,558) (14,608) (5,262) (8,867) (8,987)
Interest income (expense), net......................... (771) (1,049) (460) (16) (139)
Other non-operating expenses........................... -- (997) -- -- (483)
Income taxes........................................... -- -- -- -- --
------- -------- ------- ------- --------
Net loss............................................... $(11,329) $(16,654) $(5,722) $ (8,883) $(9,609)
======= ======== ======= ======= ========
Loss per common and common equivalent share............ $ (.31) $ (0.45) $ (.15) $ (.23) $ (0.25)
======= ======== ======= ======= ========
Weighted average common and common equivalent shares
outstanding.......................................... 37,055 37,416 37,055 38,512 38,873
======= ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------------
1991 1992 1993 1994
--------------- ------ ------ -------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets........................................ $ 2 $ 544 $ 7,077 $ 4,862
Working capital (deficit)............................. (72) $ (440) $ 5,962 $ 1,659
Property and equipment, net........................... $ -- $ 135 $ 1,958 $ 4,716
Total assets.......................................... $ 21 $ 694 $ 9,051 $ 10,687
Long-term debt........................................ -- -- -- $ 3,500
Stockholders' equity (deficit)........................ $ (53) $ (290) $ 7,936 $ 3,291
<CAPTION>
AS OF
DECEMBER 31, JUNE 30, 1996
------------ -----------------------
PRO
1995(2)(7) ACTUAL FORMA(8)
------------ ---------- ---------
<S> <C> <C> <C>
BALANCE SHEET DATA
Current assets........................................ $ 9,624 $249,528 $ 200,071
Working capital (deficit)............................. $ (92) $229,920 $ 158,665
Property and equipment, net........................... $ 15,078 $ 35,223 $ 40,140
Total assets.......................................... $ 28,986 $289,299 $ 326,648
Long-term debt........................................ $ 3,600 -- $ 2,959
Stockholders' equity (deficit)........................ $ 14,958 $265,929 $ 278,175
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1991 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------
1991(1) 1992 1993 1994
--------------- ------ ------ -------
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures, including acquisition of
business............................................. -- $ 138 $ 2,052 $ 3,393
EBITDA(9).............................................. $(56) $ (231) $ (2,368) $ (10,571)
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------- ---------------------------------
PRO FORMA PRO FORMA
1995(2)(3) 1995(4)(5) 1995 1996 1996(6)
---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures, including acquisition of
business............................................. $ 14,697 $ 17,489 $ 8,822 $ 21,337 $22,534
EBITDA(9).............................................. $ (8,723) $ (6,590) $(4,499) $ (6,294) $(3,262)
</TABLE>
(Footnotes on following page)
22
<PAGE> 26
- ---------------
(1) The Company was organized on June 6, 1991.
(2) The acquisition of MWR in April 1995 affects the comparability of the
historical data presented for 1995 to the historical data for prior periods
shown.
(3) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(4) The acquisitions of MWR, Ruffalo, Cody and Telecom*USA Publishing in April
1995, July 1996 and September 1996, respectively, affect the comparability
of the pro forma data presented for 1995 to the data for prior periods
shown.
(5) Includes operations of MWR, Ruffalo, Cody and Telecom*USA Publishing from
January 1, 1995 to December 31, 1995 and certain adjustments attributable to
the acquisitions of MWR, Ruffalo, Cody and Telecom*USA Publishing by the
Company.
(6) Includes operations of Ruffalo, Cody and Telecom*USA Publishing from January
1, 1996 to June 30, 1996 and certain adjustments attributable to the
acquisitions of Ruffalo, Cody and Telecom*USA Publishing by the Company.
(7) Includes MWR, which was acquired by the Company on April 28, 1995.
(8) Includes Ruffalo, Cody and Telecom*USA Publishing, which were acquired by
the Company on July 15, 1996 and September 20, 1996, respectively.
(9) EBITDA consists of operating loss before 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.
23
<PAGE> 27
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared to
give effect to the acquisitions of MWR, Ruffalo, Cody and Telecom*USA Publishing
by the Company in April 1995, July 1996 and September 1996, respectively. The
unaudited pro forma financial statements reflect such acquisitions using the
purchase method of accounting, assuming, for the pro forma statements of
operations data, that such acquisitions were consummated at the beginning of the
periods presented. The unaudited pro forma financial information is derived from
and should be read in conjunction with the Consolidated Financial Statements of
the Company, Ruffalo, Cody and Telecom*USA Publishing and the Financial
Statements of MWR and the related Notes thereto included elsewhere in this
Prospectus. The pro forma adjustments are based upon available information and
certain assumptions that management believes to be reasonable. Final purchase
adjustments may differ from the pro forma adjustments herein.
The unaudited pro forma financial information is provided for informational
purposes only and is not necessarily indicative of the financial position or
operating results that would have occurred had the acquisitions been consummated
on the date presented or at the beginning of the periods presented, nor is it
necessarily indicative of future operating results or financial position.
The unaudited historical information as of and for the six month period
ended June 30, 1996 may not be indicative of the results of operations for a
full year. Specifically, due primarily to seasonal factors generally resulting
in higher revenues during the first six months of a given year, the unaudited
historical information presented for Telecom*USA Publishing for such periods is
not indicative of the results of operations for a full year.
MCLEOD, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
RUFFALO, CODY &
MCLEOD, INC. ASSOCIATES, INC.
--------------- ----------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents...................................................... $ 232,019 $ 47
Trade receivables, net......................................................... 12,975 2,602
Inventory...................................................................... 3,075 --
Deferred expenses.............................................................. -- --
Prepaid expenses and other..................................................... 1,458 141
-------- -------
Total current assets......................................................... 249,527 2,790
-------- -------
Property and Equipment, net..................................................... 35,223 1,151
-------- -------
Intangibles, net................................................................ 2,436 --
-------- -------
Other assets.................................................................... 2,113 575
-------- -------
$ 289,299 $ 4,516
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable.................................................................. $ -- $ 200
Current maturities of long-term debt........................................... -- --
Accounts payable............................................................... 14,848 372
Other current liabilities...................................................... 4,760 1,579
-------- -------
Total current liabilities.................................................... 19,608 2,151
-------- -------
Long-Term Debt, less current maturities......................................... -- --
-------- -------
Deferred Revenue, less current portion.......................................... 3,762 --
-------- -------
Minority interest in consolidated subsidiary.................................... -- --
-------- -------
Redeemable Common Stock and Warrants
Capital stock, common.......................................................... -- 2,227
Common stock held by the 401(k) profit sharing plan............................ -- 140
Warrants....................................................................... -- 546
-------- -------
-- 2,913
-------- -------
Common Stockholders' Equity (Deficit)
Capital stock, common.......................................................... 458 619
Additional paid-in capital..................................................... 299,833 --
Accumulated earnings (deficit)................................................. (34,362) (1,027)
-------- -------
265,929 (408)
Less treasury stock............................................................. -- --
Less maximum cash obligation related to 401(k) profit sharing plan shares....... -- (140)
-------- -------
265,929 (548)
-------- -------
$ 289,299 $ 4,516
======== =======
<CAPTION>
TELECOM*USA ADJUSTMENTS PRO FORMA
PUBLISHING FOR FOR
GROUP, INC. ACQUISITIONS ACQUISITIONS
----------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents...................................................... $ 207 $(4,808)(1) $154,111
90 (2)
616 (3)
(74,060)(4)
Trade receivables, net......................................................... 12,877 -- 28,454
Inventory...................................................................... -- -- 3,075
Deferred expenses.............................................................. 7,635 4,288 (4) 11,923
Prepaid expenses and other..................................................... 3,079 (2,170)(5) 2,508
------- ------- --------
Total current assets......................................................... 23,798 (76,044) 200,071
------- ------- --------
Property and Equipment, net..................................................... 3,830 (64)(1) 40,140
------- ------- --------
Intangibles, net................................................................ 13,518 14,947 (1) 83,363
52,462 (4)
------- ------- --------
Other assets.................................................................... 1,340 (208)(1) 3,074
(746)(5)
------- ------- --------
$42,486 $(9,653) $326,648
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable.................................................................. $ 2,959 $ -- $ 3,159
Current maturities of long-term debt........................................... 1,764 -- 1,764
Accounts payable............................................................... 2,958 -- 18,178
Other current liabilities...................................................... 10,356 1,610 (4) 18,305
------- ------- --------
Total current liabilities.................................................... 18,037 1,610 41,406
------- ------- --------
Long-Term Debt, less current maturities......................................... 16,623 (13,664)(3) 2,959
------- ------- --------
Deferred Revenue, less current portion.......................................... -- -- 3,762
------- ------- --------
Minority interest in consolidated subsidiary.................................... 346 -- 346
------- ------- --------
Redeemable Common Stock and Warrants
Capital stock, common.......................................................... -- (2,227)(6) --
Common stock held by the 401(k) profit sharing plan............................ 220 (360)(6) --
Warrants....................................................................... -- (546)(6) --
------- ------- --------
220 (3,133) --
------- ------- --------
Common Stockholders' Equity (Deficit)
Capital stock, common.......................................................... 4,202 (19,101)(6) 462
4 (1)
14,280 (3)
Additional paid-in capital..................................................... -- 12,242 (1) 312,075
Accumulated earnings (deficit)................................................. 3,391 (2,364)(6) (34,362)
------- ------- --------
7,593 5,061 278,175
Less treasury stock............................................................. (113) 113 (6) --
Less maximum cash obligation related to 401(k) profit sharing plan shares....... (220) 360 (6) --
------- ------- --------
7,260 5,534 278,175
------- ------- --------
$42,486 $(9,653) $326,648
======= ======= ========
</TABLE>
(Footnotes on following page)
24
<PAGE> 28
- ---------------
(1) To record the preliminary allocation of the net purchase price for the
acquisition of Ruffalo, Cody by the Company to assets acquired, including
goodwill and customer lists, and to record the issuance of the Company's
Class A Common Stock and options to purchase Class A Common Stock valued at
$24.75 per share, the average closing sales prices of the Class A Common
Stock on the Nasdaq National Market during the five business days before and
after July 15, 1996, the date the Company acquired Ruffalo, Cody. Assumes
none of the conditions for the payment of certain additional consideration
are met and that the total net purchase price for the Ruffalo, Cody
acquisition is $17,053,860, which is computed as follows, assuming all
options to purchase shares of Class A Common Stock granted in connection
with the acquisition will be exercised upon vesting:
<TABLE>
<S> <C>
Cash................................................................................ $ 4,807,898
361,420 shares of Class A Common Stock valued at $24.75 per share................... 8,945,145
Options to purchase 158,009 shares of Class A Common Stock valued at $24.75 per
share............................................................................. 3,910,723
Less cash to be received upon exercise of vested options............................ (609,906)
-----------
Total net purchase price............................................................ $ 17,053,860
===========
</TABLE>
If all of the conditions for the payment of the additional consideration
were met, the total net purchase price would include additional cash of
$50,782 and 113,387 additional shares of Class A Common Stock valued at the
market price at the time of issuance. This additional consideration would be
allocated to intangible assets, common stock and additional paid-in capital.
See "Business -- Recent Transactions."
(2) To record cash received for conversion of Ruffalo, Cody warrants to common
stock.
(3) To record the conversion of Telecom*USA Publishing convertible debentures
into shares of Telecom*USA Publishing common stock and the exercise of
options and warrants to purchase Telecom*USA Publishing common stock.
(4) To record the preliminary allocation of the purchase price for the
acquisition of Telecom*USA Publishing by the Company to assets acquired,
including intangibles. The Company paid $74,060,427 in cash to the
shareholders of Telecom*USA Publishing and established an incentive plan for
the holders of non-vested options to purchase shares of Telecom*USA
Publishing common stock.
(5) To record a valuation allowance on deferred tax assets acquired due to the
uncertainty of realizing the benefit of the Company's loss carryforwards.
(6) To eliminate Ruffalo, Cody and Telecom*USA Publishing equity components,
including common stock, warrants, additional paid-in capital, accumulated
earnings (deficit) and treasury stock. This adjustment includes the
elimination of the additional Telecom*USA Publishing Common Stock issued
upon conversion of convertible debentures and the exercise of warrants and
options to purchase Telecom*USA Publishing common stock.
25
<PAGE> 29
MCLEOD, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------------
MWR TELECOM*USA ADJUSTMENTS PRO FORMA
MCLEOD, TELECOM, RUFFALO, CODY & PUBLISHING FOR FOR
INC.(1) INC.(2) ASSOCIATES, INC. GROUP, INC. ACQUISITIONS ACQUISITIONS
--------- -------- ---------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenue.............................. $ 28,998 $873 $ 13,286(3) $43,319 $ -- $ 86,476
--------- ------ -------- ------- -------- --------
Operating expenses:
Cost of service.................... 19,667 376 6,619 18,226 2,573 (4) 47,461
Selling, general and
administrative................... 18,054 98 5,376 20,362 1,715 (4) 45,605
Depreciation and amortization...... 1,835 220 475 2,104 3,396 (5) 8,018
(12)(6)
--------- ------ -------- ------- -------- --------
Total operating expenses....... 39,556 694 12,470 40,692 7,672 101,084
--------- ------ -------- -------- -------- --------
Operating income (loss).............. (10,558) 179 816 2,627 (7,672) (14,608)
Interest income (expenses), net...... (771) (55) (77) (1,546) 1,400 (7) (1,049)
Other non-operating expenses......... -- -- -- (997) -- (997)
Income taxes......................... -- (51) (274) (34) 359 (8) --
--------- ------ -------- ------- -------- --------
Net income (loss).................... $ (11,329) $ 73 $ 465 $ 50 $ (5,913) $(16,654)
========= ====== ======== ======= ======== ========
Loss per common and common equivalent
share.............................. $ (0.31) $ (0.45)
========= ========
Weighted average common and common
equivalent shares outstanding...... 37,055 37,416
========= ========
Other Financial Data:
EBITDA (9)........................... $ (8,723) $399 $ 1,291 $ 4,731 $ (4,288) $ (6,590)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-----------------------------------------------------------------------
RUFFALO, CODY
& TELECOM*USA ADJUSTMENTS PRO FORMA
MCLEOD, ASSOCIATES, PUBLISHING FOR FOR
INC. INC. GROUP, INC. ACQUISITIONS ACQUISITIONS
-------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenue.......................................... $ 26,406 $ 8,278(3) $30,262 $ -- $ 64,946
-------- ------- ------- -------- --------
Operating expenses:
Cost of service................................ 18,724 4,225 11,218 2,205 (4) 36,372
Selling, general and administrative............ 13,976 3,253 13,137 1,470 (4) 31,836
Depreciation and amortization.................. 2,573 269 1,184 1,699 (5) 5,725
-------- ------- ------- -------- --------
Total operating expenses................... 35,273 7,747 25,539 5,374 73,933
-------- ------- ------- -------- --------
Operating income (loss).......................... (8,867) 531 4,723 (5,374) (8,987)
Interest income (expenses), net.................. (16) (6) (817) 700 (7) (139)
Other non-operating expenses..................... -- -- (483) -- (483)
Income taxes..................................... -- (194) (1,360) 1,554 (8) --
-------- ------- ------- -------- --------
Net income (loss)................................ $ (8,883) $ 331 $ 2,063 $ (3,120) $ (9,609)
======== ======= ======= ======== ========
Loss per common and common equivalent share...... $ (0.23) $ (0.25)
======== ========
Weighted average common and common equivalent
shares outstanding............................. 38,512 38,873
======== ========
Other Financial Data:
EBITDA (9)....................................... $ (6,294) $ 800 $ 5,907 $ (3,675) $ (3,262)
</TABLE>
(Footnotes on following page)
26
<PAGE> 30
- ---------------
(1) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(2) Includes operations of MWR from January 1, 1995 to April 28, 1995.
(3) Includes revenue from an agreement with a major long distance carrier to
provide telemarketing services. Over 40% of Ruffalo, Cody's revenues in 1995
and a significant portion of its revenues in 1996 were derived from this
agreement. The major long distance carrier has informed the Company that it
intends to terminate this agreement effective December 31, 1996.
(4) To recognize the costs associated with the directories in progress at the
time of the Company's acquisition of Telecom*USA Publishing.
(5) To adjust depreciation and amortization to include amortization of
intangibles acquired in the Company's acquisitions of Ruffalo, Cody and
Telecom*USA Publishing. Intangibles acquired in these acquisitions will be
amortized over periods ranging from 5 years to 25 years. These adjustments
assume that none of the conditions for the payment of certain additional
consideration in the Ruffalo, Cody acquisition are met. If all such
conditions were met, amortization of the intangibles would be increased over
their estimated remaining lives.
(6) To adjust depreciation and amortization to include amortization of
intangibles 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. Intangibles acquired in
the Company's acquisition of MWR are being amortized over 15 years.
(7) To eliminate the interest expense recorded on Telecom*USA Publishing
convertible debentures that were converted to shares of Telecom*USA
Publishing common stock immediately prior to the acquisition of Telecom*USA
Publishing by the Company.
(8) 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.
(9) EBITDA consists of operating loss before 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.
27
<PAGE> 31
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 and the
other financial data appearing elsewhere in this Prospectus.
OVERVIEW
The Company has historically derived 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 of revenues from these sources:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- -----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Local and long distance
telecommunications services......... -- % 58% 74% 76% 68%
Telecommunications network maintenance
services............................ 100 42 17 20 11
Special access and private line
services............................ -- -- 9 4 21
---- ---- ---- ---- ----
100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
The Company also derives revenue from ancillary services as a result of its
acquisitions of Ruffalo, Cody and Telecom*USA Publishing in July 1996 and
September 1996, respectively. The Company began deriving revenue from direct
marketing and telemarketing services on July 15, 1996, the date the Company
acquired Ruffalo, Cody. The Company also began deriving revenue from the sale of
advertising space in telephone directories published by Telecom*USA Publishing
on September 20, 1996, the date the Company acquired Telecom*USA Publishing.
See "-- Liquidity and Capital Resources" and "Business -- Recent Transactions."
The Company began offering "bundled" local and long distance services to
business customers in January 1994. At the end of 1995, the Company began
providing, on a test basis, long distance services to residential customers. In
June 1996, the Company began marketing and providing to residential customers in
Cedar Rapids, Iowa and Iowa City, Iowa an integrated package of
telecommunications services, marketed under the name PrimeLine(R), that includes
local and long distance service, voice mail, paging, Internet access and travel
card services. The Company plans to continue its efforts to market and provide
local, long distance and other telecommunications services to business customers
and plans to accelerate its efforts to market its PrimeLine(R) service to
residential customers. The Company believes its efforts to market its integrated
telecommunications services will be enhanced by its July 1996 acquisition of
Ruffalo, Cody, which specializes in direct marketing and telemarketing services,
including telecommunications sales, and its September 1996 acquisition of
Telecom*USA Publishing, which publishes and distributes "white page" and "yellow
page" telephone directories in fifteen states in the midwestern and Rocky
Mountain regions of the United States, including most of the Company's target
markets. 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 percentage
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 six months ended June 30, 1996 was primarily due to the
revenue from a one-time construction and sale of a fiber optic network.
Excluding the revenue
28
<PAGE> 32
from this project, the percentage of total revenues from the three historical
sources would have been 76%, 12% and 12%, 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 primarily 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. Cost of service also includes the costs of
printing and distributing the telephone directories published by Telecom*USA
Publishing. 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;
amortization of goodwill related to the Company's acquisitions of MWR, Ruffalo,
Cody and Telecom*USA Publishing; amortization expense related to the excess of
estimated fair market value in aggregate of certain options over the aggregate
exercise price of such options granted to certain officers, other employees and
directors; and amortization of one-time installation costs associated with
transferring customers' local line service from the Regional Bell Operating
Companies to the Company's telemanagement service.
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 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 total 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 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. 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
business and installs and expands its fiber optic network. 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
29
<PAGE> 33
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.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995
Telecommunications revenue increased from $11.4 million for the six-month
period ended June 30, 1995 to $26.4 million for the six months ended June 30,
1996, representing an increase of $15.0 million or 131%. Revenue from the sale
of local and long distance telecommunications services accounted for $9.3
million of this increase. Revenue from special access and private line services
accounted for $5 million of this increase, of which $2.8 million was a one-time
construction and sale of a fiber-optic network. Total local and long-distance
customers increased 63% from 7,030 at June 30, 1995 to 11,474 at June 30, 1996.
Local lines under the Company's management increased 77% from 26,960 at June 30,
1995 to 47,699 at June 30, 1996. Average lines per customer increased from 3.84
at June 30, 1995 to 4.34 at June 30, 1996. Average monthly revenue per line
decreased from $69.68 for the month ended June 30, 1995 to $66.54 for the month
ended June 30, 1996, due to fewer revenue-generating business days during June
1996.
Revenue from telecommunications network maintenance services was $3 million
for the six-month period ended June 30, 1996, and $2.3 million for the six
months ended June 30, 1995. This increase was primarily attributable to
increased revenues from the Company's Iowa Communications Network Maintenance
Contract. 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 $393,000 and $1.7
million, respectively, of the Company's revenue for the six-month periods ending
June 30, 1995 and 1996.
Cost of service increased from $7.6 million for the six-month period ended
June 30, 1995 to $18.7 million for the six-month period ended June 30, 1996, an
increase of $11.1 million or 145%. 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 increased from 67% for the
six-month period ended June 30, 1995 to 71% for the six-month period ended June
30, 1996. Although the cost of providing local and long-distance services
decreased as a percentage of the local and long-distance telecommunications
revenue by less than 1%, the overall 4% increase in cost of service as a
percentage of telecommunication revenue was principally due to the low margin
realized on the one-time construction and sale of a fiber optic network.
SG&A increased from $8.3 million for the six-month period ended June 30,
1995 to $14 million for the six-month period ended June 30, 1996, an increase of
$5.7 million or 69%. This increase was due to increased compensation resulting
from selling and customer support activities of $2.4 million, additional
administrative personnel expenses of $1.2 million and associated costs of $2.1
million required to handle the growth experienced primarily in local and long
distance revenues.
Depreciation and amortization expenses increased from $763,000 for the
six-month period ended June 30, 1995 to $2.6 million for the six-month period
ended June 30, 1996, an increase of $1.8 million or 237%. This increase
consisted of $882,000 of amortization expense related to the excess of estimated
aggregate fair market value of certain options over the aggregate exercise price
of such options granted to certain officers, other employees, and directors;
depreciation of $359,000 related to the additional fiber optic network purchased
and built during 1995 and the first six months of 1996; $367,000 of depreciation
related to capital costs associated with the growth of the Company; $145,000
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 $56,000 related to the Company's acquisition of MWR
in April 1995.
Interest expense increased from $487,000 for the six months ended June 30,
1995 to $521,000 for the six months ended June 30, 1996. The increase is
primarily a result of an increase in the amortization expense from $257,000 for
the six months ended June 30, 1995 to $341,000 for the six
30
<PAGE> 34
months ended June 30, 1996 related to the excess of estimated aggregate fair
market value of certain options over the aggregate exercise price of such
options granted to a significant stockholder of the Company in connection with
the guarantee and/or support by such stockholder of certain portions of the
Credit Facility, offset by lower interest expense on reduced borrowings as a
result of the Company's payment of all amounts outstanding under the Credit
Facility in June 1996 with a portion of the net proceeds from the Company's
initial public offering of Class A Common Stock; and the capitalization of
interest costs in the amounts of $6,000 and $204,000 for the six-month periods
ended June 30, 1995 and 1996, respectively.
Interest income increased from $27,000 for the six-month period ended June
30, 1995 to $505,000 for the same period in 1996. This increase resulted from
additional highly liquid interest-bearing investments made in June 1996 with a
portion of the proceeds of the Company's initial public offering of Class A
Common Stock.
Net loss increased from $5.7 million for the six-month period ended June
30, 1995 to $8.9 million for the six-month period ended June 30, 1996, an
increase of $3.2 million. This increase 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.
Operating loss before depreciation and amortization ("EBITDA") decreased
from a negative $4.5 million for the six months ended June 30, 1995 to a
negative $6.3 million for the six months ended June 30, 1996, a decrease of $1.8
million. The change reflected the increase in the net loss incurred in 1996 due
primarily to the expansion of the Company's local, long distance and other
telecommunications services 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. Total local and long distance
customers served increased 69% from 5,137 at December 31, 1994 to 8,700 at
December 31, 1995. Local lines under the Company's management increased 109%
from 17,112 at December 31, 1994 to 35,795 at December 31, 1995. Average lines
per customer increased from 3.33 at December 31, 1994 to 4.31 at December 31,
1995. Average monthly revenue per line increased from $58.30 for the month ended
December 31, 1994 to $62.68 for the month ended December 31, 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
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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%. This 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.
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.
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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 $289.3 million at June 30, 1996. At June 30, 1996, $35.2 million
of the total assets consisted of property and equipment, net of depreciation.
The growth of the Company has been funded through private sales of equity
securities yielding proceeds of $41 million, drawings under the Credit Facility,
and net proceeds of approximately $258.6 million from the Company's initial
public offering of Class A Common Stock. At June 30, 1996, the Company's current
assets of $249.5 million exceeded its current liabilities of $19.6 million,
providing working capital of $229.9 million, which represents an improvement of
$230 million compared to December 31, 1995 primarily attributable to the
Company's completion of its initial public offering of Class A Common Stock. 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 $3.8 million for the six
months ended June 30, 1996 and $9.5 million for the year ended December 31,
1995. During the six months ended June 30, 1996, cash for operating activities
was used primarily to fund the Company's net loss of $8.9 million for such
period. The Company also required cash to fund the growth in trade receivables
of $6.3 million and other assets of $937,000 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 $7 million due to the costs associated
with the increase in telecommunications revenue, an increase in deferred revenue
of $3.5 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 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 $18.3 million during the
six months ended June 30, 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
fiber optic cable totaling $18 million and $5.3 million during the six months
ended June 30, 1996 and the year ended December 31, 1995, respectively.
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Cash received from net financing activities was $254.1 million during the
six months ended June 30, 1996, primarily as a result of the Company's initial
public offering of Class A Common Stock. The Company paid off and canceled the
Credit Facility with a portion of the net proceeds from the initial public
offering of Class A Common Stock during the same period. 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.
On July 15, 1996, the Company acquired Ruffalo, Cody in a cash and stock
transaction valued at up to a maximum of approximately $19.9 million, based on
the average closing sales price of the Class A Common Stock on the Nasdaq
National Market at the time of the transaction. On July 15, 1996, the Company
paid approximately $4.8 million in cash and issued 361,420 shares of Class A
Common Stock to the shareholders of Ruffalo, Cody, and granted options to
purchase 158,009 shares of Class A Common Stock to certain of the holders of
options to purchase shares of Ruffalo, Cody common stock. An additional $50,782
in cash and 113,387 shares of Class A Common Stock were placed into escrow and
will be delivered to the shareholders of Ruffalo, Cody over a period of 18
months, contingent upon the fulfillment of certain conditions relating to
Ruffalo, Cody's ongoing revenues. The Company will record the Ruffalo, Cody
acquisition as a purchase for accounting purposes.
On September 20, 1996, the Company acquired Telecom*USA Publishing for
approximately $74.1 million in cash and an additional amount currently estimated
to be approximately $1.6 million to be paid to certain employees of Telecom*USA
Publishing as part of an incentive plan. At the time of the acquisition,
Telecom*USA Publishing had outstanding debt of approximately $6.6 million. The
Company will record the Telecom*USA Publishing acquisition as a purchase for
accounting purposes.
The Company used a portion of the net proceeds from the Company's initial
public offering of Class A Common Stock to fund the Telecom*USA Publishing
acquisition and for the cash portion of the Ruffalo, Cody acquisition.
Telecom*USA Publishing has a revolving line of credit and term loan (the
"Telecom Credit Facility") with Norwest Bank Iowa, National Association (the
"Telecom Credit Facility Bank"), with an aggregate credit limit of approximately
$9.8 million. As of August 31, 1996, Telecom*USA Publishing had borrowings of
approximately $4.8 million outstanding under the Telecom Credit Facility.
Borrowings of less than $6 million under the Telecom Credit Facility bear
interest at the Telecom Credit Facility Bank prime rate as in effect from time
to time. Borrowings in excess of $6 million under the Telecom Credit Facility
bear interest at the Telecom Credit Facility Bank prime rate as in effect from
time to time plus .75%. Borrowings under the Telecom Credit Facility are secured
by substantially all of Telecom*USA Publishing's assets. The Company currently
intends to retain the Telecom Credit Facility.
At June 30, 1996, the Company had actual contractual capital commitments of
approximately $5.5 million for costs associated with the construction of fiber
optic networks.
The Company is currently bidding for certain PCS licenses being auctioned
by the FCC and expects to explore alternatives to permit it to provide other
wireless services which may require substantial additional capital. As of
September 30, 1996, the Company had submitted bids totaling approximately $21.8
million for "D" and "E" block frequency licenses covering areas of Iowa,
Illinois, Nebraska and Minnesota in the FCC's auctions of PCS licenses. If the
Company is successful in obtaining PCS licenses, it will be required to make
significant expenditures to develop, construct and operate a PCS system.
As of September 30, 1996, the Company estimates that its aggregate capital
requirements for the remainder of 1996, 1997 and 1998 will be approximately
$ .
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The Company's estimated capital requirements include the estimated cost of
(i) developing and constructing its fiber optic network, (ii) market expansion
activities, (iii) constructing its network operations center and corporate
headquarters, and (iv) obtaining PCS licenses and related capital expenditures,
including those licenses described above for which the Company currently has
bids outstanding. These capital requirements are expected to be funded, in large
part, out of the net proceeds from the Offering and the net proceeds remaining
from the Company's initial public offering of Class A Common Stock (estimated to
be $122 million as of September 30, 1996), and lease payments to the Company for
portions of the Company's networks.
The Company may require additional capital in the future for business
activities related to those specified above and also for acquisitions, joint
ventures and strategic alliances, as well as to fund operating deficits and net
losses. These activities could require significant additional capital not
included in the foregoing estimated aggregate capital requirements of $
million.
The Company expects to meet its additional capital needs with the proceeds
from credit facilities and other borrowings, and additional debt and equity
issuances. The Company currently plans to obtain one or more additional bank
lines of credit, although no such lines of credit have yet been negotiated.
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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BUSINESS
OVERVIEW
The Company is a provider of integrated telecommunications services to
small and medium-sized businesses and, since June 1996, residential customers,
primarily in Iowa and Illinois. The Company derives its telecommunications
revenue from (i) the sale of "bundled" local, long distance and other
telecommunications services to end users, (ii) telecommunications network
maintenance services, (iii) competitive access services, including special
access and private line services, and (iv) ancillary services, including direct
marketing and telemarketing services and the sale of advertising space in
telephone directories. As of June 30, 1996, the Company served over 11,550
telecommunications customers in 54 cities and towns.
The Company offers "one-stop" integrated telecommunications services,
including local, long distance, voice mail, paging and Internet access services,
tailored to the customer's specific needs. For business customers, this approach
simplifies telecommunications procurement and management and makes available
customized services, such as "least-cost" long distance pricing and enhanced
calling features, that might not otherwise be directly available to such
customers on a cost-effective basis. For residential customers, this approach
provides integrated local, long distance and other telecommunications services,
flat-rate long distance pricing and enhanced calling features as part of the
Company's basic PrimeLine(R) residential services. The Company also operates a
competitive access provider that offers a variety of special access and private
line services to 75 large businesses, institutional customers and interexchange
carriers. In addition, the Company provides network maintenance services for the
State of Iowa's fiber optic network.
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, July 1996 and September 1996, respectively, the Company acquired
MWR, a competitive access provider in Des Moines, Iowa, Ruffalo, Cody, a
telemarketing company, and Telecom*USA Publishing, a publisher of telephone
directories.
The Company is organized as a holding company and operates through six
wholly owned subsidiaries. Since September 1996, the Company's business has been
organized into four operational groups: (i) Business Services, which develops,
markets and sells the Company's telecommunications services to business
customers; (ii) Consumer Services, which markets and sells the Company's
PrimeLine(R) service to residential customers and engages in various direct
marketing and telemarketing activities; (iii) Network Services, which designs,
constructs, and operates the Company's fiber optic network and engages in the
Company's network maintenance activities; and (iv) Media Services, which
publishes and distributes telephone directories.
The Company is currently offering telecommunications services to business
and residential customers located primarily in Iowa and Illinois. The Company
also offers long distance service in Omaha, Nebraska. The Company intends to
begin sales of telecommunications services in a number of markets in Minnesota
and Wisconsin during the fourth quarter of 1996. The Company plans to enter
markets in South Dakota and North Dakota in 1997. Over the next several years,
depending on competitive and other factors, the Company also intends to offer
telecommunications services in Colorado, Wyoming, Montana, Utah and Idaho.
Implementation of the Company's current and future expansion plans will depend
on a variety of factors, including: (i) the availability of financing and
regulatory approvals; (ii) the number of potential customers in a target market;
(iii) the existence of strategic alliances or relationships; (iv) technological,
regulatory or other developments in the Company's business; (v) changes in the
competitive climate in which the Company operates; and (vi) the emergence of
future opportunities.
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The Company believes it is the first telecommunications provider in most of
its current markets to offer "bundled" local, long distance and other
telecommunications 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, known as Raterizer(R), each business
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 business customers, and, in certain cases, rates specifically
identified by a business customer and agreed to by the Company. The Company also
provides paging and Internet access services.
Since the Company completed its initial public offering of Class A Common
Stock in June 1996, it has actively pursued its strategy of increasing market
penetration and expanding into new markets in the following ways: (i) in June
1996, the Company began offering to residential customers in Cedar Rapids, Iowa
and Iowa City, Iowa an integrated package of telecommunications services,
marketed under the name PrimeLine(R), that includes local and long distance
service, voice mail, paging, Internet access and travel card services;
PrimeLine(R) services are expected to be available in other residential markets
in the near future; (ii) the Company has positioned itself to enter the
Minnesota and Wisconsin markets in late 1996 in addition to the Iowa and
Illinois markets currently served; (iii) in July 1996, the Company acquired
Ruffalo, Cody, which specializes in direct marketing and telemarketing services,
to enhance the Company's marketing of its telecommunications services; (iv) in
September 1996, the Company acquired Telecom*USA Publishing, which publishes
"white page" and "yellow page" telephone directories in fifteen states in the
midwestern and Rocky Mountain regions of the United States to increase the
Company's penetration of its current markets and to accelerate its entry into
new markets; (v) the Company has constructed approximately 1,000 new route miles
of fiber optic network at a cost of approximately $22.9 million; and (vi) the
Company is bidding for certain PCS licenses as part of its strategy to increase
the range of services provided to customers in its target markets.
RECENT TRANSACTIONS
On September 20, 1996, the Company acquired Telecom*USA Publishing by means
of a merger of a newly formed wholly owned subsidiary of the Company with and
into Telecom*USA Publishing. As consideration for the acquisition, the Company
paid approximately $74.1 million in cash and an additional amount currently
estimated to be approximately $1.6 million to be paid to certain employees of
Telecom*USA Publishing as part of an incentive plan. At the time of the
acquisition, Telecom*USA Publishing had outstanding debt of approximately $6.6
million.
Telecom*USA Publishing publishes and distributes "white page" and "yellow
page" telephone directories in fifteen states in the midwestern and Rocky
Mountain regions of the United States, including most of the Company's target
markets. Telecom*USA Publishing derives its revenues primarily from the sale of
advertising space in its telephone directories.
On July 15, 1996, the Company acquired Ruffalo, Cody by means of a merger
of Ruffalo, Cody with and into a newly formed wholly owned subsidiary of the
Company. As consideration for the acquisition, the Company paid approximately
$4.8 million in cash and issued an aggregate of 361,420 shares of Class A Common
Stock to the shareholders of Ruffalo, Cody, and granted options to purchase an
aggregate of 158,009 shares of Class A Common Stock to the holders of options to
purchase shares of Ruffalo, Cody common stock. An additional $50,782 in cash and
113,387 shares of Class A Common Stock were placed into escrow and will be
delivered to certain of the shareholders of Ruffalo, Cody over a period of 18
months, contingent upon the fulfillment of certain conditions relating to
Ruffalo, Cody's ongoing revenues.
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Ruffalo, Cody specializes in direct marketing and telemarketing services,
including telecommunications sales, as well as a variety of fund-raising
services for colleges, universities and other non-profit organizations
throughout the United States.
On April 28, 1995, the Company purchased all of the outstanding stock of
MWR from Midwest Capital Group, Inc. ("Midwest Capital Group"), 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. As part of the transaction, Midwest Capital
Group received the right to appoint one director to the Board and one "observer
Board member." Subsequently, Midwest Capital Group agreed to reduce its Board
representation to one director. See "Management -- Stockholders' Agreements." 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 exercised in June 1995.
MWR is a competitive access provider which owns and operates a fiber optic
network in Des Moines, Iowa and which offers special access and private line
services to 75 large businesses, institutional customers and interexchange
carriers.
Effective September 4, 1996, the Company, through McLeod Telemanagement,
agreed to purchase the customer base of Total Communication Systems, Inc.
("TCSI") for an aggregate cash purchase price of approximately $550,000. TCSI is
an Iowa corporation that offers local and long distance service in Iowa by
partitioning of U S WEST's central office switches. TCSI currently manages
approximately 1,300 local and 250 long distance lines in Iowa. Completion of the
transaction is subject to the approval of the Iowa Utilities Board and certain
other conditions.
BUSINESS STRATEGY
The Company's objective is to become a leading provider of integrated
telecommunications services in Iowa, Illinois, Nebraska, Minnesota, Wisconsin,
South Dakota, North Dakota, Colorado, Wyoming, Montana, Utah and Idaho. The
Company intends to increase its penetration of its current 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 September 30, 1996 it had a market share of
approximately 20.1% of business local telephone lines in its Iowa markets (based
on 1994 market data) and a market share of approximately 12.3% 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). There can be no assurance that the Company will attain
similar market share in other markets.
The principal elements of the Company's business strategy include:
- PROVIDE INTEGRATED TELECOMMUNICATIONS SERVICES. The Company believes
that there is substantial demand among business and residential customers
in its target markets for an integrated package of telecommunications
services that meets all of the customer's telecommunications needs. The
Company believes that, by bundling a variety of telecommunications
services, it will position itself to become an industry leader in
offering "one-stop" integrated telecommunications services, to penetrate
rapidly its target markets and to build customer loyalty.
- BUILD MARKET SHARE THROUGH BRANDING 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'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, voice mail,
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paging, Internet access 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. The Company has been successful
in obtaining long-term commitments from its business customers and
responding rapidly and creatively to customer needs.
- FOCUS ON SMALL AND MID-SIZED MARKETS. The Company principally targets
small and mid-sized markets (cities and towns with a population between
8,000 and 350,000) in its service areas. The Company estimates that its
current and planned target markets have a combined population of
approximately 9.5 million. The Company strives to be the first to market
integrated telecommunications services in its principal markets and
expects that intense competition in bundled telecommunications services
will be slower to develop in these markets than in larger markets.
- EXPAND ITS FIBER OPTIC NETWORK. The Company is constructing a
state-of-the-art digital fiber optic telecommunications network designed
to serve markets in Iowa. In the future, the Company expects to expand
its fiber optic network to include additional markets. The Company's
decision to expand its fiber optic network will be 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). The
Company currently owns approximately 1,700 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.
- 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 three years. 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 when
the economic terms of interconnection with the incumbent local exchange
carrier make the provision of local switched services cost-effective.
- EXPLORE POTENTIAL ACQUISITIONS AND STRATEGIC ALLIANCES. The Company
believes that its strategic alliances with two utilities in its current
markets provide it with rights-of-way and other resources on favorable
terms. The Company believes that its recent acquisitions of Ruffalo, Cody
and Telecom*USA Publishing will increase the Company's penetration of its
current markets and accelerate its entry into new markets. As part of its
expansion strategy, the Company contemplates additional acquisitions,
joint ventures and strategic alliances with businesses that are related
or complementary to its current operations. The Company
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believes that the addition of such related or complementary businesses
will help it to expand its operations into its target markets. As a
result, the Company plans to consider acquisitions, joint ventures and
strategic alliances in areas such as wireless services, directory
publishing, network construction and infrastructure and Internet access.
In undertaking these transactions, the Company may use proceeds from the
Offering, credit facilities and other borrowings, and additional debt and
equity issuances.
- 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 regions. Eight of the 11 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.
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, including
the publication of "white page" and "yellow page" telephone directories.
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 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
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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.
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
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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 June 30, 1996, a number of states, including Iowa, Illinois,
Minnesota, Wisconsin and North Dakota, have taken regulatory and legislative
action to open local telecommunications markets to various degrees of
competition. State regulatory agencies in other states within the Company's
target market area, including South Dakota, Nebraska, Colorado, Montana and
Wyoming, are conducting administrative proceedings to investigate opening local
telecommunications markets to 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 has historically derived revenue from: (i) the sale of local
and long distance telecommunications services, (ii) special access and private
line services and (iii) telecommunications network maintenance services. For the
six months ended June 30, 1996, these services represented 68%, 11% and 21%,
respectively, of the Company's total revenues. Following the acquisition by the
Company of Ruffalo, Cody and Telecom*USA Publishing in July 1996 and September
1996, respectively, the Company also derives revenue from ancillary services,
including direct marketing and telemarketing services and the sale of
advertising space in telephone directories. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
INTEGRATED TELECOMMUNICATIONS SERVICES. Since beginning sales activities
in January 1994, the Company has increased its revenue approximately 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. In order to provide integrated telecommunications services to its business
and residential customers, 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 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
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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 or residential 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.
In March 1996, the Company 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, 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 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, voice mail, paging, Internet access 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.
Business Services. End-user business customers in each of the 54 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. By using Centrex service instead of a private branch exchange
("PBX") to direct their telecommunications traffic, business 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 generally offers its business 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 for business customers generally are
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calculated by totaling each business 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 business 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 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 business 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 also offers other long distance rates to certain business
customers, based on the customers' particular needs. The Company has developed
the software, known as Raterizer(R), 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 believes that its method of computing
long distance service rates is an important factor in attracting and retaining
business customers. The Company's average business telemanagement service
contract has an approximately 49-month term.
Residential Services. In June 1996, the Company introduced its
PrimeLine(R) service to residential and certain small business customers in the
Cedar Rapids, Iowa and Iowa City, Iowa markets. PrimeLine(R) service includes
local, long distance telephone service, paging, voice mail, Internet access and
travel card services, as well as enhanced features such as three-way calling,
call transfer and consultation hold. PrimeLine(R) customers may choose from five
integrated telecommunications service packages generally ranging in price from
$19.95 to $32.95 per month. Per minute long distance rates for PrimeLine(R)
customers range from $.12 to $.15, depending on monthly calling volumes. These
rates are applied 24 hours a day, seven days a week for all calls within the
continental United States. The Company's standard PrimeLine(R) service contract
has a 12-month term. The Company intends to begin offering PrimeLine(R) service
in all of its Iowa markets and in Illinois, Minnesota and Wisconsin in the near
future.
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 $3.2 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 57-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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ANCILLARY SERVICES. Through Telecom*USA Publishing, which the Company
acquired in September 1996, the Company publishes and distributes an aggregate
of over 7 million copies of 80 annual "white page" and "yellow page" telephone
directories to local telephone subscribers in fifteen states in the midwestern
and Rocky Mountain regions of the United States, including most of the Company's
target markets. Telecom*USA Publishing derives its revenues primarily from the
sale of advertising space in its telephone directories. In addition, through
Ruffalo, Cody, which the Company acquired in July 1996, the Company provides
direct marketing and telemarketing services, including telecommunications sales,
as well as a variety of fund-raising services for colleges, universities and
other non-profit organizations throughout the United States. Ruffalo, Cody
derived over 40% of its revenues in 1995 from an agreement with a major long
distance carrier to provide telemarketing services. Both Ruffalo, Cody and the
major long distance carrier can terminate this agreement after giving notice to
the other party. The major long distance carrier has informed the Company that
it intends to terminate this agreement effective December 31, 1996. Upon
termination of this agreement, the Company intends to redirect resources towards
selling the Company's local and long distance telecommunications services.
The Company believes that its telephone directories and its direct
marketing and telemarketing services will provide valuable marketing
opportunities and expertise for its telecommunications services, particularly
with respect to potential residential customers. The Company intends to utilize
Telecom*USA Publishing's sales force of 259 direct sales personnel and
telemarketers to sell both advertising space in the Company's telephone
directories and, where available, the Company's telecommunications services.
Furthermore, by September 30, 1996, ten of the Company's 140 full-time
telemarketing sales personnel at its Ruffalo, Cody subsidiary were engaged in
sales of the Company's PrimeLine(R) residential services. See "-- Sales and
Marketing."
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.
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For a detailed description of the expansion of the Company's fiber optic
network, see "-- Network Facilities."
WIRELESS SERVICES
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.
The Company does not currently offer PCS or cellular services. The Company
is, however, currently bidding for "D" and "E" block frequency licenses covering
areas of Iowa, Illinois, Nebraska and Minnesota in the FCC's auctions of PCS
licenses. As of September 30, 1996, the Company had submitted bids totaling
approximately $21.8 million for such licenses. If the Company is successful in
obtaining PCS licenses, it will be required to make significant expenditures to
develop, construct and operate a PCS system. There can be no assurance that the
Company will be successful in acquiring any PCS licenses. Nevertheless, 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 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. However, except for its
participation in the FCC auction of PCS licenses, 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 MWR from MidAmerican. MWR is a competitive access provider which
currently owns and operates a fiber optic network and offers special access and
private line services to 75 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 optic links, unlike Parts I
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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 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 optic
cable 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 whether 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
Until June 1996, the Company directed its local and long distance
telecommunications sales efforts primarily toward small and medium-sized
businesses. In June 1996, the Company began marketing its PrimeLine(R) services
to residential customers.
Marketing of the Company's telecommunications services is handled by a
sales and marketing group composed of direct sales personnel and telemarketers.
The Company's sales force is trained to emphasize the Company's customer-focused
sales and customer service efforts, including 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.
Marketing of the Company's telecommunications services to business
customers is conducted by 160 direct sales personnel, located both at the
Company's headquarters in Cedar Rapids, Iowa and in 35 branch sales offices in
Iowa and Illinois. The sales personnel make direct calls to
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prospective and existing business customers, conduct analyses of business
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.
Marketing of the Company's telecommunications services to residential
customers is currently conducted by ten telemarketers from the Company's
Ruffalo, Cody subsidiary. The Company plans to increase this number in the
future. The telemarketers emphasize the PrimeLine(R) integrated package of
telecommunications services and its flat-rated per minute pricing structure for
long distance service. The Company also plans to use Ruffalo, Cody's information
database to identify attractive sales opportunities and to pursue those
opportunities through a variety of methods, including calls from Ruffalo, Cody's
telemarketing personnel. Furthermore, the Company believes that its acquisition
of Telecom*USA Publishing in September 1996 will further the Company's sales and
marketing efforts of its residential services in several ways. First, it gives
the Company an immediate presence in states where it is initiating service
(Minnesota and Wisconsin) and also in states where it does not yet provide
service but expects to do so in the future (such as Colorado, Wyoming, Montana,
Utah and Idaho). Second, the Company believes that the acquisition will increase
the Company's penetration of current markets and accelerate its entry into new
markets. The telephone directories published and distributed by Telecom*USA
Publishing will serve as "direct mail" advertising for the Company's
telecommunications products. The directories will contain detailed product
descriptions and step-by-step instructions on the use of the Company's
telecommunications products. The Company believes that telephone directories are
commonly used sources of information that potentially provide the Company with a
long-term marketing presence in millions of households and businesses that
receive a Telecom*USA Publishing directory. By using the directories to market
its products, the Company can reach more customers than would be possible if the
acquisition had not occurred. Third, the Company believes that combining the
directories' distinctive black-and-gold motif with the McLeod name will create
in all of the Company's markets the brand awareness that the McLeod name now
enjoys in Iowa.
In the fourth quarter of 1996 and in 1997, the Company expects to expand
its local and long distance sales and marketing efforts primarily by opening new
branch sales offices in approximately 25 cities and towns in Minnesota and
approximately 13 cities and towns in Wisconsin, by continuing its expansion in
Iowa and Illinois and by increasing its sales of long distance service in Omaha,
Nebraska. The Company also expects to begin sales and marketing efforts in 1997
in South Dakota and North Dakota, assuming the Company is successful in its
challenges to the U S WEST Centrex Action in those states, and in Colorado,
Wyoming, Montana, Utah and Idaho. See "Risk Factors -- Dependence on Regional
Bell Operating Companies; U S WEST Centrex Action" and "-- Legal Proceedings."
In addition, the Company expects to expand its long distance sales and marketing
efforts in 1997 to the remaining states in the continental United States upon
receipt of required certifications from various state regulatory authorities.
The Company estimates that as of September 30, 1996, after 33 months of
operations, it had a market share of approximately 20.1% of business local
telephone lines in its Iowa markets (based on 1994 market data) and a market
share of approximately 12.3% 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). There can be
no assurance that the Company will attain similar market share in other markets.
Because residential sales efforts have begun so recently, the Company has not
achieved any significant share of the residential telecommunications services
market. As of June 30, 1996, the Company was providing, on a retail basis,
approximately 47,700 lines in its Iowa and Illinois 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.
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Sales and marketing of the Company's competitive access services are
handled by a 6-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.
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 the
Regional Bell Operating Companies and other local exchange carriers, numerous
direct marketers and telemarketers, 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 for sales to business customers and
telemarketing for sales to residential customers) 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
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generally enjoys a competitive advantage over other competitive access providers
that later attempt to enter the market, because it has the first opportunity to
contact customers who are willing to switch from the local exchange carrier
serving the market.
Competition for local and access telecommunications services is based
principally on price, quality, network reliability, customer service and service
features. The Company believes that its management expertise allows it to
compete effectively with the incumbent local exchange carriers. The Company
generally offers its customers local exchange services at prices that are
substantially similar to the established retail local exchange carrier rates for
basic business service, while generally providing enhanced calling features and
a higher level of customer service. Long distance 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.
The Company, through its wholly owned subsidiary Ruffalo, Cody, is subject
to certain federal and state regulatory requirements due to its fund-raising
activities, including in certain states, bonding requirements.
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
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from these duties. Some duties are also imposed on non-incumbent local exchange
carriers, such as the Company. The duties created by the Telecommunications Act
include the following:
Reciprocal
Compensation Requires all local exchange carriers to complete
calls originated by competing carriers under
reciprocal arrangements at prices based on a
reasonable approximation of incremental cost or
through mutual exchange of traffic without explicit
payment.
Resale Requires all local exchange carriers to permit
resale of their telecommunications services without
unreasonable restrictions or conditions. In
addition, incumbent local exchange carriers are
required to offer wholesale versions of all retail
services to other telecommunications carriers for
resale at discounted rates, based on the costs
avoided by the incumbent local carrier in the
wholesale offering.
Interconnection Requires incumbent local exchange carriers to
permit their competitors to interconnect with their
facilities at any technically 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
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service ("out-of-region long distance service") upon receipt of any necessary
state and/or federal regulatory approvals that are otherwise applicable to the
provision of intrastate and/or interstate long distance service. Under the
Telecommunications Act, the Regional Bell Operating Companies will be allowed to
provide long distance service within the regions in which they also provide
local exchange service ("in-region service") upon specific approval of the FCC
and satisfaction of other conditions, including a checklist of interconnection
requirements. The General Telephone Operating Companies are permitted to enter
the long distance market without regard to limitations by region, although
regulatory approvals otherwise applicable to the provision of long distance
service will need to be obtained. The General Telephone Operating Companies are
also subject to the provisions of the Telecommunications Act that impose
interconnection and other requirements on local exchange carriers.
The Telecommunications Act imposes certain restrictions on the Regional
Bell Operating Companies in connection with the Regional Bell Operating
Companies' entry into long distance services. Among other things, the Regional
Bell Operating Companies must pursue such activities only through separate
subsidiaries with separate books and records, financing, management and
employees, and all affiliate transactions must be conducted on an arm's length
and 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.
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On March 21, 1996, the FCC initiated a rulemaking proceeding in which it
proposed to eliminate the requirement that non-dominant interstate carriers such
as the Company maintain tariffs on file with the FCC for domestic interstate
services. The FCC's proposed rules are pursuant to authority granted to the FCC
in the Telecommunications Act to "forebear" from regulating any
telecommunications service provider if the FCC determines that the public
interest will be served. The FCC also requested public comment on whether any
other regulations currently imposed on non-dominant carriers also should be
eliminated pursuant to the FCC's "forebearance" authority. It is not known when
the FCC will take final action on this proposal.
The FCC also imposes prior approval requirements on transfers of control
and assignments of operating authorizations. The FCC has the authority to
generally condition, modify, cancel, terminate or revoke operating authority for
failure to comply with federal laws and/or the rules, regulations and policies
of the FCC. Fines or other penalties also may be imposed for such violations.
There can be no assurance that the FCC or third parties will not raise issues
with regard to the Company's compliance with applicable laws and regulations.
The Company does not currently hold any radio licenses issued by the FCC,
although FCC radio licenses may be acquired in the future in connection with the
provision of wireless services. In 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
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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. On August 8, 1996, the FCC adopted rules to implement the
interconnection, resale and number portability provisions of the
Telecommunications Act. Certain provisions of these rules have been appealed to
various U.S. Courts of Appeals which were consolidated into proceedings
currently pending before the U.S. Eighth Circuit Court of Appeals. In addition,
applications for a stay of the proposed rules were rejected by the FCC. However,
the U.S. Eighth Circuit Court of Appeals has granted a temporary stay in the
matter.
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.
The Company, through its wholly owned subsidiary Ruffalo, Cody, is also
subject to rules governing telemarketing that have been promulgated by both the
FCC and the Federal Trade Commission (the "FTC"). The FCC and FTC telemarketing
rules prohibit telemarketers, such as Ruffalo, Cody, from engaging in certain
deceptive telemarketing practices and require that telemarketers make certain
disclosures. For example, these telemarketing rules: prohibit the use of
autodialers that employ prerecorded voice messages without the prior express
consent of the dialed party; proscribe the facsimile transmission of unsolicited
advertisements; require telemarketers to disclose clear and conspicuous
information concerning quality, cost and refunds to a customer before a customer
makes a purchase; require telemarketers to compile lists of individuals who
desire not to be contacted; limit telemarketers to calling residences between
the hours of 8:00 a.m. and 9:00 p.m.; require telemarketers to explicitly
identify the seller and state that the purpose of the call is to sell goods; and
prohibit product misrepresentations.
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
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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 through resale in Minnesota,
Wisconsin and North Dakota. The Company also is authorized to offer long
distance service in Nebraska, Missouri, Colorado, Michigan, Montana and Utah. On
October 3, 1996, the South Dakota Public Utilities Commission voted to approve
the Company's application for local and long distance operating authority, which
will become effective upon the issuance of a written order. Applications for
authority to provide long distance service are pending in several states,
including Arizona, California, Georgia, Indiana, Kansas, Ohio, Oregon,
Pennsylvania, Texas, Washington and Wyoming. The Company has applied for
authority to provide long distance service in such states, including states
outside of its target markets, because it believes this capability will enhance
the Company's ability to attract business customers that have offices outside of
the Company's target markets. 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 public
utilities commissions in certain states, such as Nebraska, South Dakota,
Montana, Colorado, Wyoming and Missouri, where the legality of such competition
was previously uncertain, have not yet taken regulatory or statutory actions to
comply with the Telecommunications Act. Furthermore, the Telecommunications Act
preserves the ability of states to impose reasonable terms and conditions of
service and other regulatory requirements. In the last several years, Iowa,
Illinois, Minnesota, Wisconsin and North Dakota 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 these state statutes provide some protection to the Company against any
discriminatory conduct by the Regional Bell Operating Companies. The Iowa
Utilities Board, for example, has determined in three separate instances that
the conduct of U S WEST discriminated against the Company in violation of Iowa
law. U S WEST has appealed one of these decisions by the Iowa Utilities Board,
which appeal is currently pending before the Iowa District Court for Polk
County.
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.
The Company, through Ruffalo, Cody, engages in various direct marketing,
telemarketing and fund-raising activities. Most states have laws that govern
either direct marketing, telemarketing or
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fund-raising activities. In states that regulate such activities, several types
of restriction have been imposed, either singly or in combination, including:
(i) pre-commencement and post-completion registration requirements; (ii) posting
of professional bonds; (iii) filing of operational contracts; (iv) imposing
statutory waiting periods; (v) requiring employee registration; and (vi)
prohibiting control over funds collected from such activities.
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 September 30, 1996, the Company employed a total of 1,554 full-time
employees and 261 part-time employees. 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. 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. In August 1996, the Company
purchased approximately 194 acres of farm land in southern Cedar Rapids, Iowa,
and announced plans to construct a one-story, 160,000 square foot building to
serve as the Company's headquarters. Adjacent to the new headquarters, the
Company plans to construct a 38,000 square foot disaster-resistant network
operations center that will house the Company's telephone switching and computer
equipment. The total cost of the construction of the Company's corporate
headquarters and network operations center is estimated to be approximately $25
million. See "Use of Proceeds." In connection with the new headquarters
construction, the State of Iowa has awarded a $1 million grant to fund certain
road construction costs. The new headquarters is scheduled for occupancy by
mid-1997. In addition, the Company owns 88 acres of undeveloped farm and forest
land in southern Cedar Rapids, Iowa.
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. On October 9, 1996, the parties began non-binding
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mediation in an attempt to resolve this dispute. See "Management -- Compensation
Committee Interlocks and Insider Participation."
The Company is dependent on the Regional Bell Operating Companies for
provision of its local and certain of its long distance services. U S WEST and
Ameritech are currently the Company's sole suppliers of access to local central
office switches. The Company uses such access to partition the local switch and
provide local service to its customers.
The Company purchases access in the form of a product generally known as
"Centrex." Without such access, the Company could not currently provide bundled
local and long distance services, although it could provide stand-alone long
distance service. Since the Company believes 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 the Company believes
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 the Company believes 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
the Company believes 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 withdrew its complaint before
the Iowa Utilities Board. Because MCI, AT&T and others also challenged U S
WEST's action, the Iowa Utilities Board continued to review the U S WEST Centrex
Action and on June 14, 1996 issued an order rejecting U S WEST's filing. The
order of the Iowa Utilities Board was appealed by U S WEST to the Iowa District
Court for Polk County on July 12, 1996. The appeal remains pending.
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In Nebraska and North Dakota, complaints filed by the Company with respect
to the U S WEST Centrex Action are awaiting decision by the public utilities
commissions in those states. In Minnesota, U S West's initial filing was
rejected on procedural grounds by the Public Utilities Commission. 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. The Minnesota Public
Utilities Commission is expected to render a ruling in the proceedings by
December 20, 1996. In South Dakota, U S WEST has appealed the unfavorable
decision of the Public Utilities Commission in state court and has been granted
a stay of the decision pending appeal. The Company anticipates that U S WEST
will appeal other unfavorable decisions by public utilities commissions in other
states with respect to 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 and public utilities commissions in several of those states have also
rejected the U S WEST Centrex action. In Oregon, U S WEST's filing was rejected
by the Public Utilities Commission on March 7, 1996. In South Dakota, the Public
Utilities Commission rejected the U S WEST Centrex Action on August 22, 1996. In
Colorado, on September 3, 1996, an Administrative Law Judge issued a
recommendation that the U S WEST Centrex Action be rejected. In Wyoming, U S
WEST's filing was rejected by the Public Service Commission on September 6,
1996. On its own motion, the Arizona Corporation Commission ordered U S WEST to
continue the availability of Centrex services until a comparable replacement
system becomes available. In New Mexico, the Public Service Commission has not
allowed the U S WEST's filing to become effective. In Utah, on September 25,
1996, the Public Service Commission rejected the U S WEST Centrex Action and
ordered U S WEST to continue the availability of Centrex service for resale. In
Montana, the Public Service Commission is expected to render a decision with
respect to the U S WEST Centrex Action in October 1996.
There can be no assurance that the Company will succeed in its legal
challenges to the U S WEST Centrex 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; U S WEST Centrex
Action."
As a result of its use of the Centrex product, the Company depends upon U S
WEST to process service orders placed by the Company to transfer new customers
to the Company's local service. U S WEST has imposed a limit of processing one
new local service order of the Company per hour for each U S WEST central
office. Furthermore, according to the Company's records, U S WEST commits an
error on one of every three lines ordered by the Company, thereby further
delaying the transition of new customers to the Company's local service. The
Company has repeatedly requested that U S WEST increase its local service order
processing rate and improve the accuracy of such processing. U S WEST has
refused to change its service order processing practices.
On July 12, 1996, the Company filed a complaint with the Iowa Utilities
Board against U S WEST in connection with such actions. At a hearing held to
consider the complaint, U S WEST acknowledged that it had not dedicated
resources to improve its processing of the Company's service orders to switch
new customers to the Company's local service because of its desire to limit
Centrex service. On October 2, 1996, the Iowa Utilities Board determined that
U S WEST's limitation on the processing of service orders constituted an
unlawful discriminatory practice under Iowa law. There can be no assurance,
however, that the decision of the Iowa Utilities Board will adequately resolve
the service order problems or that such problems will not impair the Company's
ability to expand or to attract new customers, which could have a material
adverse effect on the Company. See "Risk Factors -- Refusal of U S WEST to
Improve its Processing of Service Orders," "Risk Factors -- Dependence on
Regional Bell Operating Companies; U S WEST Centrex Action" and "Risk
Factors -- Refusal of U S WEST to Improve its Processing of Service Orders."
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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 September 30,
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............... 38 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,
Executive Vice President,
Corporate Administration and
Treasurer
Kirk E. Kaalberg.............. 37 Executive Vice President,
Network Services
Stephen K. Brandenburg........ 44 Chief Information Officer
David M. Boatner.............. 47 Executive Vice President,
Business Services
Albert P. Ruffalo............. 49 Executive Vice President,
Consumer Services
Arthur L. Christoffersen...... 49 Executive Vice President, Media
Services
Casey D. Mahon................ 44 Senior Vice President, General
Counsel and Secretary
Joseph H. Ceryanec............ 35 Vice President, Finance and
Controller
Russell E. Christiansen(1).... 61 Director 1998
Thomas M. Collins(1)(2)....... 68 Director 1998
Paul D. Rhines(2)............. 53 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
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long distance telecommunications company with nearly 6,000 employees. MCI
purchased Telecom*USA in August 1990 for $1.25 billion.
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. Mr. Cram has announced his retirement to be effective in
January 1997.
Blake O. Fisher, Jr. Mr. Fisher has served as Executive Vice President,
Corporate Administration of the Company since September 1996 and as Chief
Financial Officer and Treasurer since February 1996. Mr. Fisher 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 September 1996 as the
Company's Executive Vice President, Network Services 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 March 1994 to
September 1996, Mr. Kaalberg served as Senior Vice President, Network Design and
Development and 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.
Stephen K. Brandenburg. Mr. Brandenburg has served since September 1996 as
Chief Information Officer of the Company, where he is responsible for the design
and deployment of the Company's internal computing systems and operations. From
June 1995 to September 1996, he served as Senior Vice President, Intelligent
Technologies and Systems of the Company. 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
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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.
David M. Boatner. Mr. Boatner has served since September 1996 as Executive
Vice President, Business Services of the Company. From February 1996 to
September 1996, he served as the Company's Senior Vice President, Sales and
Marketing. Prior to joining the Company, Mr. Boatner served from January 1995 to
February 1996 as Regional Vice President of Sales of WorldCom, a long distance
telecommunications company, where he was responsible for sales in the central,
western 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 in
January 1995. Prior to joining WilTel, Inc., Mr. Boatner held a variety of
positions at AT&T and its Bell operating subsidiaries.
Albert P. Ruffalo. Mr. Ruffalo has served as the Company's Executive Vice
President, Consumer Services since September 1996. Since August 1991 Mr. Ruffalo
has served as President and Chief Executive Officer of Ruffalo, Cody, which was
acquired by the Company on July 15, 1996. From September 1990 to July 1991, Mr.
Ruffalo served as President of MCI Direct, Inc., an indirect wholly owned
subsidiary of MCI. From 1983 to August 1990, Mr. Ruffalo held various executive
positions at Teleconnect and Telecom*USA Data Base Marketing Company, an
indirect wholly owned subsidiary of Telecom*USA, Teleconnect's successor. From
1980 to 1983, Mr. Ruffalo was Marketing Manager of National Oats Corporation, a
grain distribution firm.
Arthur L. Christoffersen. Mr. Christoffersen has served as the Company's
Executive Vice President, Media Services since September 20, 1996, the date the
Company acquired Telecom*USA Publishing. Mr. Christoffersen has served as
Chairman, President and Chief Executive Officer of Telecom*USA Publishing since
November 1990, the date Mr. Christoffersen and other investors acquired
Telecom*USA Publishing from MCI. From December 1987 to August 1990, Mr.
Christoffersen served as Executive Vice President and Chief Financial Officer of
Teleconnect and its successor, Telecom*USA. From 1975 to 1987, Mr.
Christoffersen held a variety of management positions, including Executive Vice
President, of Life Investors, Inc., a diversified financial services 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.
Joseph H. Ceryanec. Mr. Ceryanec has served since September 1996 as Vice
President, Finance and Controller of the Company. Prior to joining the Company,
Mr. Ceryanec was employed by Met-Coil Systems Corporation, a manufacturer of
machine tools and factory automation equipment, where he served as Chief
Financial Officer and Vice President -- Finance from May 1994 to September 1996
and as Vice President -- Finance from December 1993 to May 1994. From 1986 to
December 1993, Mr. Ceryanec served as a supervisor, manager and senior manager
for Ernst & Young, a public accounting firm.
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,
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from October 1992 to June 1995, President from 1990 to 1995 and Vice Chairman
and Chief Operating Officer from November 1990 to 1992.
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.
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 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.
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.
INVESTOR AGREEMENT
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. 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
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services to be performed by the independent accountants. The current members of
the Audit 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. Collins,
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. Collins,
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.
Prior to September 20, 1996, the Company purchased advertising space in
telephone directories published by Telecom*USA Publishing, a corporation
whose directors included, among others, Clark E. McLeod, Paul D. Rhines
and James L. Cram. Messrs. McLeod and Rhines and Ms. Casey D. Mahon were
stockholders of Telecom*USA Publishing. Telecom*USA Publishing also purchased
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.
On September 20, 1996, the Company acquired Telecom*USA Publishing for
approximately $74.1 million in cash and an additional amount currently
estimated to be approximately $1.6 million to be paid to certain employees of
Telecom*USA Publishing as part of an incentive plan. At the time of the
acquisition, Telecom*USA had outstanding debt of approximately $6.6 million.
Clark E. McLeod, a director and executive officer of the Company, Mary E.
McLeod, a stockholder of the Company, the McLeod Charitable Foundation, Inc., a
non-profit foundation controlled by Mr. and Mrs. McLeod, Aaron, Holly, Frank
and Jane McLeod, relatives of Mr. and Mrs. McLeod, Paul D. Rhines, a director
of the Company, James L. Cram, a director and executive officer of the Company,
Casey D. Mahon, an executive officer of the Company, and IES, a stockholder of
the Company, were shareholders of Telecom*USA Publishing. The Company paid
$18,571,982, $1,195,313, $105,187, $1,459,563, $46,125, $250,219 and $1,000,875
to Mr. and Mrs. McLeod, the McLeod Charitable Foundation, Inc., Aaron, Holly,
Frank and Jane McLeod, Mr. Rhines, Mr. Cram, Ms. Mahon and IES, respectively,
in exchange for the shares of Telecom*USA Publishing common stock held by them.
Messrs. McLeod, Rhines and Cram served as directors of Telecom*USA Publishing.
A Special Committee of the Board, consisting of disinterested directors,
approved the acquisition of Telecom*USA Publishing as fair to, and in the best
interests of, the stockholders of the Company.
In August 1996, Ryan Properties, Inc. ("Ryan Properties") assigned to the
Company all of its right, title and interest in and to a purchase agreement
between Ryan Properties and Iowa Land and Building Company ("Iowa Land"), and
the Company assumed Ryan Properties' obligation to pay Iowa Land $691,650 for
approximately 75 of the approximately 194 acres of farm land in southern Cedar
Rapids, Iowa upon which the Company is constructing its new corporate
headquarters and network operations center. See "Business -- Property."
Following the assignment, the Company
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paid Iowa Land $691,650 for the title to such land. Iowa Land is an indirect
wholly owned subsidiary of IES, a significant stockholder of the Company.
On July 15, 1996, the Company acquired Ruffalo, Cody in a cash and stock
transaction valued at up to a maximum of $19.9 million, based on the average
price of the Class A Common Stock on the Nasdaq National Market at the time of
the transaction. Clark E. McLeod, a director and executive officer of the
Company, and Mary E. McLeod owned 110,454 shares of Ruffalo, Cody common stock,
which were exchanged for 77,218 shares of Class A Common Stock, of which 11,584
shares were placed in escrow to be released to Mr. and Mrs. McLeod, if at all,
over a period of 18 months, contingent upon the fulfillment of certain
conditions relating to Ruffalo, Cody's ongoing revenues. Allsop, a stockholder
of the Company the general partner of which is Paul D. Rhines, a director of the
Company, owned 278,182 shares of Ruffalo, Cody common stock, which were
exchanged for 194,476 shares of Class A Common Stock, of which 29,171 shares
were placed in escrow to be released to Allsop, if at all, after six months,
contingent upon the fulfillment of certain conditions relating to Ruffalo,
Cody's ongoing revenues. Mr. Rhines served as a director of Ruffalo, Cody. A
Special Committee of the Board, consisting of disinterested directors, approved
the acquisition of Ruffalo, Cody as fair to, and in the best interests of, the
stockholders of the Company.
In June 1996, in connection with the initial public offering of the
Company's Class A Common Stock, Clark E. McLeod, Mary E. McLeod, MidAmerican and
IES purchased 125,000, 125,000, 1,000,000 and 500,000 shares of Class A Common
Stock, respectively, directly from the Company at the initial public offering
price of $20.00 per share for $2,500,000, $2,500,000, $20,000,000 and
$10,000,000, respectively. The Company was advised that such shares were
purchased for investment purposes. Mr. McLeod is a director and executive
officer of the Company and Mrs. McLeod, MidAmerican and IES are significant
stockholders of the Company.
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 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.
Since June 1996, the Company has rented office space from McLeod Educational
Group. The Company paid McLeod Educational Group an aggregate of approximately
$36,055 from June 1996 through September 1996 for this space. Clark E. McLeod
and Mary E. McLeod own over 99% of the stock of McLeod 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
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<PAGE> 69
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 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 and Selling
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 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 and
Selling 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 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
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<PAGE> 70
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 and the July 1996 acquisition of Ruffalo, Cody, 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.
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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
Executive Vice President, Network
Services
James L. Cram........................ 102,884 56,177 84,375 1,500
Chief Accounting Officer
Stephen K. Brandenburg............... 106,692 33,842 187,500 --
Chief Information Officer
</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.
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
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<PAGE> 72
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.
MANAGEMENT AGREEMENTS
Employment, Confidentiality and Non-Competition Agreements. The Company
has entered into employment, confidentiality and non-competition agreements with
55 members of senior management, including the Named Executive Officers,
pursuant to which the senior managers have agreed that during the term of
employment and for a two-year period following a termination for cause,
resignation or voluntary termination of employment (other than on account of the
Company's discontinuance of activities), 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 942,500 shares of Class A
Common Stock at exercise prices ranging from $20.00 to $33.875 per share. Such
options were granted pursuant to the Company's 1996 Employee Stock Option Plan,
with vesting generally to occur with respect to one-third of the shares subject
to such options in the last month of the fourth year following 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. As an owner of more
than 10% of the outstanding Common Stock of the Company, Clark E. McLeod is
ineligible, pursuant to Sections 422(b)(6) and 424(d) of the Internal Revenue
Code of 1986, as amended (the "Code"), to receive options intended to qualify as
incentive stock options under the Code if such options vest after the expiration
of five years from the date of grant. Accordingly, options granted to Clark E.
McLeod pursuant to an
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<PAGE> 73
employment, confidentiality and non-competition agreement vest (i) with respect
to options to purchase 13,636 shares of Class A Common Stock, one-third on each
of the 42-month, 49-month and 56-month anniversaries of the date of grant (which
options are intended to qualify as incentive stock options under the Code) and
(ii) as to the remaining options (which are not intended to qualify as incentive
stock options under the Code), one-third on each of the 54-month, 61-month and
68-month anniversaries of the date of grant. See "Management -- Stock Option
Plans -- 1996 Employee Stock Option Plan."
Change-of-Control Agreements. The Company has entered into
change-of-control agreements with certain executive employees, including the
Named Executive Officers, which provide for certain payments and benefits 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
(other than for "disability," "cause," death or "retirement") or by the
executive following a "material reduction" in responsibilities or compensation
(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 Code, the Company will continue to pay the employer portion of the
premiums for such coverage for the longer of 24 months or the period of coverage
provided pursuant to Section 4980B. 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 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 September 30, 1996, options to purchase 1,271,021 shares of Class A Common
Stock had been granted under the 1992 Plan and options to purchase 17,615 shares
of Class A Common Stock had been exercised. The option agreements under the 1992
Plan typically include provisions by which (i) options granted under the 1992
Plan may be exercised with respect to 25 percent of the shares subject to such
option one year after the option is granted and with respect to an additional 25
percent of the shares subject to such option in each of the three subsequent
years and (ii) options expire seven years after the date of grant. The 1992 Plan
provides that optionees may not dispose of shares of Class A Common Stock
acquired pursuant to the exercise of an option unless they have first complied
with certain transfer restrictions. The exercise price of the options granted
under the 1992 Plan is equal to the fair market value of the Class A Common
Stock as determined by the Board as of the date of grant. Shares of Class A
Common Stock issued under the 1992 Plan have been registered under the
Securities Act on Form S-8. The Board terminated the 1992 Plan in March 1996 in
connection with the adoption of the Company's 1996 Employee Stock Option Plan
(as amended, 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
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<PAGE> 74
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 September 30,
1996, options to purchase 4,224,787 shares of Class A Common Stock had been
granted under the 1993 Plan and options to purchase 151,748 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. Shares of Class A Common Stock issued under the 1993 Plan
have been registered under the Securities Act on Form S-8. 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 September 30, 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. Shares of Class A Common Stock
issued under the 1995 Plan have been registered under the Securities Act on Form
S-8. The Board terminated the 1995 Plan in March 1996 in connection with the
adoption of the 1996 Plan.
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 or any of its subsidiaries, or other individuals whose participation in
the 1996 Plan is determined to be in the best interests of the Company by the
Compensation Committee. In the event there is any increase or decrease in the
number of shares of Class A Common Stock without receipt of consideration by the
Company (for instance, by a recapitalization or stock split) after the effective
date of the 1996 Plan, an appropriate and proportionate adjustment will be made
in the number and kinds of shares subject to the 1996 Plan, and in the number,
kinds, and per-share exercise price of shares subject to the unexercised portion
of options granted prior to any such change. The 1996 Plan provides for the
grant of options that are intended to qualify as "incentive stock options" under
Section 422 of the Code to employees of the Company as well as the grant of
non-qualifying options to officers, directors or key employees of the Company,
or other individuals whose participation in the 1996 Plan is determined to be in
the best interests of the Company by the Compensation Committee. 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
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<PAGE> 75
Company and each optionee. As of September 30, 1996, options to purchase
1,687,489 shares of Class A Common Stock had been granted under the 1996 Plan,
including options to purchase an aggregate of 942,500 shares of Class A Common
Stock, at exercise prices ranging from $20.00 to $33.875 per share, granted to
certain senior management employees of the Company as partial consideration for
the execution of employment, confidentiality and non-competition agreements, and
700 options had been exercised. See "Management -- Management Agreements." In
addition, on July 15, 1996, in connection with the Company's acquisition of
Ruffalo, Cody, the Company granted options to purchase an aggregate of 158,009
shares of Class A Common Stock under the 1996 Plan to the holders of options to
purchase shares of Ruffalo, Cody common stock at exercise prices ranging from
$1.43 to $9.30, depending on the exercise price of the options to purchase
Ruffalo, Cody common stock in exchange for which such options were granted.
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. Shares of Class A Common
Stock issued or issuable under the 1996 Plan have been registered under the
Securities Act on Form S-8. 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 332,813
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 September 30, 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
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<PAGE> 76
Stock issued pursuant to the exercise of an option, except a transfer to a
Company employee or director approved by the Board, the Company has the right to
repurchase the Class A Common Stock for a price which is the greater of the book
value of the Class A Common Stock or the then fair market value of the Common
Stock, as determined by the Board. Under the Directors Plan, as amended, each
Eligible Director who commences service as a director after the 1996 amendment
and restatement of the Directors Plan is granted an initial option to purchase
10,000 shares of Class A Common Stock. Each such Eligible Director is also
granted an additional option to purchase 5,000 shares of Class A Common Stock
immediately after each of the next two annual meetings of the Company's
stockholders if the Eligible Director continues to be an Eligible Director.
Options granted under the Directors Plan, as amended, may be exercised with
respect to 25 percent of the shares subject to such option one year after the
option is granted and with respect to an additional 25 percent of the shares
subject to such option in each of the three subsequent years; provided, however,
that all unvested options become fully exercisable upon a change in control of
the Company (as defined in the Directors Plan). Shares of Class A Common Stock
issued or issuable under the Directors Plan, as amended, have been registered
under the Securities Act on Form S-8. 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"). The Company has not yet
implemented the Employee Purchase Plan.
All employees of the Company are eligible to participate in the Employee
Purchase Plan, except the following: (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. Shares of Class A Common
Stock issuable under the Employee Purchase Plan have been registered under the
Securities Act on Form S-8.
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<PAGE> 77
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.
INCENTIVE COMPENSATION PLAN
On September 20, 1996, in connection with the Company's acquisition of
Telecom*USA Publishing, the Company adopted the McLeod, Inc. Incentive Plan (the
"Incentive Plan"). The 155 employees of Telecom*USA Publishing who held
non-vested options (the "Telecom Non-Vested Options") to purchase shares of
Telecom*USA Publishing common stock under its incentive stock option plan on
September 20, 1996 (the "Telecom Participants") were eligible to participate in
the Incentive Plan. Under the Incentive Plan, Telecom Participants received a
unit of participation (a "Unit") for each Telecom Non-Vested Option. On
September 20, 1996, an aggregate of 210,825 Units were granted to the Telecom
Participants under the Incentive Plan and each Unit had a value of $12.75 less
the option exercise price of the corresponding Telecom Non-Vested Option. Units
accrue earnings at an annual rate no less than 6% and can, in certain
circumstances, accrue earnings up to 31% annually depending on Telecom*USA
Publishing's operating income. Units vest on January 1 of the year following the
year in which the corresponding Telecom Non-Vested Option would have vested.
Distributions with respect to each vested Unit and the earnings accrued thereon
are made as soon as practicable following the January 1 vesting date. The
Incentive Plan is administered by the Board, which may terminate or amend the
Incentive Plan at any time. No additional Units will be granted under the
Incentive Plan.
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."
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<PAGE> 78
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding capital stock as of September 30, 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, (iv) each Selling Stockholder and (v) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
PRIOR TO BENEFICIAL OWNERSHIP
OFFERING(1)(2) AFTER OFFERING(1)
-------------------- NUMBER OF --------------------
NUMBER OF SHARES NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENT OFFERED SHARES PERCENT
- ------------------------------------------- ---------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
IES Investments Inc.(3).................... 10,221,145 25.2% -- 10,221,145 22.1%
Clark E. McLeod(4)......................... 9,285,942 29.8 -- 9,285,942 25.3
MWR Investments Inc.(5).................... 8,205,472 21.6 -- 8,205,472 18.8
Mary E. McLeod(6).......................... 4,451,459 14.4 -- 4,451,459 12.2
Allsop Venture Partners III, L.P.(7)....... 3,888,393 12.6 -- 3,888,393 10.7
Putnam Investments, Inc.(8)................ 3,281,270 10.6 -- 3,281,270 9.0
Russell E. Christiansen(9)................. 9,375 * -- 9,375 *
Thomas M. Collins(10)...................... 227,431 * -- 227,431 *
Paul D. Rhines(11)......................... 3,923,550 12.7 -- 3,923,550 10.8
Lee Liu(12)................................ 35,157 * -- 35,157 *
James L. Cram(13).......................... 609,240 2.0 120,000 489,240 1.3
Stephen C. Gray(14)........................ 747,190 2.4 150,000 597,190 1.6
Kirk E. Kaalberg(15)....................... 246,921 * 65,000 181,921 *
Stephen K. Brandenburg(16)................. 46,876 * 40,000 6,876 *
Casey D. Mahon(17)......................... 225,217 * 60,000 165,217 *
Albert P. Ruffalo(18)...................... 105,976 * 20,000 85,976 *
Michael J. Brown(19)....................... 106,989 * 50,000 56,989 *
Laura L. Dement(20)........................ 56,240 * 12,000 44,240 *
Joseph P. Cunningham(21)................... 56,052 * 12,000 44,052 *
Directors and executive officers as a group
(15 persons)(22)......................... 15,496,313 47.5% 455,000 15,041,313 39.3%
</TABLE>
- ---------------
* Less than one percent.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (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, selling stockholders 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.
(3) Includes 500,000 shares of Class A Common Stock and 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 1,300,688 shares of Class B Common Stock that IES has the
right to purchase 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.
(4) Includes 4,508,418 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 326,050 shares of Class A Common Stock
that Mr. McLeod has the right to purchase within 60 days from September 30,
1996 pursuant to options.
(Footnotes continued on following page)
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<PAGE> 79
(5) Includes 1,000,000 shares of Class A Common Stock and 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.
(6) Mrs. McLeod's address is c/o McLeod, Inc., Suite 500, Town Centre, 221 3rd
Ave., SE, Cedar Rapids, IA 52401.
(7) The address of Allsop is 2750 1st Ave., NE, Cedar Rapids, IA 52402.
(8) Includes 3,214,270 and 67,000 shares of Class A Common Stock held as of
August 6, 1996 by Putnam Investment Management, Inc. and The Putnam
Advisory Group, Inc., respectively, as disclosed on a Schedule 13G filed by
Putnam Investments, Inc. with the Securities and Exchange Commission (the
"Commission"). The address of Putnam Management, Inc. and The Putnam
Advisory Group, Inc. is c/o Putnam Investments, Inc., One Post Office
Square, Boston, MA 02109.
(9) Includes 9,375 shares of Class A Common Stock that Mr. Christiansen has the
right to purchase within 60 days from September 30, 1996 pursuant to
options.
(10) Includes 35,157 shares of Class A Common Stock that Mr. Collins has the
right to purchase within 60 days from September 30, 1996 pursuant to
options.
(11) Mr. Rhines' address is c/o Allsop Venture Partners III, L.P., 2750 1st
Ave., NE, Cedar Rapids, IA 52402. Includes 3,888,393 shares of Class A
Common Stock held of record by Allsop. Includes 35,157 shares of Class A
Common Stock that Mr. Rhines has the right to purchase within 60 days from
September 30, 1996 pursuant to options.
(12) Includes 35,157 shares of Class A Common Stock that Mr. Liu has the right
to purchase within 60 days from September 30, 1996 pursuant to options.
(13) Includes 140,423 shares of Class A Common Stock held of record by members
of James L. Cram's family. Includes 317,144 shares of Class A Common Stock
that Mr. Cram has the right to purchase within 60 days from September 30,
1996 pursuant to options.
(14) 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 570,939 shares of Class A Common
Stock that Mr. Gray has the right to purchase within 60 days from September
30, 1996 pursuant to options.
(15) Includes 229,689 shares of Class A Common Stock that Mr. Kaalberg has the
right to purchase within 60 days from September 30, 1996 pursuant to
options.
(16) Includes 46,876 shares of Class A Common Stock that Mr. Brandenburg has the
right to purchase within 60 days from September 30, 1996 pursuant to
options.
(17) Includes 157,033 shares of Class A Common Stock that Ms. Mahon has the
right to purchase within 60 days from September 30, 1996 pursuant to
options.
(18) Includes 73,600 shares of Class A Common Stock and options to purchase
32,376 shares of Class A Common Stock issued in connection with the
Company's acquisition of Ruffalo, Cody on July 15, 1996.
(19) Includes 93,751 shares of Class A Common Stock that Mr. Brown has the right
to purchase within 60 days from September 30, 1996 pursuant to options. Mr.
Brown is a Senior Vice President of McLeod Telemanagement.
(20) Includes 37,386 shares of Class A Common Stock and options to purchase
18,854 shares of Class A Common Stock issued in connection with the
Company's acquisition of Ruffalo, Cody on July 15, 1996. Ms. Dement is a
Vice President of Ruffalo, Cody.
(21) Includes 40,301 shares of Class A Common Stock and options to purchase
15,751 shares of Class A Common Stock issued in connection with the
Company's acquisition of Ruffalo, Cody on July 15, 1996. Mr. Cunningham is
the Vice President and Chief Financial Officer of Ruffalo, Cody.
(22) Includes 1,794,953 shares of Class A Common Stock that such persons have
the right to purchase within 60 days from September 30, 1996 pursuant to
options.
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<PAGE> 80
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 October 7, 1996, the Class A
Common Stock was held by 366 holders of record and the Class B Common Stock was
held by two holders of record.
As of June 30, 1996, 30,210,519 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.
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 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.
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<PAGE> 81
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
The Class A Preferred Stock was authorized in connection with the guarantee
and support by a principal stockholder of the Company of certain portions of the
Credit Facility, which was repaid in full and terminated subsequent to the
Company's initial public offering of Class A Common Stock. No shares of Class A
Preferred Stock have been issued. The Company currently anticipates eliminating
from the Restated Certificate the Class A Preferred Stock at its next annual
meeting of stockholders.
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
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<PAGE> 82
$.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 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"
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<PAGE> 83
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 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 Minnesota, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
The Class A Common Stock has been traded on the Nasdaq National Market
since June 10, 1996. Future 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.
Upon completion of the Offering, the Company will have approximately
52,065,319 shares of Common Stock outstanding, including 5,471,000 shares of
Class A Common Stock offered hereby and 32,455,005 "restricted" shares of Common
Stock. Of these restricted shares, 22,070,187 shares of Common Stock generally
are currently eligible for sale under Rule 144 as currently in effect, and
10,384,818 shares of Common Stock generally will be eligible for sale under Rule
144 as currently in effect beginning in January 1997 through July 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.
80
<PAGE> 84
The Company, its directors and officers, the Selling Stockholders 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 120 days after the date of this Prospectus, without the prior
written consent of Salomon Brothers Inc, 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. In connection with the Company's initial public offering
of Class A Common Stock, Clark E. McLeod, Mary E. McLeod, IES and MidAmerican
have each agreed with the Representatives that, subject to certain exceptions,
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 June 10, 1996, without the prior written consent of
the Representatives. 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."
At September 30, 1996, the Company has reserved 11,738,945 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 7,660,109 shares of Class A Common
Stock are currently outstanding and unexercised under the Company's stock option
plans. The Company has registered the shares of Class A Common Stock reserved
for issuance under the Company's stock option plans and stock purchase plan. See
"Management -- Stock Option Plans" and "Management -- The Employee Stock
Purchase Plan." In addition, options to purchase 1,300,688 shares of Class B
Common Stock, which were granted to IES in connection with its guarantee and
support of certain portions of the Credit Facility, were outstanding and
unexercised as of September 30, 1996. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
81
<PAGE> 85
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company, the Selling Stockholders and the Underwriters (the
"Underwriting Agreement"), the Company and the Selling Stockholders have 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 and the
Selling Stockholders 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 900,000 additional shares
of Class A Common Stock to cover over-allotments, if any, at the 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.
82
<PAGE> 86
The Underwriting Agreement provides that the Company and the Selling
Stockholders 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 Company, its directors and officers, the Selling Stockholders and
certain other stockholders 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 120 days from the date of this Prospectus, without the prior written
consent of Salomon Brothers Inc, and Clark E. McLeod, Mary E. McLeod, IES and
MidAmerican have each agreed with the underwriters, in connection with the
Company's initial public offering of the Class A Common Stock, 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 June 10, 1996, 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 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 June 10,
1996, 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."
In connection with the offering, certain Underwriters may engage in passive
market making transactions in the Class A Common Stock on the Nasdaq National
Market in accordance with Rule 10b-6A under the Exchange Act, during the two
business day period before commencement of offers or sales of the Class A Common
Stock offered hereby. Passive market making transactions must comply with
certain volume and price limitations and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for the security, and if all independent bids are lowered below
the passive market maker's bid, then such bid must be lowered when certain
purchase limits are exceeded.
VALIDITY OF SECURITIES
The validity of the Class A Common Stock and certain other legal matters in
connection with the Class A Common Stock offered hereby are being passed upon
for the Company by Hogan & Hartson L.L.P., Washington, D.C., special counsel for
the Company. The validity of the Class A Common Stock is being passed upon for
the Underwriters by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1994 and
1995, and the consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1995 and financial statement schedule included herein and elsewhere in the
Registration Statement have been audited by McGladrey & Pullen, LLP, as
indicated in their reports with respect thereto, and are included herein in
reliance and upon the authority of said firm as experts in giving said reports.
The statements of income, stockholders' equity and cash flows for MWR
Telecom, Inc., for the years ended December 31, 1993 and December 31, 1994 and
for the period from January 1, 1995 to April 28, 1995, included herein and
elsewhere in the Registration Statement have been audited by
83
<PAGE> 87
McGladrey & Pullen, LLP, as indicated in their reports with respect thereto, and
are included herein in reliance and upon the authority of said firm as experts
in giving said reports.
The consolidated balance sheets of Ruffalo, Cody & Associates, Inc. as of
December 31, 1994 and 1995, and the consolidated statements of income,
statements of 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 this 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 authority of said firm as experts
in giving said reports.
The consolidated balance sheets of Telecom*USA Publishing Group, Inc. as of
August 31, 1995 and 1996, and the consolidated statements of income, statements
of stockholders' equity and cash flows for each of the years in the three-year
period ended August 31, 1996 and financial statement schedule, included herein
and elsewhere in this 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 authority of said firm as experts in giving
said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400 Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300,
New York, New York 10048. Copies of the reports, proxy statements and other
information can be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549, upon payment of prescribed rates or in certain cases by
accessing the Commission's World Wide Web site at http://www.sec.gov. The Class
A Common Stock of the Company is quoted on the Nasdaq National Market under the
symbol "MCLD", and such reports, proxy statements and other information
concerning the Company also can be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed a Registration Statement under the Securities Act
with respect to the shares of Class A Common Stock offered hereby. As permitted
by the rules and regulations of the Commission, this Prospectus does not contain
all the information set forth in the Registration Statement. For further
information about the Company and the Class A Common Stock, reference is made to
the Registration Statement and to the financial statements, exhibits and
schedules filed therewith. The statements contained in this Prospectus about the
contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to a copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of each such
document may be obtained from the Commission at its principal office in
Washington, D.C. upon payment or the charges prescribed by the Commission or, in
the case of certain such documents, by accessing the Commission's World Wide Web
site at http://www.sec.gov.
84
<PAGE> 88
GLOSSARY
Access -- Telecommunications services that permit long distance carriers to
use local exchange facilities to originate and/or terminate long distance
service.
Access to Rights-of-Way -- Access to poles, ducts, conduits and other
rights-of-way.
CAP (competitive access provider) -- A company that provides its customers
with an alternative to the local exchange company for local transport of private
line and special access telecommunications services.
Central offices -- The switching centers or central switching facilities of
the local exchange companies.
Collocation -- The ability of a CAP such as the Company to connect its
network to the LECs central offices. Physical collocation occurs when a CAP
places its network connection equipment inside the local exchange company's
central offices. Virtual collocation is an alternative to physical collocation
pursuant to which the local exchange company permits a CAP to connect its
network to the local exchange company's central offices on comparable terms,
even through the CAP's network connection equipment is not physically located
inside the central offices.
Dedicated -- Telecommunications lines reserved for use by particular
customers.
Dialing Parity -- The ability of a competing local or toll service provider
to provide telecommunications services in such a manner that customers have the
ability to route automatically, without the use of any access code, their
telecommunications to the service provider of the customer's designation.
Digital -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
FCC -- Federal Communications Commission.
Interconnection -- Interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.
Interconnection Decisions -- Rulings by the FCC announced in September 1992
and August 1993, which require the Regional Bell Operating Companies and most
other large local exchange carriers to provide interconnection in local exchange
company central offices to any CAP, long distance carrier or end user seeking
such interconnection for the provision of interstate special access and switched
access transport services.
InterLATA -- Telecommunications services originating in a LATA and
terminating outside of that LATA.
IntraLATA -- Telecommunications services originating and terminating in the
same LATA.
LATA (local access and transport area) -- A geographic area composed of
contiguous local exchanges, usually but not always within a single state. The
State of Iowa contains all or part of five LATAs; the State of Illinois contains
all or part of 17 LATAs. There are approximately 200 LATAs in the United States.
Local exchange -- A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.
LEC (local exchange carrier) -- A company providing local telephone
services.
G-1
<PAGE> 89
Long distance carriers (interexchange carriers) -- Long distance carriers
provide services between local exchanges on an interstate or intrastate basis. A
long distance carrier may offer services over its own or another carrier's
facilities.
Number portability -- The ability of an end user to change local exchange
carriers while retaining the same telephone number.
POPs (points of presence) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PUC (public utilities commission) -- A state regulatory body, established
in most states, which regulates utilities, including telephone companies
providing intrastate services.
Private line -- A dedicated telecommunications connection between end user
locations.
Public switched network -- That portion of a local exchange company's
network available to all users generally on a shared basis (i.e., not dedicated
to a particular user). Traffic along the public switched network is generally
switched at the local exchange company's central offices.
Reciprocal compensation -- The same compensation of a new competitive local
exchange carrier for termination of a local call by the local exchange carrier
on its network, as the new competitor pays the local exchange carrier for
termination of local calls on the local exchange carrier network.
Resale -- Resale by a provider of telecommunications services (such as a
local exchange carrier) of such services to other providers or carriers on a
wholesale or a retail basis.
Route mile -- The number of miles of the telecommunications path in which
fiber optic cables are installed.
Self-healing ring -- A self-healing ring is a network design in which the
network backbone consists of a continuous ring connecting a central hub facility
with one or more network nodes (such as customer premises). Traffic is routed
between the hub and each of the nodes simultaneously in both a clockwise and a
counterclockwise direction. In the event of a cable cut or component failure
along one of these paths, traffic will continue to flow along the alternate path
so no traffic is lost. In the event of a catastrophic node failure, other nodes
will be unaffected because traffic will continue to flow along whichever path
(primary or alternate) does not pass through the affected node. The switch from
the primary to the alternate path will be imperceptible to most users.
Special access services -- The lease of private, dedicated
telecommunications lines or "circuits" along the network of a local exchange
company or a CAP, which lines or circuits run to or from the long distance
carrier POPs. Examples of special access services are telecommunications lines
running between POPs of a single long distance carrier, from one long distance
carrier POP to the POP of another long distance carrier or from an end user to a
long distance carrier POP.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Switched access transport services -- Transportation of switched traffic
along dedicated lines between the local exchange company central offices and
long distance carrier POPs.
Switched traffic -- Telecommunications traffic along the public switched
network. This traffic is generally switched at the local exchange company's
central offices.
Unbundled Access -- Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment, features,
functions and capabilities, at any technically feasible point within such
network.
G-2
<PAGE> 90
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 June 30, 1996
(Unaudited)..................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1995 and 1996 (Unaudited)............ F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995 and the six months ended June 30, 1996 (Unaudited).......... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1995 and 1996 (Unaudited)............ F-6
Notes to Consolidated Financial Statements......................................... F-7
MWR TELECOM, INC.
Independent Auditor's Report....................................................... F-20
Statements of Income 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 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-22
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....................... F-23
Notes to Financial Statements...................................................... F-24
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
Independent Auditor's Report....................................................... F-27
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996
(Unaudited)..................................................................... F-28
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1995 and 1996 (Unaudited)................ F-29
Consolidated Statements of Redeemable Common Stock and Warrants and Common
Stockholders' Equity (Deficit) for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1996 (Unaudited)......................... F-30
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1995 and 1996 (Unaudited)............ F-32
Notes to Consolidated Financial Statements......................................... F-33
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
Independent Auditor's Report....................................................... F-40
Consolidated Balance Sheets as of August 31, 1995 and 1996......................... F-41
Consolidated Statements of Income for the years ended August 31, 1994,
1995 and 1996................................................................... F-42
Consolidated Statements of Stockholders' Equity for the years ended August 31,
1994, 1995 and 1996............................................................. F-43
Consolidated Statements of Cash Flows for the years ended August 31, 1994,
1995 and 1996................................................................... F-44
Notes to Consolidated Financial Statements......................................... F-46
</TABLE>
F-1
<PAGE> 91
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> 92
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1994 1995 1996
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 3)
Current Assets
Cash and cash equivalents................................................ $ -- $ -- $232,019,068
Trade receivables, less allowance for doubtful accounts and
discounts 1994 $84,000; 1995 $219,000; 1996 $289,000 (Note 2).......... 2,723,249 6,689,069 12,975,005
Inventory................................................................ 1,930,208 2,638,829 3,075,351
Prepaid expenses and other............................................... 208,776 295,689 1,458,181
----------- ----------- ------------
TOTAL CURRENT ASSETS............................................... 4,862,233 9,623,587 249,527,605
----------- ----------- ------------
Property and Equipment
Land..................................................................... 310,917 310,917 309,539
Telecommunication networks............................................... 922,769 7,696,101 14,870,155
Equipment................................................................ 4,328,732 6,100,470 10,538,142
Networks in progress (Note 2)............................................ -- 3,115,361 12,841,810
----------- ----------- ------------
5,562,418 17,222,849 38,559,646
Less accumulated depreciation............................................ 846,203 2,144,615 3,337,089
----------- ----------- ------------
4,716,215 15,078,234 35,222,557
----------- ----------- ------------
Intangibles and Other Assets
Deferred line installation costs, less accumulated amortization
1994 $126,000; 1995 $518,000; 1996 $737,000............................ 1,010,704 1,424,685 1,705,252
Goodwill, less accumulated amortization 1995 $117,000; 1996 $205,000..... -- 2,525,091 2,436,333
Other.................................................................... 97,544 334,855 407,746
----------- ----------- ------------
1,108,248 4,284,631 4,549,331
----------- ----------- ------------
$10,686,696 $28,986,452 $289,299,493
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable......................................................... $ 1,689,216 $ 5,832,543 $ 14,848,252
Checks issued not yet presented for payment.............................. 34,115 918,932 --
Accrued payroll and payroll related expenses............................. 1,216,144 1,954,621 2,503,400
Other accrued liabilities................................................ 239,669 874,916 1,653,497
Deferred revenue, current portion........................................ 24,107 134,325 602,664
----------- ----------- ------------
TOTAL CURRENT LIABILITIES.......................................... 3,203,251 9,715,337 19,607,813
----------- ----------- ------------
Long-Term Debt (Note 3).................................................... 3,500,000 3,600,000 --
----------- ----------- ------------
Deferred Revenue, less current portion..................................... 692,263 713,173 3,762,281
----------- ----------- ------------
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 30,210,519
shares............................................................... 144,785 163,871 302,105
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 40,117,164 299,833,502
Accumulated deficit...................................................... (14,150,413) (25,479,352) (34,362,467)
Cost of common stock reacquired for the treasury, 1994 22,500 shares;
1995 and 1996 none..................................................... (33,000) -- --
----------- ----------- ------------
3,291,182 14,957,942 265,929,399
----------- ----------- ------------
$10,686,696 $28,986,452 $289,299,493
=========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 93
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- --------------------------
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 $11,418,728 $26,405,823
------------ ------------- ------------- ----------- -----------
Operating expenses:
Cost of service................... 1,527,658 6,211,783 19,667,138 7,628,002 18,723,990
Selling, general and
administrative.................. 2,389,890 12,373,411 18,053,431 8,289,459 13,976,310
Depreciation and amortization..... 235,013 771,879 1,835,127 763,238 2,572,849
------------ ------------- ------------- ----------- -----------
TOTAL OPERATING EXPENSES... 4,152,561 19,357,073 39,555,696 16,680,699 35,273,149
------------ ------------- ------------- ----------- -----------
OPERATING LOSS............. (2,602,463) (11,342,980) (10,557,816) (5,261,971) (8,867,326)
Financial income (expense):
Interest income................... 162,846 145,193 138,691 27,510 504,890
Interest (expense)................ -- (218,175) (909,814) (487,396) (520,679)
------------ ------------- ------------- ----------- -----------
LOSS BEFORE INCOME TAXES... (2,439,617) (11,415,962) (11,328,939) (5,721,857) (8,883,115)
Income taxes (Note 5)............... -- -- -- -- --
------------ ------------- ------------- ----------- -----------
NET LOSS................... $ (2,439,617) $ (11,415,962) $ (11,328,939) $(5,721,857) $(8,883,115)
============ ============= ============= =========== ===========
Loss per common and common
equivalent share (Note 11)........ $ (0.08) $ (0.31) $ (0.31) $ (0.15) $ (0.23)
============ ============= ============= =========== ===========
Weighted average common and common
equivalent shares outstanding
(Note 11)......................... 29,655,063 36,369,916 37,054,744 37,054,553 38,511,720
============ ============= ============= =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 94
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 3, 6, 7 AND 11)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND SIX MONTHS ENDED
JUNE 30, 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)............ -- -- -- -- (8,883,115) -- (8,883,115)
Issuance of 13,823,438
shares of Class A
common stock (Unaudited)...... -- 138,234 -- 258,493,171 -- -- 258,631,405
Amortization of fair value of
stock options issued to
non-employees (unaudited)
(Note 3)...................... -- -- -- 341,167 -- -- 341,167
Amortization of compensation
expense related to stock
options (unaudited) (Note
6)............................ -- -- -- 882,000 -- -- 882,000
--------- --------- -------- ------------ ------------ -------- ------------
Balance, June 30, 1996
(Unaudited)..................... $ -- $302,105 $156,259 $299,833,502 $(34,362,467) $ -- $265,929,399
========= ======== ======== ============ ============ ======== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 95
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------- ------------------------------
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) $ (5,721,857) $ (8,883,115)
Adjustments to reconcile net loss to net cash
(used in)
operating activities:
Depreciation............................... 230,321 632,472 1,299,381 560,187 1,197,499
Amortization............................... 4,692 314,407 1,167,746 460,051 1,716,515
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) (906,170) (6,285,935)
(Increase) in inventory.................. (1,739,861) (184,845) (269,128) (92,023) (436,522)
(Increase) in deferred line installation
costs.................................. -- (1,136,504) (806,146) (445,875) (500,009)
Increase in accounts payable and accrued
expenses............................... 827,230 2,000,753 4,095,478 1,343,620 7,003,339
Increase (decrease) in deferred
revenue................................ -- 716,370 8,749 (14,263) 3,517,448
Other, net............................... (134,104) (16,302) (70,026) (194,917) (1,167,521)
----------- ------------ ------------ ------------ ------------
NET CASH (USED IN) OPERATING
ACTIVITIES........................... (3,452,152) (11,362,047) (9,477,779) (5,011,247) (3,838,301)
----------- ------------ ------------ ------------ ------------
Cash Flows from Investing Activities
Purchase of property and equipment........... (1,940,893) (3,363,223) (5,272,248) (564,069) (17,997,066)
Other........................................ 152,019 (78,773) (266,092) (267,749) (258,038)
----------- ------------ ------------ ------------ ------------
NET CASH (USED IN) INVESTING
ACTIVITIES........................... (1,788,874) (3,441,996) (5,538,340) (831,818) (18,255,104)
----------- ------------ ------------ ------------ ------------
Cash Flows from Financing Activities
Increase (decrease) in checks issued not yet
presented for payment...................... -- 34,115 884,817 (34,115) (918,932)
Proceeds from line of credit agreement....... -- 8,400,000 42,200,000 36,100,000 47,900,000
Payments on line of credit agreement......... -- (4,900,000) (42,100,000) (37,800,000) (51,500,000)
Net proceeds from issuance of common stock... 9,857,908 6,629,270 13,992,302 14,000,000 258,631,405
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 12,304,885 254,112,473
----------- ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................... 4,616,882 (4,673,658) -- 6,461,820 232,019,068
Cash and cash equivalents:
Beginning.................................... 56,776 4,673,658 -- -- --
----------- ------------ ------------ ------------ ------------
Ending....................................... $ 4,673,658 $ -- $ -- $ 6,461,820 $ 232,019,068
=========== ============ ============ ============ ============
Supplemental Disclosure of Cash Flow
Information
Cash payment for interest, net of interest
capitalized 1993 and 1994 none; 1995
$61,914;
1996 $204,056.............................. $ -- $ 35,345 $ 260,922 $ 227,782 $ 408,291
=========== ============ ============ ============ ============
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 $ 66,548 $ 4,573,509
=========== ============ ============ ============ ============
Acquisition of MWR Telecom Inc. (Note 9):
Working capital acquired, net.............. $ 392,508 $ 392,508
Fair value of other assets acquired,
principally fiber optic telecommunication
networks................................. 5,298,082 5,298,082
Goodwill................................... 2,641,807 2,641,807
------------ ------------
Stock issued............................... $ 8,332,397 $ 8,332,397
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 96
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 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. Included in cash and cash
equivalents is approximately $219,400,000 consisting of a 30 day U.S. Treasury
Bill. This security is classified as held to maturity and the fair market value
approximates amortized cost.
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.
F-7
<PAGE> 97
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
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 was
determined on a periodic basis by the Company's Board of Directors prior to the
Company's initial public offering on June 10, 1996 (see Note 11). Subsequent to
the Company's initial public offering, the market value used for stock options
granted is based upon the closing price of the Class A common stock on the day
before the grant date.
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 effective date 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
F-8
<PAGE> 98
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 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 June 30, 1996, and for the six month periods ended
June 30, 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
F-9
<PAGE> 99
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
NOTE 2. MAJOR CUSTOMER AND COMMITMENTS -- (CONTINUED)
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 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 December 31, 1995, the Company had a line of credit agreement with The
First National Bank of Chicago under which it may borrow up to a total of
$20,000,000. The agreement expires on May 16, 1998 with a one year extension
upon mutual agreement. 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 this agreement. Additionally, the agreement contains
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, the Company was in compliance with all
covenants.
The agreement is structured as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 BORROWINGS AT DECEMBER 31,
MAXIMUM ---------------------------------------
BORROWING LIMIT 1994 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Facility A..................... $ 6,000,000 $3,500,000 $3,600,000
Facility B..................... 6,000,000 -- --
Facility C..................... 8,000,000 -- --
----------- ---------- ----------
Total................ $20,000,000 $3,500,000 $3,600,000
=========== ========== ==========
</TABLE>
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.
F-10
<PAGE> 100
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
NOTE 3. PLEDGED ASSETS, RELATED DEBT AND SUBSEQUENT EVENTS -- (CONTINUED)
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, 562,500 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, 225,000 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.
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.
F-11
<PAGE> 101
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
NOTE 3. PLEDGED ASSETS, RELATED DEBT AND SUBSEQUENT EVENTS -- (CONTINUED)
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.
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.
A portion of the proceeds from the Company's initial public offering on
June 10, 1996 (see Note 11) was used to pay off all existing indebtedness on the
Company's credit facilities, which were subsequently cancelled. In addition, the
guarantees on Facility A and C were cancelled, which terminated the vesting of
the Class B common stock options granted in conjunction with the guarantees. At
June 30, 1996, a total of 1,300,688 Class B common stock options are vested.
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> 102
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 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>
NOTE 6. STOCK OPTION PLAN AND SUBSEQUENT EVENTS
The Company has reserved 5,471,630 and 12,071,899 shares of Class A common
stock for issuance to key employees and directors under certain employee and
director stock option plans at
F-13
<PAGE> 103
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
NOTE 6. STOCK OPTION PLAN AND SUBSEQUENT EVENTS (CONTINUED)
December 31, 1995 and June 30, 1996, respectively, which have been approved by
the Board of Directors. Options are granted at prices equal to the fair market
value on the dates of grant as determined by the Company's Board of Directors.
Subsequent to the Company's initial public offering on June 10, 1996 (see Note
11), the market value of the options is based on the closing price of the Class
A common stock on the day before the grant date. 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................................................ 2,423,143 2.67 - 23.75
Exercised.............................................. (23,438) 0.80 - 1.73
Forfeited.............................................. (193,004) 1.07 - 2.67
---------
Under option, June 30, 1996.............................. 7,075,749 $0.27 - $23.75
=========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- JUNE 30,
1993 1994 1995 1996
-------- --------- --------- ---------
NUMBER OF SHARES
<S> <C> <C> <C> <C>
Available for grant, end of year.......... 393,692 590,270 591,988 4,996,150
======= ========= ========= =========
Options exercisable, end of year.......... 251,100 1,035,143 1,580,989 1,876,461
======= ========= ========= =========
</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 six months ended June 30, 1996 was approximately $882,000.
On April 30, 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> 104
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 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 at December 31, 1995 for issuance to a stockholder which has guaranteed a
debt agreement. As discussed in Note 3, the vesting of these options was
terminated upon cancellation of the credit facilities and the related
guarantees, and at June 30, 1996, 1,300,688 shares of Class B common stock are
reserved for issuance upon exercise of these vested options.
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. 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 became effective on June 10, 1996, the effective date
of the Registration Statement filed in connection with the Company's initial
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> 105
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 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: On June 10, 1996, the Company undertook an initial public
offering of Class A common stock for $276 million at $20 per share. The above
amount includes an over-allotment option to sell additional shares which was
exercised at the time of the initial public offering. The Company plans to use
the offering proceeds to finance (i) certain development, construction and
F-16
<PAGE> 106
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
NOTE 11. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 -- (CONTINUED)
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 became effective on June 10, 1996, the effective date
of the Registration Statement filed in connection with the Company's initial
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
stock). The options granted terminate 10 years after the grant date (or
five years after the grant
F-17
<PAGE> 107
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
NOTE 11. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 -- (CONTINUED)
date if the grantee beneficially owns more than 10% of the outstanding
Class A common stock). The options vest over periods determined by the
Compensation Committee, 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 an exercise price generally equal to 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.
NOTE 12. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1995
Ruffalo, Cody & Associates, Inc. -- On July 15, 1996, the Company
consummated an acquisition of Ruffalo, Cody & Associates, Inc. ("Ruffalo,
Cody"), from the shareholders of Ruffalo, Cody by means of a forward triangular
merger pursuant to an Agreement and Plan of Reorganization, dated
F-18
<PAGE> 108
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
NOTE 12. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1995 -- (CONTINUED)
as of July 12, 1996 (the "Agreement"), by and among the Company, Ruffalo, Cody
and certain shareholders of Ruffalo, Cody. Pursuant to the Agreement, (i) McLeod
Merging Co., a newly incorporated Iowa corporation and a wholly-owned subsidiary
of the Company, was merged with and into Ruffalo, Cody, with McLeod Merging Co.
(which has been renamed "Ruffalo, Cody & Associates, Inc.") being the surviving
corporation, (ii) the outstanding shares of Ruffalo, Cody common stock were
converted into the right to receive cash and/or shares of the Company's Class A
Common Stock (the "Class A Common Stock"), and (iii) the outstanding options to
purchase shares of Ruffalo, Cody common stock were converted into options to
purchase shares of the Class A Common Stock (the "Substitute Options"). Under
the Agreement, each issued and outstanding share of Ruffalo, Cody common stock
was converted into the right to receive a maximum of approximately 0.7 of a
share of the Class A Common Stock.
The Company agreed to purchase Ruffalo, Cody for a maximum aggregate
purchase price of approximately $19.9 million (based on the average market price
of the Class A Common Stock during the five business days before and after the
acquisition date). The purchase price consisted of approximately $4.9 million in
cash, 474,807 shares of Class A Common Stock issuable in exchange for Ruffalo,
Cody common stock, and 158,009 shares of Class A Common Stock issuable upon the
exercise of the Substitute Options. On July 15, 1996, the Company paid an
aggregate of approximately $4.8 million in cash and issued 361,420 shares of
Class A Common Stock to the shareholders of Ruffalo, Cody, and granted to the
Ruffalo, Cody option holders Substitute Options to purchase 158,009 shares of
Class A Common Stock. An additional $50,782 in cash and 113,387 shares of Class
A Common Stock were placed into escrow and will be delivered (if at all) to
certain of the shareholders of Ruffalo, Cody over a period of 18 months,
contingent upon certain conditions relating to Ruffalo, Cody's ongoing revenues.
Telecom*USA Publishing Group, Inc. -- On September 20, 1996, the Company
acquired Telecom*USA Publishing Group, Inc. ("Telecom") pursuant to an Agreement
and Plan of Reorganization. Pursuant to this agreement, (i) Telecom was merged
with and into McLeod Reverse Merging Co., a newly incorporated Iowa corporation
and a wholly owned subsidiary of the Company, with Telecom as the surviving
corporation, (ii) each outstanding share of common stock, no par value, of
Telecom was converted into the right to receive $12.75 in cash, and (iii) all
outstanding non-vested options to purchase shares of Telecom common stock were
replaced with a deferred compensation program.
This acquisition resulted in a total purchase price of approximately $75.7
million. The purchase consisted of approximately $74.1 million in cash and $1.6
million resulting from the Company entering into a deferred compensation program
with all holders of non-vested options to purchase shares of Telecom.
Total Communications Systems, Inc. -- Effective September 4, 1996, the
Company agreed to purchase the customer base of Total Communications Systems,
Inc. for a cash purchase price of approximately $550,000.
F-19
<PAGE> 109
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-20
<PAGE> 110
MWR TELECOM INC.
STATEMENTS OF INCOME (NOTE 7)
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1,
-------------------------- 1995 TO
1993 1994 APRIL 28, 1995
----------- ----------- --------------
<S> <C> <C> <C>
Telecommunications revenue (Note 2)................... $ 1,823,056 $ 2,045,597 $872,809
----------- ----------- --------
Operating expenses:
Cost of service..................................... 673,925 806,855 375,480
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
Depreciation........................................ 428,263 569,151 220,125
----------- ----------- --------
TOTAL OPERATING EXPENSES.................... 1,398,019 1,674,006 693,933
----------- ----------- --------
OPERATING INCOME............................ 425,037 371,591 178,876
Financial income (expense):
Interest income, parent company and its
affiliates....................................... 51,087 25,305 1,093
Interest (expense), parent company and its
affiliates....................................... (137,068) (252,904) (55,820)
----------- ----------- --------
INCOME BEFORE INCOME TAXES.................. 339,056 143,992 124,149
Income taxes (Note 4)................................. 138,028 59,732 51,239
----------- ----------- --------
NET INCOME.................................. $ 201,028 $ 84,260 $ 72,910
=========== =========== ========
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE> 111
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-22
<PAGE> 112
MWR TELECOM INC.
STATEMENTS OF CASH FLOWS (NOTE 7)
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1,
---------------------------- 1995 TO
1993 1994 APRIL 28, 1995
------------ ------------ --------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income................................................ $ 201,028 $ 84,260 $ 72,910
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 428,263 569,151 220,125
Deferred income taxes................................... 105,513 261,290 13,795
Changes in assets and liabilities:
(Increase) in trade receivables....................... (142,965) (65,761) (24,693)
(Increase) decrease in related party receivables...... 921,089 28,364 2,957
Increase (decrease) in accounts payable and accrued
expenses........................................... (96,357) (120,813) 76,509
Increase (decrease) in related party payables......... (80,266) (4,825) 30,028
Increase (decrease) in deferred revenue............... 25,945 (8,142) 83,030
Other, net............................................ 20,461 (107,607) 115,601
----------- ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......... 1,382,711 635,917 590,262
----------- ----------- ----------
Cash Flows from Investing Activities
Purchase of property and equipment........................ (1,148,197) (1,032,468) (366,539)
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)
Proceeds on notes receivable.............................. -- 1,383,609 --
----------- ----------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES....................................... (3,206,197) 736,141 (465,539)
----------- ----------- ----------
Cash Flows from Financing Activities
Increase (decrease) in checks issued not yet presented for
payment................................................. (228,411) 33,942 (39,723)
Proceeds from notes payable to parent company............. 4,684,000 581,000 44,000
Payments on notes payable to parent company............... (2,632,103) (1,987,000) (129,000)
----------- ----------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... 1,823,486 (1,372,058) (124,723)
----------- ----------- ----------
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
=========== =========== ==========
Cash payments for income taxes, net of refunds............ $ 94,023 $ (144,622) $ 8,000
=========== =========== ==========
Supplemental Schedule of Noncash Investing and Financing
Activities Conversion of related party notes
payable to equity......................................... $ 1,200,000 $2,500,000
=========== ==========
Distribution to parent company of certain net assets (Note
1)...................................................... $ 412,693 $ 302,435
=========== ==========
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE> 113
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-24
<PAGE> 114
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.
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-25
<PAGE> 115
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-26
<PAGE> 116
[MCGLADREY & PULLEN, LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Ruffalo, Cody & Associates, Inc.
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheets of Ruffalo, Cody &
Associates, Inc. and subsidiary as of December 31, 1994 and 1995, and the
related consolidated statements of income, 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 Ruffalo, Cody &
Associates, Inc. and subsidiary 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.
/s/ MCGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
February 9, 1996, except
for Note 8, as to
which the date is
July 15, 1996
F-27
<PAGE> 117
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ JUNE 30,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS (NOTE 2)
Current Assets
Cash and cash equivalents................................................. $ -- $ -- $ 46,647
Receivables:
Trade, less allowance for doubtful accounts 1994 $88,072; 1995 and 1996
$50,000 (Note 7)...................................................... 2,036,844 2,062,801 2,601,859
Income tax refund....................................................... 22,163 23,900 --
Other................................................................... 18,021 39,515 41,218
Deferred income taxes, net (Note 3)......................................... 115,000 70,000 70,000
Prepaid expenses............................................................ 64,829 44,395 29,588
----------- ----------- -----------
TOTAL CURRENT ASSETS................................................ 2,256,857 2,240,611 2,789,312
----------- ----------- -----------
Equipment and Leasehold Improvements
Technical equipment....................................................... 1,510,401 1,773,178 1,966,626
Office equipment.......................................................... 127,578 250,494 278,772
Leasehold improvements.................................................... 16,552 108,724 122,976
In-house phones........................................................... 59,858 67,931 78,424
----------- ----------- -----------
1,714,389 2,200,327 2,446,798
Less accumulated depreciation............................................. 635,134 1,043,527 1,295,577
----------- ----------- -----------
1,079,255 1,156,800 1,151,221
----------- ----------- -----------
Intangibles, primarily software, less accumulated amortization 1994 $18,807;
1995 $51,046; 1996 $68,277................................................ 464,789 481,928 569,094
----------- ----------- -----------
Other Assets, deferred income taxes, net (Note 3)........................... 13,000 6,000 6,000
----------- ----------- -----------
$ 3,813,901 $ 3,885,339 $ 4,515,627
=========== =========== ===========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Notes payable (Note 2).................................................... $ 550,000 $ 100,000 $ 200,000
Current maturities of long-term debt...................................... 123,505 -- --
Checks issued not yet presented for payment............................... 207,773 16,376 --
Accounts payable.......................................................... 269,337 181,313 372,013
Accrued payroll and payroll related expenses.............................. 263,018 291,269 383,206
Accrued bonuses........................................................... 215,147 227,886 268,269
Accrued commissions....................................................... 104,585 128,573 190,245
Other accrued liabilities................................................. 317,065 243,349 209,507
Income taxes payable...................................................... -- -- 36,953
Customer deposits......................................................... 91,303 722,846 490,716
----------- ----------- -----------
TOTAL CURRENT LIABILITIES........................................... 2,141,733 1,911,612 2,150,909
----------- ----------- -----------
Long-Term Debt.............................................................. 222,340 -- --
----------- ----------- -----------
Commitments (Notes 5 and 6)
Redeemable Common Stock and Warrants (Notes 4 and 8)
Common stock, no par or stated value; issued 1994, 1995 and 1996 318,182
shares.................................................................. 1,590,910 2,068,183 2,227,274
Common stock held by the 401(k) profit-sharing plan....................... -- 69,453 139,853
Warrants, issued 1994, 1995 and 1996 90,909............................... 363,636 500,000 545,454
----------- ----------- -----------
1,954,546 2,637,636 2,912,581
----------- ----------- -----------
Common Stockholders' Equity (Deficit) (Notes 2, 4, 6 and 8)
Common stock, no par or stated value; authorized 5,000,000 shares; issued
1994 500,000 shares; 1995 515,685 shares; 1996 524,979 shares........... 500,000 558,925 618,894
Retained earnings (deficit)............................................... (1,004,718) (1,153,381) (1,026,904)
----------- ----------- -----------
(504,718) (594,456) (408,010)
Less maximum cash obligation related to 401(k) profit-sharing plan shares
(Note 4)................................................................ -- 69,453 139,853
----------- ----------- -----------
(504,718) (663,909) (547,863)
----------- ----------- -----------
$ 3,813,901 $ 3,885,339 $ 4,515,627
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-28
<PAGE> 118
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------ --------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Telemarketing and other revenue (Note 7)... $ 8,370,904 $ 9,756,894 $ 13,286,146 $ 6,101,884 $ 8,278,479
---------- ---------- ----------- ---------- ----------
Operating expenses:
Cost of service.......................... 3,811,520 4,752,031 6,618,481 2,998,585 4,225,252
Selling, general and administrative...... 3,380,973 4,022,104 5,376,135 2,401,419 3,252,973
Depreciation and amortization............ 173,251 313,499 475,296 228,037 269,281
---------- ---------- ----------- ---------- ----------
TOTAL OPERATING EXPENSES.......... 7,365,744 9,087,634 12,469,912 5,628,041 7,747,506
---------- ---------- ----------- ---------- ----------
OPERATING INCOME.................. 1,005,160 669,260 816,234 473,843 530,973
Financial income (expense):
Interest income.......................... 4,854 1,034 41,780 135 10,258
Interest (expense)....................... (3,132) (45,280) (119,305) (65,626) (16,209)
---------- ---------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES........ 1,006,882 625,014 738,709 408,352 525,022
Income taxes (Note 3)...................... 340,532 223,380 273,735 143,000 194,000
---------- ---------- ----------- ---------- ----------
NET INCOME........................ $ 666,350 $ 401,634 $ 464,974 $ 265,352 $ 331,022
========== ========== =========== ========== ==========
Net income (loss) attributable to common
stockholders............................. $ 666,350 $ (416,548) $ (148,663) $ (41,467) $ 126,477
========== ========== =========== ========== ==========
Income (loss) per common and common
equivalent share......................... $ 1.10 $ (0.83) $ (0.29) $ (0.08) $ 0.19
========== ========== =========== ========== ==========
Weighted average common and common
equivalent shares outstanding............ 606,000 500,000 508,546 506,317 675,745
========== ========== =========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-29
<PAGE> 119
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND
WARRANTS AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 6)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (CONTINUED ON PAGE F-31)
<TABLE>
<CAPTION>
REDEEMABLE COMMON STOCK AND WARRANTS
-------------------------------------------------------
401(k) PROFIT-
COMMON SHARING PLAN
STOCK SHARES WARRANTS TOTAL
----------- -------------- -------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1992........................ $ 1,050,000 $-- $300,000 $1,350,000
Issuance of 9,091 shares of common stock upon
the exercise of warrants...................... 27,273 -- (18,182) 9,091
Purchase of 40,909 shares of redeemable common
stock for retirement.......................... (122,727) -- -- (122,727)
Warrants cancelled or expired................... -- -- (100,000) (100,000)
Dividends ($.30 per share)...................... -- -- -- --
Net income...................................... -- -- -- --
---------- -------- -------- ----------
Balance, December 31, 1993........................ 954,546 -- 181,818 1,136,364
Net income...................................... -- -- -- --
Increase in estimated redemption price.......... 636,364 -- 181,818 818,182
---------- -------- -------- ----------
Balance, December 31, 1994........................ 1,590,910 -- 363,636 1,954,546
Common stock contributed to 401(k) profit-
sharing plan, 10,685 shares (Note 4).......... -- -- -- --
Issuance of 5,000 shares of common stock upon
the exercise of options (Note 4).............. -- -- -- --
Net income...................................... -- -- -- --
Increase in estimated redemption price.......... 477,273 -- 136,364 613,637
Change related to 401(k) profit-sharing plan
shares........................................ -- 69,453 -- 69,453
---------- -------- -------- ----------
Balance, December 31, 1995........................ 2,068,183 69,453 500,000 2,637,636
Common stock contributed to 401(k) profit-
sharing plan, 10,140 shares (unaudited) (Note
4)............................................ -- -- -- --
Issuance of 375 shares of common stock upon the
exercise of options (unaudited) (Note 4)...... -- -- -- --
Purchase of 1,221 shares of common stock for
retirement (unaudited)........................ -- -- -- --
Net income (unaudited).......................... -- -- -- --
Increase in estimated redemption price
(unaudited)................................... 159,091 -- 45,454 204,545
Change related to 401(k) profit-sharing plan
shares (unaudited)............................ -- 70,400 -- 70,400
---------- -------- -------- ----------
Balance, June 30, 1996 (unaudited)................ $ 2,227,274 $139,853 $545,454 $2,912,581
========== ======== ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-30
<PAGE> 120
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND
WARRANTS AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 6)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------
LESS
MAXIMUM
CASH
OBLIGATION
RELATED TO
401(k)
RETAINED PROFIT-
COMMON EARNINGS SHARING
STOCK (DEFICIT) PLAN TOTAL
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1992........................... $500,000 $(1,108,974) $ -- $(608,974)
Issuance of 9,091 shares of common stock upon the
exercise of warrants............................. -- (91) -- (91)
Purchase of 40,909 shares of redeemable common
stock for retirement............................. -- -- -- --
Warrants cancelled or expired...................... -- 100,000 -- 100,000
Dividends ($.30 per share)......................... -- (245,455) -- (245,455)
Net income......................................... -- 666,350 -- 666,350
-------- ----------- --------- ---------
Balance, December 31, 1993........................... 500,000 (588,170) -- (88,170)
Net income......................................... -- 401,634 -- 401,634
Increase in estimated redemption price............. -- (818,182) -- (818,182)
-------- ----------- --------- ---------
Balance, December 31, 1994........................... 500,000 (1,004,718) -- (504,718)
Common stock contributed to 401(k) profit-sharing
plan, 10,685 shares (Note 4)..................... 53,425 -- -- 53,425
Issuance of 5,000 shares of common stock upon the
exercise of options (Note 4)..................... 5,500 -- -- 5,500
Net income......................................... -- 464,974 -- 464,974
Increase in estimated redemption price............. -- (613,637) -- (613,637)
Change related to 401(k) profit-sharing plan
shares........................................... -- -- (69,453) (69,453)
-------- ----------- --------- ---------
Balance, December 31, 1995........................... 558,925 (1,153,381) (69,453) (663,909)
Common stock contributed to 401(k) profit-sharing
plan, 10,140 shares (unaudited) (Note 4)......... 65,909 -- -- 65,909
Issuance of 375 shares of common stock upon the
exercise of options (unaudited) (Note 4)......... 375 -- -- 375
Purchase of 1,221 shares of common stock for
retirement (unaudited)........................... (6,315) -- -- (6,315)
Net income (unaudited)............................. -- 331,022 -- 331,022
Increase in estimated redemption price
(unaudited)...................................... -- (204,545) -- (204,545)
Change related to 401(k) profit-sharing plan shares
(unaudited)...................................... -- -- (70,400) (70,400)
-------- ----------- --------- ---------
Balance, June 30, 1996 (unaudited)................... $618,894 $(1,026,904) $ (139,853) $(547,863)
======== =========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-31
<PAGE> 121
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income...................................... $ 666,350 $ 401,634 $ 464,974 $ 265,352 $ 331,022
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................. 173,251 213,725 304,255 142,516 182,649
Amortization.................................. -- 99,774 171,041 85,521 86,632
Provision for doubtful accounts............... -- 38,072 -- -- --
(Gain) loss on sale of equipment.............. -- 10,761 (3,942) (3,942) --
Deferred income taxes......................... (6,000) -- 52,000 -- --
Changes in assets and liabilities:
Other receivables........................... (541,671) (869,041) (47,451) 626,797 (540,761)
(Increase) decrease in income taxes
receivable................................ (18,042) (4,121) (1,737) 22,163 23,900
(Increase) decrease in prepaid expenses..... (15,008) (42,726) 20,434 (158,999) 14,807
Increase (decrease) in accounts payable and
accrued expenses.......................... 253,107 411,916 (43,337) (392,739) 416,759
Increase (decrease) in income tax payable... (28,452) -- -- 38,445 36,953
Increase (decrease) in customer deposits.... (42,141) 16,086 631,543 7,650 (232,130)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.............................. 441,394 276,080 1,547,780 632,764 319,831
----------- ----------- ----------- ----------- -----------
Cash Flows from Investing Activities
Proceeds from sale of equipment................. -- 5,000 52,000 52,000 --
Purchase of equipment and leasehold
improvements.................................. (146,220) (784,985) (568,660) (302,641) (246,471)
Purchase of intangibles......................... -- (483,596) (49,378) -- (104,397)
----------- ----------- ----------- ----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES... (146,220) (1,263,581) (566,038) (250,641) (350,868)
----------- ----------- ----------- ----------- -----------
Cash Flows from Financing Activities
Proceeds from notes payable..................... 1,065,000 3,510,000 6,120,000 3,080,000 3,135,000
Principal payments on notes payable............. (1,080,000) (2,960,000) (6,570,000) (3,480,000) (3,035,000)
Proceeds from long-term borrowings.............. -- 600,000 -- 204,104 --
Principal payments on long-term borrowings...... (40,525) (254,155) (345,845) (58,890) --
Proceeds from issuance of common stock upon the
exercise of options........................... -- -- 5,500 -- 375
Proceeds from issuance of redeemable common
stock......................................... 9,000 -- -- -- --
Purchase of redeemable common stock for
retirement.................................... (122,727) -- -- -- --
Purchase of common stock for retirement......... -- -- -- -- (6,315)
Cash dividends paid............................. -- (245,455) -- -- --
Increase (decrease) in checks issued not yet
presented for payment......................... -- 207,773 (191,397) (127,337) (16,376)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.............................. (169,252) 858,163 (981,742) (382,123) 77,684
----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. 125,922 (129,338) -- -- 46,647
Cash and cash equivalents:
Beginning....................................... 3,416 129,338 -- -- --
----------- ----------- ----------- ----------- -----------
Ending.......................................... $ 129,338 $ -- $ -- $ -- $ 46,647
=========== =========== =========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest...................................... $ 3,262 $ 39,183 $ 125,530 $ 61,862 $ 14,237
Income taxes.................................. 400,702 235,517 223,472 82,392 133,146
Supplemental Schedule of Noncash Investing and
Financing Activities
Common stock contributed to 401(k)
profit-sharing plan (Note 4).................. $ 53,425 $ 53,425 $ 65,909
=========== =========== ===========
Increase in estimated redemption price of
redeemable common stock and warrants.......... $ 818,182 $ 613,637
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-32
<PAGE> 122
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: The Company provides telemarketing services and
systems to businesses and nonprofit entities throughout the United States.
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 follows:
Principles of consolidation: The accompanying consolidated financial
statements include Ruffalo, Cody & Associates, Inc. and its subsidiary,
Campus-Call, Inc., which is wholly-owned. All material intercompany transactions
and balances have been eliminated.
The results of operations of the subsidiary have been reported since the
inception date of June 2, 1994.
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.
Equipment and leasehold improvements and depreciation: Equipment and
leasehold improvements are carried at cost. Depreciation is computed by the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Technical equipment.................................. 3-5
Office equipment..................................... 5
Leasehold improvements............................... 5-10
In-house phones...................................... 5
</TABLE>
Software costs: Costs incurred to develop software products are charged to
expense as research and development costs until technological feasibility for
the product is established. Thereafter, software production costs are
capitalized and, once the product is available for sale, are amortized by the
greater of (a) the ratio that current gross revenues for the product bear to the
total current and anticipated future gross revenues for that product and (b) the
straight-line method over the remaining estimated economic life of the product
including the period being reported on. If management's estimate of the future
gross revenues or the remaining economic life of the product are reduced
significantly, the carrying amount of software costs would be affected.
Revenue recognition: Fees from telemarketing contracts are recognized as
revenue in the period the services are performed.
Revenue on software license fees and sales that require installation is
recognized upon installation. Revenue on hardware sales is recognized upon
delivery and installation. Training and consulting fees are recognized as the
services are performed. Upon installation of a system, the Company records as
deferred revenue the charge for software maintenance. Revenue is then recognized
on the straight-line basis over the term of the contract.
F-33
<PAGE> 123
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income taxes: Deferred taxes are provided on a liability method, whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Stock options issued to employees and directors: 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.
Common stock held by 401(k) profit-sharing plan: The Company's maximum
cash obligation related to these shares is classified outside stockholders'
equity because the shares are not readily traded and could be put to the Company
for cash.
Earnings (loss) per common and common equivalent share: Earnings (loss)
per common and common equivalent share are determined by dividing net income,
less the increase in the estimated redemption price of redeemable common stock
and warrants, by the weighted average number of common and common equivalent
shares outstanding during each of the periods presented. Dilutive common stock
equivalents related to the stock options discussed in Note 4 were determined
using the treasury stock method. The estimated fair market value of the
Company's common stock used to calculate the common stock equivalents under the
treasury stock method for the periods presented has been estimated by management
or determined by an independent appraisal. Earnings (loss) per common and common
equivalent share assuming full dilution are the same as earnings (loss) per
common and common equivalent share.
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 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.
F-34
<PAGE> 124
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 current notes
payable approximates fair value because these obligations bear interest at
current rates.
Interim financial information (unaudited): The financial statements and
notes related thereto as of June 30, 1996, and for the six-month periods ended
June 30, 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. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT
At June 30, 1996, the Company had a line of credit agreement with a bank
under which they may borrow up to 80% of eligible trade receivables up to a
maximum of $2,500,000. The Company has $200,000 outstanding under this agreement
at June 30, 1996. Borrowings under this agreement are collateralized by
substantially all of the Company's assets and bear interest at the bank's prime
rate (the current effective rate is 8.25%). The agreement contains a covenant
requiring the Company to maintain a certain amount of tangible net worth. The
covenant was waived as of June 30, 1996. Additional available borrowings under
the agreement totaled approximately $2,300,000 at June 30, 1996. The agreement
expires May 2, 1997.
NOTE 3. INCOME TAX MATTERS
Net deferred tax assets consist of the following components as of December
31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
--------- --------
<S> <C> <C>
Deferred tax assets:
Receivable allowances............................. $ 35,000 $ 20,000
Equipment and leasehold improvements.............. 5,000 17,000
Intangibles....................................... 21,000 9,000
Accrued expenses.................................. 32,000 50,000
Deferred rent..................................... 35,000 --
--------- --------
128,000 96,000
Deferred tax liabilities:
Capitalized software costs........................ -- 20,000
--------- --------
$ 128,000 $ 76,000
========= ========
</TABLE>
F-35
<PAGE> 125
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
NOTE 3. INCOME TAX MATTERS -- (CONTINUED)
The deferred income tax amounts mentioned above have been classified on the
accompanying balance sheets as of December 31, 1994 and 1995 as follows:
<TABLE>
<CAPTION>
1994 1995
--------- --------
<S> <C> <C>
Current assets......................................... $ 115,000 $ 70,000
Noncurrent assets...................................... 13,000 6,000
--------- --------
$ 128,000 $ 76,000
========= ========
</TABLE>
Income tax expense is composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current tax expense........................ $ 346,532 $ 223,380 $ 221,735
Deferred tax expense....................... (6,000) -- 52,000
--------- --------- ---------
$ 340,532 $ 223,380 $ 273,735
========= ========= =========
</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 for 1993, 1994 and
1995 due to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax.................... $ 342,340 $ 212,505 $ 251,161
Increase (decrease) in income taxes
resulting from:
Nondeductible expenses................ 1,674 6,072 9,774
State income taxes, net of federal
income tax benefit.................. 1,393 1,864 4,691
Other................................. (4,875) 2,939 8,109
--------- --------- ---------
$ 340,532 $ 223,380 $ 273,735
========= ========= =========
</TABLE>
NOTE 4. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing plan for eligible employees.
Contributions to the plan are at the discretion of the Company's Board of
Directors. The amount of contribution included in operating expenses for the
years ended December 31, 1993, 1994 and 1995 is $30,802, $52,473 and $59,494,
respectively. The contributions for 1994 and 1995 have been made with company
stock.
In the event a terminated plan participant desires to sell his or her
shares of the Company stock, or if certain employees elect to diversify their
account balances, the Company may be required to purchase the shares from the
participant at their fair market value. To the extent that shares of common
stock held by the 401(k) profit-sharing plan are not readily traded, a sponsor
must reflect the maximum cash obligation related to those securities outside of
stockholders' equity. As of June 30, 1996, 19,979 shares held by the 401(k)
profit-sharing plan, at a fair value of $7.00 per share, have been reclassified
from stockholders' equity to liabilities.
F-36
<PAGE> 126
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
NOTE 4. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
The Company pays bonuses to its officers at the discretion of the Board of
Directors. The amount of these bonuses charged to operating expenses for the
years ended December 31, 1993, 1994 and 1995 is $288,665, $179,165 and $186,466,
respectively.
The Company has established employee and director stock option plans for
the benefit of eligible employees and directors under which options for the
issuance of up to 295,000 shares of common stock may be granted. Under the
employee and director plans, all options vest over a period of up to ten years
as determined by the Board of Directors at the time of grant.
Other pertinent information related to the plan is as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
-------- ------------
<S> <C> <C>
Outstanding at January 1, 1993.............................. 154,000 $ 1.00-$1.10
Granted................................................ 67,000 3.00- 3.30
Forfeited.............................................. (15,000) 1.00- 3.00
--------
Outstanding at December 31, 1993............................ 206,000 1.00- 3.30
Granted................................................ 32,500 6.00
--------
Outstanding at December 31, 1994............................ 238,500 1.00- 6.00
Exercised.............................................. (5,000) 1.10
--------
Outstanding at December 31, 1995............................ 233,500 1.00- 6.00
Granted................................................ 26,500 6.50
Exercised.............................................. (375) 1.00
Forfeited.............................................. (1,875) 1.00- 6.00
--------
Under option, June 30, 1996................................. 257,750 $ 1.00-$6.50
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE
--------------------------- 30,
1993 1994 1995 1996
------ ------ ------- -------
NUMBER OF SHARES
--------------------------------------
<S> <C> <C> <C> <C>
Available for grant, end of year............... 69,000 56,500 56,500 31,875
====== ====== ======= =======
Options exercisable, end of year............... -- 72,500 135,500 170,000
====== ====== ======= =======
</TABLE>
NOTE 5. LEASE COMMITMENTS AND TOTAL RENT EXPENSE
The Company leases its main office space under an agreement which expires
on April 30, 2005. This lease requires monthly rent payments totaling $29,851
and increasing to $32,429 in later years plus the payment of property taxes and
maintenance.
The Company also leases other office space and office equipment under
various leases which require various minimum rental payments through July 1997.
F-37
<PAGE> 127
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
NOTE 5. LEASE COMMITMENTS AND TOTAL RENT EXPENSE -- (CONTINUED)
The total minimum lease commitment at December 31, 1995 under the operating
leases mentioned above is $3,620,229 which is due as follows:
<TABLE>
<S> <C>
During the year ending December 31:
1996...................................................... $ 438,644
1997...................................................... 399,992
1998...................................................... 358,215
1999...................................................... 358,215
2000...................................................... 378,839
Later years............................................... 1,686,324
----------
$3,620,229
==========
</TABLE>
The total rent expense for the years ended December 31, 1993, 1994 and 1995
is approximately $241,500, $293,200 and $353,800, respectively.
NOTE 6. REDEEMABLE COMMON STOCK AND WARRANTS
In connection with an Investment Agreement covering the issuance of 350,000
shares of the Company's common stock, warrants were issued which entitle the
holders to purchase one share of common stock in exchange for $1 and one
warrant. At December 31, 1995 and June 30, 1996, a total of 90,909 warrants are
outstanding. All of the outstanding warrants expire on October 2, 2001.
At anytime after October 2, 1997, the shareholders covered by the
Investment Agreement may, at their option, put the common stock and warrants to
the Company and require the Company to immediately pay in cash, in the case of
the common stock, the fair market value of the common stock as determined by an
independent appraiser and, in the case of the warrants, the fair market value of
the common stock less the exercise price of the warrants.
The Company is increasing the carrying amount of the redeemable common
stock and warrants so that the carrying amount will equal the estimated
redemption amount. The estimated redemption amount at each year end was
determined by an independent appraiser. For interim periods, the amount was
estimated by management.
NOTE 7. MAJOR CUSTOMER
Telemarketing revenue for the years ended December 31, 1993, 1994 and 1995
includes approximately $2,750,000, $3,465,000 and $5,600,000, respectively, from
a major customer. Trade receivables from this customer totaled $382,928,
$579,943 and $522,544 at December 31, 1993, 1994 and 1995, respectively.
In October 1995, the Company was informed by the major customer that it
intends to terminate its contract with the Company effective December 31, 1996.
NOTE 8. EVENTS SUBSEQUENT TO DECEMBER 31, 1995
On July 15, 1996, McLeod, Inc. consummated the acquisition (the
"Acquisition") of the Company, from the shareholders of the Company by means of
a forward triangular merger pursuant to an Agreement and Plan of Reorganization,
dated as of July 12, 1996 (the "Agreement"), by and
F-38
<PAGE> 128
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
NOTE 8. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 -- (CONTINUED)
among McLeod, Inc., the Company and certain shareholders of the Company.
Pursuant to the Agreement, (i) McLeod Merging Co., a newly incorporated Iowa
corporation and a wholly-owned subsidiary of McLeod, Inc., was merged with and
into the Company, with McLeod Merging Co. (which has been renamed "Ruffalo, Cody
& Associates, Inc.") being the surviving corporation, (ii) the outstanding
shares of the Company's common stock were converted into the right to receive
cash and/or shares of McLeod, Inc.'s Class A Common Stock (the "Class A Common
Stock"), and (iii) the outstanding options to purchase shares of the Company's
common stock were converted into options to purchase shares of the Class A
Common Stock (the "Substitute Options"). Under the Agreement, each issued and
outstanding share of the Company's common stock was converted into the right to
receive a maximum of approximately 0.7 of a share of the Class A Common Stock.
McLeod, Inc. agreed to purchase the Company for a maximum aggregate
purchase price of approximately $19.9 million (based on the average market price
of the Class A Common Stock during the five business days before and after the
Acquisition). The purchase price consisted of approximately $4.9 million in
cash, 474,807 shares of Class A Common Stock issuable in exchange for the
Company's common stock, and 158,009 shares of Class A Common Stock issuable upon
the exercise of the Substitute Options. On July 15, 1996, McLeod, Inc. paid an
aggregate of approximately $4.8 million in cash and issued 361,420 shares of
Class A Common Stock to the shareholders of the Company, and granted to the
Company's option holders Substitute Options to purchase 158,009 shares of Class
A Common Stock. An additional $50,782 in cash and 113,387 shares of McLeod,
Inc.'s Class A Common Stock were placed into escrow and will be delivered (if at
all) to certain of the shareholders of the Company over a period of 18 months,
contingent upon certain conditions relating to the Company's ongoing revenues.
F-39
<PAGE> 129
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Telecom*USA Publishing Group, Inc.
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheets of Telecom*USA
Publishing Group, Inc. and subsidiaries as of August 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended August 31, 1996. 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 Telecom*USA
Publishing Group, Inc. and subsidiaries as of August 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1996 in conformity with generally accepted
accounting principles.
Cedar Rapids, Iowa
September 27, 1996
F-40
<PAGE> 130
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS (NOTE 4)
Current Assets
Accounts receivable:
Billed........................................................................... $ 3,744,468 $ 5,543,874
Unbilled......................................................................... 6,493,122 8,555,438
----------- -----------
10,237,590 14,099,312
Less allowance for doubtful accounts and adjustments............................. 2,334,156 3,102,923
----------- -----------
7,903,434 10,996,389
Income taxes receivable............................................................ -- 54,710
Other receivables.................................................................. 553,447 828,345
Deferred expenses.................................................................. 7,896,840 9,078,470
Prepaid expenses................................................................... 723,031 380,903
Deferred income taxes, net (Note 6)................................................ 1,410,000 1,536,000
----------- -----------
TOTAL CURRENT ASSETS......................................................... 18,486,752 22,874,817
----------- -----------
Equipment and Furniture (Note 13).................................................... 5,502,530 7,129,908
Less accumulated depreciation...................................................... 2,316,912 3,433,755
----------- -----------
3,185,618 3,696,153
----------- -----------
Investments and Other Assets
Investment in Colorado Directory Company, L.L.C. (Note 3).......................... 1,000,000 --
Purchase option (Note 2)........................................................... 500,000 500,000
Deferred income taxes, net (Note 6)................................................ 920,000 704,000
Other investment................................................................... -- 100,000
----------- -----------
2,420,000 1,304,000
----------- -----------
Intangibles
Customer lists, at cost, less accumulated amortization
1995 $1,155,646; 1996 $1,489,634 (Note 12)....................................... 5,349,506 6,176,196
Noncompete agreements, at cost, less accumulated amortization 1995 $1,094,317;
1996 $1,947,662.................................................................. 6,900,246 6,955,720
Organization and loan costs, at cost, less accumulated depreciation 1995 $72,592;
1996 $109,087.................................................................... 230,597 185,947
----------- -----------
12,480,349 13,317,863
----------- -----------
$36,572,719 $41,192,833
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable, bank (Note 4)........................................................ $ 1,532,000 $ 2,773,800
Current maturities of long-term debt (Note 4)...................................... 875,050 1,224,286
Payables for intangibles acquired, due within one year............................. 1,439,846 572,528
Accounts payable................................................................... 1,573,680 2,160,855
Checks issued not yet presented for payment........................................ 21,981 219,942
Accrued payroll and payroll related expenses....................................... 1,597,745 1,920,379
Other accrued expenses............................................................. 759,925 914,053
Income taxes payable............................................................... 172,524
Customer deposits.................................................................. 6,761,668 7,534,485
----------- -----------
TOTAL CURRENT LIABILITIES.................................................... 14,734,419 17,320,328
----------- -----------
Long-Term Debt, less current maturities (Note 4)..................................... 15,511,295 16,228,889
----------- -----------
Commitments and Contingencies (Notes 5, 7, 9, 10 and 13)
Minority Interests
Redeemable preferred stock, redeemed on September 2, 1995.......................... 200,000 --
Consolidated subsidiary............................................................ 484,043 352,816
----------- -----------
684,043 352,816
----------- -----------
Redeemable common stock held by 401(k) profit-sharing plan (Note 9).................. 125,595 220,070
----------- -----------
Stockholders' Equity (Notes 4 and 14)
Capital stock, common, no par or stated value; authorized 10,000,000 shares; issued
1995 2,533,124 shares; 1996 2,719,481 shares (Notes 9, 10 and 11)................ 3,968,357 4,194,075
Retained earnings.................................................................. 1,787,855 3,209,975
----------- -----------
5,756,212 7,404,050
Less cost of treasury stock, 37,750 shares......................................... 113,250 113,250
Less maximum cash obligation related to 401(k) profit-sharing plan (Note 9)........ 125,595 220,070
----------- -----------
5,517,367 7,070,730
----------- -----------
$36,572,719 $41,192,833
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-41
<PAGE> 131
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenue......................................... $31,438,605 $38,620,274 $52,117,929
----------- ----------- -----------
Operating expenses:
Production and distribution................... 12,568,411 15,022,983 22,340,587
Market sales.................................. 9,244,961 10,940,711 13,798,321
Sales and marketing administrative............ 1,761,103 2,279,484 2,294,370
General and administrative.................... 4,322,338 5,020,000 7,249,349
Depreciation and amortization................. 1,167,458 1,891,198 2,348,490
Restructuring loss (Note 11).................. 524,670 -- --
----------- ----------- -----------
TOTAL OPERATING EXPENSES.............. 29,588,941 35,154,376 48,031,117
----------- ----------- -----------
OPERATING INCOME...................... 1,849,664 3,465,898 4,086,812
----------- ----------- -----------
Nonoperating (income) expense:
Interest income............................... (1,707) (93,997) (251,000)
Interest expense.............................. 843,961 1,497,699 1,767,309
Loan inducement fee payoff (Note 7)........... -- 1,330,000 --
Loss on disposal of investment (Note 3)....... -- -- 500,000
----------- ----------- -----------
842,254 2,733,702 2,016,309
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY.......................... 1,007,410 732,196 2,070,503
Federal and state income taxes (Note 6)......... 137,190 302,586 975,610
----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST IN NET
(LOSS) IN CONSOLIDATED SUBSIDIARY... 870,220 429,610 1,094,893
Minority interest in net (loss) of consolidated
subsidiary.................................... -- (15,959) (327,227)
----------- ----------- -----------
NET INCOME............................ $ 870,220 $ 445,569 $ 1,422,120
=========== =========== ===========
Earnings per common and common equivalent shares
outstanding:
Primary....................................... $ 0.27 $ 0.14 $ 0.43
=========== =========== ===========
Fully diluted................................. $ 0.26 $ 0.14 $ 0.36
=========== =========== ===========
Weighted average common and common equivalent
shares outstanding:
Primary....................................... 3,198,776 3,271,497 3,332,659
=========== =========== ===========
Fully diluted................................. 4,510,864 3,289,720 4,678,549
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-42
<PAGE> 132
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
LESS MAXIMUM
CASH OBLIGATION
RELATED TO
LESS 401(k)
COMMON RETAINED TREASURY PROFIT-SHARING
STOCK EARNINGS STOCK PLAN SHARES TOTAL
---------- ---------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1993............... $3,868,400 $ 472,066 $(113,250) $ -- $4,227,216
Common stock contributed to 401(k)
profit-sharing plan, 15,179 shares
(Note 9)........................... 53,126 -- -- (53,126) --
Issuance of 925 shares of common
stock upon the exercise of options
(Note 10).......................... 925 -- -- -- 925
Purchase of 775 shares of common
stock for retirement............... (2,713) -- -- -- (2,713)
Net income........................... -- 870,220 -- -- 870,220
---------- ---------- --------- --------- ----------
Balance, August 31, 1994............... 3,919,738 1,342,286 (113,250) (53,126) 5,095,648
Common stock contributed to 401(k)
profit-sharing plan, 12,945 shares
(Note 9)........................... 57,307 -- -- (57,307) --
Issuance of 14,175 shares of common
stock upon the exercise of options
(Note 10).......................... 19,775 -- -- -- 19,775
Purchase of 6,325 shares of common
stock for retirement............... (28,463) -- -- -- (28,463)
Change related to 401(k) profit-
sharing plan shares................ -- -- -- (15,162) (15,162)
Net income........................... -- 445,569 -- -- 445,569
---------- ---------- --------- --------- ----------
Balance, August 31, 1995............... 3,968,357 1,787,855 (113,250) (125,595) 5,517,367
Common stock contributed to 401(k)
profit-sharing plan, 10,363 shares
(Note 9)........................... 57,470 -- -- (57,470) --
Issuance of 182,300 shares of common
stock upon the exercise of options
(Note 10).......................... 208,850 -- -- -- 208,850
Purchase of 6,306 shares of common
stock for retirement............... (40,602) -- -- -- (40,602)
Change related to 401(k) profit-
sharing plan shares................ -- -- -- (37,005) (37,005)
Net income........................... -- 1,422,120 -- -- 1,422,120
---------- ---------- --------- --------- ----------
Balance, August 31, 1996............... $4,194,075 $3,209,975 $(113,250) $(220,070) $7,070,730
========== ========== ========= ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-43
<PAGE> 133
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income.......................................... $ 870,220 $ 445,569 $ 1,422,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 551,531 802,428 1,116,508
Amortization..................................... 615,927 1,088,770 1,231,982
Deferred income taxes............................ (171,512) (813,000) 90,000
Provision for loan inducement fee payable
(Note 7)....................................... -- 1,330,000 --
Restructuring loss (Note 11)..................... 524,670 -- --
Loss on disposal of investment (Note 3).......... -- -- 500,000
Minority interest in net (loss) of consolidated
subsidiary..................................... -- (15,959) (327,227)
Provision for doubtful accounts and
adjustments.................................... 1,340,069 1,669,478 2,636,421
Change in assets and liabilities:
(Increase) in accounts receivable.............. (2,235,749) (2,539,025) (5,729,376)
(Increase) in income taxes receivable.......... -- -- (54,710)
(Increase) in deferred expenses................ (1,454,860) (1,769,831) (1,181,630)
Increase (decrease) in accounts payable and
accrued expenses............................ 345,414 887,580 (163,439)
Increase in customer deposits.................. 1,609,118 1,469,140 772,817
Increase (decrease) in income taxes payable.... 209,224 115,524 (172,524)
Other.......................................... (67,702) (94,998) 67,230
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES... 2,136,350 2,575,676 208,172
------------ ------------ ------------
Cash Flows from Investing Activities
Purchase of equipment and furniture................. (809,908) (1,483,881) (1,598,290)
Purchase of customer lists.......................... (583,522) (3,121,804) (457,276)
Purchase of noncompete agreements................... (684,828) (3,681,801) (204,692)
Investment in Colorado Directory Company, L.L.C.
(Note 3)......................................... -- (1,000,000) --
Proceeds received on disposal of investment......... -- -- 500,000
Purchase option (Note 2)............................ -- (500,000) --
Organization and loan costs......................... -- (158,332) --
Purchase of other investment........................ -- -- (100,000)
------------ ------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES..... (2,078,258) (9,945,818) (1,860,258)
------------ ------------ ------------
</TABLE>
F-44
<PAGE> 134
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
------------ ------------ ------------
Cash Flows from Financing Activities
Increase (decrease) in checks issued not yet
presented for payment............................ $ (3,493) $ (83,223) $ 197,961
Borrowings on revolving credit agreements........... 12,906,000 10,109,500 21,211,000
Payments on revolving credit agreements............. (12,853,000) (9,103,500) (17,733,200)
Proceeds from long-term debt........................ -- 9,330,500 --
Principal payments on long-term debt................ (105,811) (3,374,447) (2,187,923)
Proceeds from issuance of common stock upon the
exercise of options.............................. 925 19,775 208,850
Purchase of common stock for retirement............. (2,713) (28,463) (40,602)
Payment on redemption of preferred stock............ -- -- (200,000)
Capital contribution received from minority owner in
consolidated subsidiary.......................... -- 500,000 196,000
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................ (58,092) 7,370,142 1,652,086
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS... -- -- --
Cash and cash equivalents:
Beginning........................................... -- -- --
------------ ------------ ------------
Ending.............................................. $ -- $ -- $ --
============ ============ ============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest......................................... $ 793,609 $ 1,247,048 $ 1,767,309
Income taxes, net of refunds..................... 99,478 1,000,062 1,115,250
Supplemental Schedules of Noncash Investing and
Financing Activities
Customer list acquired by issuance
payables......................................... $ 669,000 $ 464,923 $ 829,022
Noncompete agreement acquired by issuance
payables......................................... 669,000 974,923 578,506
Common stock contributed to 401(k) profit-sharing
plan (Note 9).................................... 53,126 57,307 57,470
Reclassification of intangibles to deferred income
taxes (Note 6)................................... 1,188,488
Equipment acquired by contracts payable............. 552,612 28,753
Current note payable converted to long-term debt
(Note 4)......................................... 2,236,000
</TABLE>
See Notes to Consolidated Financial Statements.
F-45
<PAGE> 135
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Telecom*USA Publishing Group, Inc. and subsidiaries
(the "Company") are publishers of telephone directories in a fifteen-state area
primarily in the midwestern United States. Revenues are principally derived from
advertising in such publications.
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 follows:
Principles of consolidation: The consolidated financial statements include
the accounts of Telecom*USA Publishing Group, Inc. and its wholly-owned
subsidiaries, Telecom*USA Publishing Company and Telecom*USA Neighborhood
Directories, Inc. (liquidated in January 1996) and its 51% owned subsidiary,
OakTel Directory, L.C. (OakTel). All significant intercompany accounts and
transactions have been eliminated in consolidation.
OakTel was formed to publish a directory for the Lincoln, Nebraska area and
its first publication was in November 1995. The Company provides directory
services to OakTel at specified prices.
Revenue and expense recognition: Revenue and expenses are recognized on
the accrual basis. Revenues are recorded upon publication of directories.
Deferred expenses consist of production and selling costs on unpublished
directory advertising orders. They are expensed when the related directory is
published and the related revenue of the directory is recognized.
Customer deposits consist of cash received from customers at the time a
sales contract is signed. They are recorded as revenue when the related
directory is published.
Advertising revenue and market sales expense includes contracts for trading
advertising space with various other media companies. These revenues are
recognized in the month of publication and the related prepaid expenses are
recorded at estimated net realizable value. These revenues totaled approximately
$548,000, $600,000, and $950,000 for the years ended August 31, 1994, 1995, and
1996, respectively.
Accounts receivable: In accordance with industry practice, accounts
receivable includes certain unbilled revenue from installment contracts. It is
anticipated that a substantial portion of all such amounts at August 31, 1996
will be collected within one year.
Equipment and furniture and depreciation: Equipment and furniture is
carried at cost. Depreciation expense is computed by the straight-line method
over primarily five or seven years.
Investment in Colorado Directory Company, L.L.C. ("CDC"): The Company is
accounting for its 12.5% investment in CDC by the cost method.
Income tax matters: Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be
F-46
<PAGE> 136
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Intangible assets: Intangible assets are being amortized by the
straight-line method over the following periods:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Customer lists (See Note 13)......................... 15
Noncompete agreements................................ 3-10
Organization and loan costs.......................... 1-6
</TABLE>
Intangible assets are periodically reviewed for impairment based upon an
assessment of future operations to ensure that they are appropriately valued.
The Company entered into noncompete agreements and acquired customer lists
for forty and eight directories during the years ended August 31, 1995 and 1996,
respectively.
Stock options: Compensation expense for stock issued through stock options
plans is accounted for using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to 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.
Common stock held by 401(k) profit-sharing plan: The Company's maximum
cash obligation related to these shares is classified outside stockholders'
equity because the shares are not readily traded and could be put to the Company
for cash.
Earnings per common and common equivalent share: Earnings per common and
common equivalent share, assuming no dilution, are determined by dividing net
income by the weighted average number of common and common equivalent shares
outstanding during each of the periods presented. Dilutive common stock
equivalents related to the stock options and warrants discussed in Note 10 were
determined using the treasury stock method. The convertible debentures are not
common stock equivalents. The estimated fair market value of the Company's
common stock used to calculate the common stock equivalents under the treasury
stock method for the periods presented has been estimated by management or
determined by an independent appraisal. Earnings per common and common
equivalent share, assuming full dilution, assumes conversion of the dilutive
convertible debentures since the date of issuance.
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 1997.
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 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
F-47
<PAGE> 137
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
expanded disclosures. SFAS No. 123 is effective in fiscal year 1997. 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.
NOTE 2. OPTION TO PURCHASE DIRECTORIES
The Company loaned $500,000 to another directory publisher in consideration
of an option to purchase nine of its directories. The note is noninterest
bearing, nonrecourse, and collateralized by the publishing rights to one of the
directories. The option price of the directories is determined based on revenue
of the directories at the time of exercise and other factors. The Company may
exercise the option anytime between June 1, 1997 and June 1, 1999. If the
Company does not exercise its option, the loan is forgiven. If the option is
exercised, the amount of the loan is applied to the option price.
NOTE 3. INVESTMENT IN COLORADO DIRECTORY COMPANY L.L.C.
The Company's investment in Colorado Directory Company, L.L.C. (CDC), a
Colorado limited liability company that publishes directories in Denver and
Boulder, Colorado, consists of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Convertible debenture which is noninterest bearing, due
December 1, 2004, and collateralized by the publishing
rights to the Boulder directory....................... $ 500,000 $ --
Members' equity, represents 12.5% ownership in CDC...... 500,000 --
---------- ----------
$1,000,000 $ --
========== ==========
</TABLE>
In June 1996, the Company recognized a $500,000 loss on the disposition of
the CDC investment as a result of selling all of its interest in CDC to an
affiliate of another member of CDC for $500,000.
NOTE 4. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT
The Company has a $9,764,000 revolving line of credit with a bank, which
expires January 31, 1997. As of August 31, 1995 and 1996, the Company had
$1,532,000 and $2,773,800, respectively, outstanding on the line of credit. The
borrowings bear interest at prime (current effective rate is 8.25% at August 31,
1996), and are collateralized by substantially all of the Company's assets. If
borrowings are in excess of $6,000,000 the interest rate is prime plus 3/4%. To
the extent that the line of credit is used to finance acquisitions that cost
more than $1,000,000, the amount borrowed for the acquisition is converted to a
term loan. The amount of the term loan reduces the line of credit on a dollar
for dollar basis. The term loan will be repaid in quarterly installments of
principal and monthly installments of interest over a five-year period and will
bear interest at prime, unless over $6,000,000 is borrowed, then the rate shall
be prime plus 3/4%. The other terms and conditions of the term loan are the
same as the line of credit. As of August 31, 1996, there is a $2,012,400 term
loan outstanding under this agreement.
F-48
<PAGE> 138
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT -- (CONTINUED)
The loan agreement contains covenants concerning various financial ratios,
additional acquisition and debt restrictions, and prohibition of any cash
dividends. As of August 31, 1996, the Company was either in compliance with the
restrictive covenants or had obtained waivers for noncompliance.
Long-term debt consists of:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
The Company has convertible unsecured debentures payable to
various individuals and corporations. The convertible
debentures are payable in quarterly payments of interest only
until maturity at which time the debentures will be converted
to common stock of the Company or paid in full, at the option
of the holder. The debentures may be converted to common
stock of the Company, at the option of the holder, upon the
earlier of (i) the expiration of two years from the date of
issuance (applies only to debentures issued April 1992), (ii)
upon a public offering of common stock of the Company, or
(iii) upon receipt of notice of redemption from the Company.
The Company may only redeem the convertible debentures in
connection with or as a precondition to a public offering of
common stock of the Company. The terms of these debentures
are due as follows:
9%, due April 1998, convertible at $4.00 per share of common
stock, issued April 1992.* ............................... $ 5,214,000 $ 5,214,000
11%, due November 2000 through January 2001, convertible at
$8.00 per share of common stock, issued November 1994
through January 1995.* ................................... 8,450,000 8,450,000
Note payable, bank, principal due in quarterly payments of
$111,800 through January 31, 2001, interest is due monthly at
prime (currently 8.25% at August 31, 1996), collateralized by
substantially all of the Company's assets. .................. -- 2,012,400
Noncompete agreement, due in monthly payments of $5,250,
including interest at 8 5/8%, through May 1996. ............. 41,980 --
Note payable, due $500,000 on January 1, 1996 and 1997,
including interest at 6 5/8%. Collateralized by a second lien
on publishing rights to purchased directories. .............. 905,377 465,377
Note payable, due in annual installments of $123,000 to
$189,000, including interest at 8.25%, through 2006.
Collateralized by publishing rights to purchased
directories.................................................. -- 990,000
Contracts payable, to finance company, due in various monthly
payments, including interest at 8.5% to 8 5/8%, through
November 1998, collateralized by equipment with a depreciated
cost of $348,053. ........................................... 444,988 321,398
Loan inducement fee payable (See Note 8)....................... 1,330,000 --
----------- -----------
16,386,345 17,453,175
Less current maturities........................................ 875,050 1,224,286
----------- -----------
$15,511,295 $16,228,889
=========== ===========
</TABLE>
- ---------------
* All debentures were converted into Common Stock prior to the acquisition of
the company by McLeod, Inc. on September 20, 1996. (See Note 14)
F-49
<PAGE> 139
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT -- (CONTINUED)
Principal payments required on the long-term debt at August 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997.................................................. $ 1,224,286
1998.................................................. 5,874,780
1999.................................................. 573,309
2000.................................................. 550,200
2001.................................................. 8,773,600
Later years........................................... 457,000
-----------
$17,453,175
===========
</TABLE>
NOTE 5. LEASE COMMITMENTS AND TOTAL RENT EXPENSE
The Company has an operating lease for its corporate headquarters, which
expires August 31, 2005. In addition to minimum annual rentals, the lease
requires the payment of operating costs of the building based on its pro rata
share of the building. The Company also leases other office facilities and
equipment under various operating leases.
The total minimum rental commitment at August 31, 1996 under the operating
leases is as follows:
<TABLE>
<S> <C>
During the year ending August 31:
1997................................................ $ 1,412,000
1998................................................ 1,290,000
1999................................................ 1,130,000
2000................................................ 1,078,000
2001................................................ 891,000
Thereafter.......................................... 5,631,000
----------
$11,432,000
==========
</TABLE>
The total rental expense for 1994, 1995, and 1996 was approximately
$1,225,000, $1,312,000, and $1,528,000, respectively.
F-50
<PAGE> 140
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. INCOME TAXES
Net deferred tax assets consist of the following components as of August
31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable..................................... $ 934,000 $1,219,000
Intangibles............................................. 679,000 664,000
Deferred expenses....................................... 101,000 --
Accrued expenses........................................ 444,000 513,000
Capital loss carryforward............................... -- 200,000
Loan inducement fee payable............................. 532,000 --
---------- ----------
2,690,000 2,596,000
Less valuation allowance................................ -- --
---------- ----------
2,690,000 2,596,000
---------- ----------
Deferred tax liabilities:
Equipment and furniture................................. 191,000 185,000
Accounts receivable..................................... 169,000 171,000
---------- ----------
360,000 356,000
---------- ----------
$2,330,000 $2,240,000
========== ==========
</TABLE>
The components giving rise to the net deferred tax assets described above
have been included in the accompanying balance sheets as of August 31, 1995 and
1996 as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Current assets............................................ $1,410,000 $1,536,000
Noncurrent assets......................................... 920,000 704,000
---------- ----------
$2,330,000 $2,240,000
========== ==========
</TABLE>
No valuation allowance is required on the deferred tax assets as of August
31, 1996 and 1995. The valuation allowance for deferred tax assets decreased
$1,110,000 during 1994, due to the utilization of the acquired operating loss
carryforwards and management's belief that deferred tax assets will ultimately
be realized.
The provision for income taxes charged to operations for 1994, 1995, and
1996 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- --------
<S> <C> <C> <C>
Current tax expense........................... $ 308,702 $1,115,586 $885,610
Deferred tax expense.......................... (171,512) (813,000) 90,000
--------- ---------- --------
$ 137,190 $ 302,586 $975,610
========= ========== ========
</TABLE>
F-51
<PAGE> 141
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. INCOME TAXES -- (CONTINUED)
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 1994, 1995,
and 1996 due to the following:
<TABLE>
<CAPTION>
1994 1995 1996
------------------ ------------------ -----------------
% OF % OF % OF
DOLLAR PRETAX DOLLAR PRETAX DOLLAR PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
--------- ------ --------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" federal
income tax expense........ $ 352,593 35% $ 256,269 35% $724,676 35%
Increase (decrease) in
income taxes resulting
from:
State income taxes, net of
federal tax benefit.... 60,445 6 96,866 13 71,656 3
Meals and entertainment... 20,920 2 59,767 8 74,724 4
Minority interest in net
loss of consolidated
limited liability
subsidiary............. -- -- 5,586 1 114,529 6
Additional deferred income
taxes after
reclassification of
intangibles to deferred
income taxes........... (396,907) (39) -- -- -- --
Other.................. 100,139 10 (115,902) (16) (9,975) (1)
--------- --- --------- --- -------- --
$ 137,190 14% $ 302,586 41% $975,610 47%
========= === ========= === ======== ==
</TABLE>
NOTE 7. LOAN INDUCEMENT FEE
The Company had previously agreed to pay a fee of 1/2% of cash revenues to
three individuals on a monthly basis as compensation for previous financing
provided such individuals. Two of these individuals are stockholders of the
Company and one of these individuals is on the Company's Board of Directors. The
fee was to be paid through October 31, 2000. For 1994, 1995, and 1996, the loan
inducement fee expense was approximately $153,000, $190,000, and none,
respectively, which is included in interest expense.
In August 1995, the Company's Board of Directors adopted a resolution to
prepay the fee according to a formula contained in the original agreement.
Therefore, the remaining liability of $1,330,000 was recorded at August 31,
1995. The payment of the remaining liability was made during the year ended
August 31, 1996.
NOTE 8. STOCKHOLDER AGREEMENTS
The common stockholders of the Company have entered into a stockholder
agreement that provides for the following:
- The stockholders may not sell, transfer, or pledge their stock without
first offering it to the Company, and secondly to the other stockholders,
at fair market value.
F-52
<PAGE> 142
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. STOCKHOLDER AGREEMENTS -- (CONTINUED)
- Any gift of the stock must be approved by the Company and will be subject
to the terms of the stockholder agreement. The gift may be made to a
spouse, child of the stockholder or to a charitable organization or
private foundation.
- Upon the death of a stockholder, any transferee of the stock will be
subject to the terms of the stockholder agreement.
- Each stockholder has co-sale rights.
- Each stockholder has piggyback rights upon a registration of the stock.
- Written action of 51% of the stock may amend or cancel the agreement.
NOTE 9. RETIREMENT AND BONUS PLAN
The Company has a 401(k) Profit Sharing Plan for those employees who have
completed one year of service and who are at least 18 years of age. The plan
provides for contributions in such amounts as the Board of Directors may
annually determine. The amount charged to expense during 1994, 1995, and 1996
was approximately $56,000, $80,000, and $117,500, respectively. The
contributions for 1994 and 1995 have been made with the Company's common stock.
The Company plans to make the 1996 contribution with cash.
In the event a terminated plan participant desires to sell his or her
shares of the Company's stock, or if certain employees elect to diversify their
account balances, the Company may be required to purchase the shares from the
participant at their fair market value. To the extent that shares of common
stock held by the 401(k) profit-sharing plan are not readily traded, a sponsor
must reflect the maximum cash obligation related to those securities outside of
stockholders' equity. As of August 31, 1996, 38,273 shares held by the 401(k)
profit-sharing plan, at a fair value of $5.75 per share, have been reclassified
from stockholder's equity to liabilities.
The Company has bonus plans for substantially all of its nonsales personnel
based on obtaining certain profitability goals. These bonuses totaled
approximately $362,000, $471,000, and $720,000 for 1994, 1995, and 1996,
respectively.
NOTE 10. STOCK OPTION PLAN AND STOCK PURCHASE WARRANTS
The Company has adopted a qualified stock option plan with 800,000 shares
of common stock reserved for the grant of options to key employees and
directors. Option prices will be the fair market value of the common stock on
the date options are granted. The options primarily vest over a
F-53
<PAGE> 143
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTION PLAN AND STOCK PURCHASE WARRANTS -- (CONTINUED)
54-month period and must be exercised within seven years from the date of grant.
The following table summarizes the options to purchase shares of the Company's
common stock:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
-------- ------------
<S> <C> <C>
Outstanding, August 31, 1993.................... 490,800 $1.00-$3.00
Granted 18,900 1.00- 3.30
Exercised..................................... (925) 1.00
Cancelled..................................... (9,925) 1.00- 3.00
--------
Outstanding, August 31, 1994.................... 498,850 1.00- 3.50
Granted....................................... 265,600 4.50- 4.95
Exercised..................................... (14,175) 1.00- 3.00
Cancelled..................................... (20,775) 1.00- 4.50
--------
Outstanding, August 31, 1995.................... 729,500 1.00- 4.95
Granted....................................... 28,050 5.75
Exercised..................................... (182,300) 1.00- 4.50
Cancelled..................................... (21,400) 3.00- 5.75
--------
Outstanding, August 31, 1996.................... 553,850 1.00- 5.75
========
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Options exercisable, end of year.... 245,325 384,300 251,900
======= ======= =======
Available for grant, end of year.... 625 55,400 48,750
======= ======= =======
</TABLE>
In connection with previous financing provided by three individuals (see
Note 7), the Company issued three stock purchase warrants enabling the holders
to purchase 488,650 shares of common stock at an exercise price of $.01 per
share. The stock purchase warrants are exercisable through November 20, 2000.
All vested options and stock purchase warrants were exercised prior to the
acquisition of the Company by McLeod, Inc. on September 20, 1996. (See Note 14).
NOTE 11. RESTRUCTURING LOSS
In January 1994, the Company restructured Telecom*USA Neighborhood
Directories, Inc. Previously it published eleven neighborhood directories in the
Chicago, Illinois area. The Company has decided to keep certain market areas and
produce two directories similar to the Company's other products. The expense
included in 1994 includes previously deferred expenses on books which will no
longer be published and a write-down of the purchased customer list and
agreement not-to-compete.
NOTE 12. CHANGE IN ACCOUNTING ESTIMATE
During the year ended August 31, 1996, the Company evaluated the turnover
of its customer lists and determined that a 15-year life was more appropriate
than the 3-10 year life it was presently using. The effect of this change was to
increase net income for 1996 by approximately $781,000, equal to $0.23 per
average common share outstanding.
F-54
<PAGE> 144
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. COMMITMENT TO PURCHASE EQUIPMENT
During the year ended August 31, 1996, the Company has capitalized
approximately $200,000 related to a telephone sales force automation project.
The Company estimates it will cost approximately $1,100,000 to complete the
project.
NOTE 14. REORGANIZATION OF COMPANY AND SUBSEQUENT EVENTS
On September 20, 1996 the Company was acquired by McLeod, Inc. pursuant to
an Agreement and Plan of Reorganization. Under the Agreement, the Company was
merged into McLeod Reverse Merging Co., a wholly owned subsidiary of McLeod, Inc
with the Company as the surviving corporation. Immediately after the merger each
share of the Company was converted into the right to receive $12.75 in cash.
This acquisition resulted in a total purchase price of approximately $75.7
million. This purchase price consisted of approximately $74.1 million in cash
and $1.6 million resulting from McLeod, Inc. entering into a deferred
compensation program with all holders of non-vested options to purchase shares
of the Company's common stock. Prior to the acquisition all debentures discussed
in Note 4 were converted into common stock and all vested stock options and
stock purchase warrants discussed in Note 10 were exercised.
F-55
<PAGE> 145
<TABLE>
<S> <C>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS 6,000,000 SHARES
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION MCLEOD, INC.
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS
GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON CLASS A COMMON STOCK
TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION. ($.01 PAR VALUE)
------------------------------
TABLE OF CONTENTS
(MCLEOD LOGO)
PAGE
----
Prospectus Summary................... 1
Risk Factors......................... 8 SALOMON BROTHERS INC
Use of Proceeds...................... 20
Price Range of Class A Common Stock BEAR, STEARNS & CO. INC.
and Dividend Policy................ 20
Capitalization....................... 21 MORGAN STANLEY & CO.
Selected Consolidated Financial INCORPORATED
Data............................... 22
Pro Forma Financial Data............. 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
Business............................. 36
Management........................... 60
Certain Transactions................. 74
Principal and Selling Stockholders... 75
Description of Capital Stock......... 77
Shares Eligible for Future Sale...... 80
Underwriting......................... 82
Validity of Securities............... 83
Experts.............................. 83
Available Information................ 84
Glossary............................. G-1 PROSPECTUS
Index to Consolidated Financial
Statements......................... F-1 DATED , 1996
</TABLE>
<PAGE> 146
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. The selling
stockholders are not paying any portion of such expenses.
<TABLE>
<S> <C>
SEC registration fee.................................................... $ 67,955
NASD filing fee......................................................... 22,925
Nasdaq National Market listing fee...................................... 17,500
Accounting fees and expenses............................................ 175,000
Legal fees and expenses................................................. 500,000
Printing and engraving expenses......................................... 195,000
Blue Sky fees and expenses.............................................. 15,000
Transfer Agent fees and expenses........................................ 6,620
---------
Total......................................................... $ 1,000,000
=========
</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 has entered into indemnity agreements with each of its
directors pursuant to which the Company has agreed to indemnify the directors as
permitted by the DGCL. The Company has obtained directors and officers liability
insurance against certain liabilities, including liabilities under the
Securities Act.
II-1
<PAGE> 147
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 September 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, effective May 2, 1996 (the "Recapitalization")):
(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> 148
(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> 149
(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> 150
(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.
(39) In June 1996, the Company granted to 175 of its employees,
pursuant to the 1996 Plan, stock options to purchase an aggregate of
223,175 shares of Class A Common Stock at an exercise price of $20.00 per
share.
(40) In June 1996, the Company granted to six of its employees,
pursuant to the 1996 Plan, stock options to purchase an aggregate of 5,800
shares of Class A Common Stock at an exercise price of $23.75 per share.
II-5
<PAGE> 151
(41) In July 1996, the Company issued an aggregate of 474,807 shares
of Class A Common Stock to Allsop (194,476), Albert P. Ruffalo (73,600),
Joseph P. Cunningham (40,301), Laura L. Dement (37,386), Randy A. Snyder
(18,763), Brian P. Donnelley (18,763), Clark E. McLeod (38,609), Mary E.
McLeod (38,609), Eric Hender (7,150), and Julie Hender (7,150). The 474,807
shares were exchanged for all the shares of Ruffalo, Cody common stock held
by such persons.
(42) In July 1996, in connection with the acquisition of Ruffalo, Cody
and pursuant to the 1996 Plan, the Company granted stock options to
purchase an aggregate of 88,436 shares of Class A Common Stock at an
exercise price of $1.43 to 19 Ruffalo, Cody employees, an aggregate of
29,537 shares of Class A Common Stock at an exercise price of $4.29 to 9
Ruffalo, Cody employees, an aggregate of 14,684 shares of Class A Common
Stock at an exercise price of $8.58 to 14 Ruffalo, Cody employees, an
aggregate of 11,370 shares of Class A Common Stock at an exercise price of
$9.30 to 31 Ruffalo, Cody employees, an aggregate of 6,991 shares of Class
A Common Stock at an exercise price of $8.58 to 1 Ruffalo, Cody independent
contractor, and an aggregate of 6,991 shares of Class A Common Stock at an
exercise price of $9.30 to 1 Ruffalo, Cody independent contractor.
(43) In July 1996, as partial consideration for the execution of
employment, confidentiality and non-competition agreements, the Company
granted to 11 employees signing such agreements options to purchase an
aggregate of 167,000 shares of Class A Common Stock at an exercise price of
$25.25 per share.
(44) In July 1996, the Company granted to one of its employees,
pursuant to the 1996 Plan, stock options to purchase an aggregate of 10,000
shares of Class A Common Stock at an exercise price of $25.25 per share.
(45) In July 1996, the Company granted to 81 of its employees,
pursuant to the 1996 Plan, stock options to purchase an aggregate of 34,100
shares of Class A Common Stock at an exercise price of $27.75 per share.
(46) In August 1996, the Company granted to 61 of its employees,
pursuant to the 1996 Plan, stock options to purchase an aggregate of
109,855 shares of Class A Common Stock at an exercise price of $30.125 per
share.
(47) In September 1996, as partial consideration for the execution of
employment, confidentiality and non-competition agreements, the Company
granted to six employees signing such agreements options to purchase an
aggregate of 225,000 shares of Class A Common Stock at an exercise price of
$33.375 per share.
(48) In September 1996, the Company granted to 548 of its employees,
pursuant to the 1996 Plan, stock options to purchase an aggregate of
193,100 shares of Class A Common Stock at an exercise price of $33.375 per
share.
(49) In September 1996, as partial consideration for the execution of
an employment, confidentiality and non-competition agreement, the Company
granted to one employee signing such agreement options to purchase 10,000
shares of Class A Common Stock at an exercise price of $33.875 per share.
(50) In September 1996, the Company granted to 29 of its employees,
pursuant to the 1996 Plan, stock options to purchase an aggregate of 35,975
shares of Class A Common Stock at an exercise price of $33.875 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
II-6
<PAGE> 152
such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
*1.1 -- Form of Underwriting Agreement among McLeod, Inc., Salomon Brothers Inc, Bear,
Stearns & Co. Inc., Morgan Stanley & Co. Incorporated, and certain stockholders
of the Company.
2.1 -- Agreement and Plan of Reorganization dated April 28, 1995 among Midwest Capital
Group Inc., MWR Telecom, Inc. and McLeod Inc. (Filed as Exhibit 2.1 to
Registration Statement on Form S-1, File No. 333-3112 ("Initial Form S-1"), and
incorporated herein by reference).
2.2 -- Agreement and Plan of Reorganization dated July 15, 1996 among Ruffalo, Cody &
Associates, Inc., certain shareholders of Ruffalo, Cody & Associates, Inc. and
McLeod, Inc. (Filed as Exhibit 2 to Current Report on Form 8-K, File No. 0-20763,
and incorporated herein by reference).
2.3 -- Agreement and Plan of Reorganization dated September 20, 1996 among Telecom*USA
Publishing Group, Inc. and McLeod, Inc. (Filed as Exhibit 2 to Current Report on
Form 8-K, File No. 0-20763, and incorporated herein by reference).
3.1 -- Amended and Restated Certificate of Incorporation of McLeod, Inc. (Filed as
Exhibit 3.1 to Initial Form S-1, and incorporated herein by reference).
3.2 -- Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to Initial Form
S-1, and incorporated herein by reference).
4.1 -- Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as Exhibit 4.1 to
Initial Form S-1, and incorporated herein by reference).
4.2 -- 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. (Filed as Exhibit 4.8 to Initial Form S-1, and
incorporated herein by reference).
*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. (Filed as Exhibit 10.1 to Initial Form S-1,
and incorporated herein by reference).
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. (Filed as
Exhibit 10.2 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as
Exhibit 10.3 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as Exhibit 10.4 to Initial Form S-1, and incorporated herein by
reference).
</TABLE>
II-7
<PAGE> 153
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
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. (Filed as Exhibit 10.5 to Initial Form S-1, and incorporated herein by
reference).
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. (Filed as Exhibit 10.6 to Initial Form S-1, and incorporated herein by
reference).
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. (Filed as Exhibit 10.7 to
Initial Form S-1, and incorporated herein by reference).
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. (Filed as Exhibit 10.8 to Initial Form S-1,
and incorporated herein by reference).
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. (Filed as
Exhibit 10.9 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as
Exhibit 10.10 to Initial Form S-1, and incorporated herein by reference).
10.11 -- Agreement Regarding Support Agreement dated December 1994 between McLeod, Inc.
and IES Diversified Inc. (Filed as Exhibit 10.11 to Initial Form S-1, and
incorporated herein by reference).
10.12 -- Agreement Regarding Guarantee dated May 16, 1994 between McLeod, Inc. and IES
Diversified Inc. (Filed as Exhibit 10.12 to Initial Form S-1, and incorporated
herein by reference).
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. (Filed as Exhibit
10.13 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as
Exhibit 10.14 to Initial Form S-1, and incorporated herein by reference).
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.
(Filed as Exhibit 10.15 to Initial Form S-1, and incorporated herein by
reference).
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. (Filed as Exhibit 10.16 to
Initial Form S-1, and incorporated herein by reference).
10.17 -- Agreement for Construction Related Services dated as of October 17, 1995 between
City Signal Fiber Services, Inc. and McLeod Network Services, Inc. (Filed as
Exhibit 10.17 to Initial Form S-1, and incorporated herein by reference).
</TABLE>
II-8
<PAGE> 154
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
10.18 -- Construction Services Agreement dated March 27, 1996 between City Signal Fiber
Services, Inc. and McLeod Network Services, Inc. (Filed as Exhibit 10.18 to
Initial Form S-1, and incorporated herein by reference).
10.19 -- Fiber Optic Use Agreement dated as of February 14, 1996 between McLeod Network
Services, Inc. and Galaxy Telecom, L.P. (Filed as Exhibit 10.19 to Initial Form
S-1, and incorporated herein by reference).
10.20 -- Agreement dated as of July 11, 1994 between McLeod Network Services, Inc. and KLK
Construction. (Filed as Exhibit 10.20 to Initial Form S-1, and incorporated
herein by reference).
10.21 -- Lease Agreement dated September 5, 1995 between State of Iowa and MWR Telecom,
Inc. (Filed as Exhibit 10.21 to Initial Form S-1, and incorporated herein by
reference).
10.22 -- Lease Agreement dated September 5, 1995 between State of Iowa and McLeod Network
Services, Inc. (Filed as Exhibit 10.22 to Initial Form S-1, and incorporated
herein by reference).
10.23 -- Contract dated September 5, 1995 between Iowa Telecommunications and Technology
Commission and MWR Telecom, Inc. (Filed as Exhibit 10.23 to Initial Form S-1, and
incorporated herein by reference).
10.24 -- Contract dated June 27, 1995 between Iowa National Guard and McLeod Network
Services, Inc. (Filed as Exhibit 10.24 to Initial Form S-1, and incorporated
herein by reference).
10.25 -- Addendum Number One to Contract dated September 5, 1995 between Iowa National
Guard and McLeod Network Services, Inc. (Filed as Exhibit 10.25 to Initial Form
S-1, and incorporated herein by reference).
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. (Filed as Exhibit
10.26 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as Exhibit
10.27 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as Exhibit 10.28 to Initial Form S-1, and incorporated
herein by reference).
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. (Filed as Exhibit 10.29 to Initial Form S-1, and incorporated
herein by reference).
10.30 -- Lease Agreement dated as of May 24, 1995 between 2060 Partnership and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.30 to Initial Form S-1, and
incorporated herein by reference).
10.31 -- Lease Agreement dated October 31, 1995 between I.R.F.B. Joint Venture and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.31 to Initial Form S-1, and
incorporated herein by reference).
</TABLE>
II-9
<PAGE> 155
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
10.32 -- First Amendment to Lease Agreement dated as of November 20, 1995 between I.R.F.B.
Joint Venture and McLeod Telemanagement, Inc. (Filed as Exhibit 10.32 to Initial
Form S-1, and incorporated herein by reference).
10.33 -- Uniform Purchase Agreement dated July 22, 1993 between McLeod, Inc. and Hill's
Maple Crest Farms Partnership. (Filed as Exhibit 10.33 to Initial Form S-1, and
incorporated herein by reference).
10.34 -- Master Right-of-Way Agreement dated July 27, 1994 between McLeod Network
Services, Inc. and IES Industries Inc. (Filed as Exhibit 10.34 to Initial Form
S-1, and incorporated herein by reference).
10.35 -- Master Right-of-Way and Tower Use Agreement dated February 13, 1996 between IES
Industries Inc. and McLeod, Inc. (Filed as Exhibit 10.35 to Initial Form S-1, and
incorporated herein by reference).
10.36 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between
MidAmerican Energy Company and McLeod, Inc. (Iowa and South Dakota). (Filed as
Exhibit 10.36 to Initial Form S-1, and incorporated herein by reference).
10.37 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between
MidAmerican Energy Company and McLeod, Inc. (Illinois). (Filed as Exhibit 10.37
to Initial Form S-1, and incorporated herein by reference).
10.38 -- Settlement Agreement dated March 18, 1996 between U S WEST Communications, Inc.
and McLeod Telemanagement, Inc. (Filed as Exhibit 10.38 to Initial Form S-1, and
incorporated herein by reference).
10.39 -- Agreement dated August 4, 1995 between Vadacom, Inc. and McLeod Telemanagement,
Inc. (Filed as Exhibit 10.39 to Initial Form S-1, and incorporated herein by
reference).
10.40 -- McLeod Telecommunications, Inc. 1992 Incentive Stock Option Plan. (Filed as
Exhibit 10.40 to Initial Form S-1, and incorporated herein by reference).
10.41 -- McLeod, Inc. 1993 Incentive Stock Option Plan. (Filed as Exhibit 10.41 to Initial
Form S-1, and incorporated herein by reference).
10.42 -- McLeod, Inc. 1995 Incentive Stock Option Plan. (Filed as Exhibit 10.42 to Initial
Form S-1, and incorporated herein by reference).
10.43 -- McLeod Telecommunications, Inc. Director Stock Option Plan. (Filed as Exhibit
10.43 to Initial Form S-1, and incorporated herein by reference).
10.44 -- Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and McLeod, Inc.
(Filed as Exhibit 10.44 to Initial Form S-1, and incorporated herein by
reference).
10.45 -- Promissory Note dated March 29, 1996 between Stephen K. Brandenburg and McLeod,
Inc. (Filed as Exhibit 10.45 to Initial Form S-1, and incorporated herein by
reference).
10.46 -- Agreement dated April 28, 1995 among McLeod, Inc., McLeod Telecommunications,
Inc., McLeod Telemanagement, Inc., McLeod Network Services, Inc. and Clark E.
McLeod. (Filed as Exhibit 10.46 to Initial Form S-1, and incorporated herein by
reference).
+10.47 -- Telecommunications Services Agreement dated March 14, 1994 between WilTel, Inc.
and McLeod Telemanagement, Inc., as amended. (Filed as Exhibit 10.47 to Initial
Form S-1, and incorporated herein by reference).
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. (Filed as Exhibit 10.48 to Initial Form S-1, and incorporated herein by
reference).
</TABLE>
II-10
<PAGE> 156
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
10.49 -- Construction Services Agreement dated June 30, 1995 between MFS Network
Technologies, Inc. and MWR Telecom, Inc. (Filed as Exhibit 10.49 to Initial Form
S-1, and incorporated herein by reference).
10.50 -- First Amendment to Agreement Regarding Support Agreement dated May 14, 1996 among
McLeod, Inc., IES Diversified Inc. and IES Investments Inc. (Filed as Exhibit
10.50 to Initial Form S-1, and incorporated herein by reference).
10.51 -- First Amendment to Agreement Regarding Guarantee dated May 14, 1996 among McLeod,
Inc., IES Diversified Inc. and IES Investments Inc. (Filed as Exhibit 10.51 to
Initial Form S-1, and incorporated herein by reference).
10.52 -- Amended and Restated Directors Stock Option Plan of McLeod, Inc. (Filed as
Exhibit 10.52 to Initial Form S-1, and incorporated herein by reference).
10.53 -- Forms of Employment, Confidentiality and Non-Competition Agreement between
McLeod, Inc. and certain employees of McLeod, Inc. (Filed as Exhibit 10.53 to
Initial Form S-1, and incorporated herein by reference).
10.54 -- Form of Change-of-Control Agreement between McLeod, Inc. and certain employees of
McLeod, Inc. (Filed as Exhibit 10.54 to Initial Form S-1, and incorporated herein
by reference).
10.55 -- McLeod, Inc. 1996 Employee Stock Option Plan, as amended.
10.56 -- McLeod, Inc. Employee Stock Purchase Plan. (Filed as Exhibit 10.56 to Initial
Form S-1, and incorporated herein by reference).
10.57 -- Form of Indemnity Agreement between McLeod, Inc. and certain officers and
directors of McLeod, Inc. (Filed as Exhibit 10.57 to Initial Form S-1, and
incorporated herein by reference).
10.58 -- License Agreement dated April 24, 1996 between PageMart, Inc. and MWR Telecom,
Inc. (Filed as Exhibit 10.58 to Initial Form S-1, and incorporated herein by
reference).
10.59 -- Assignment of Purchase Agreement dated August 15, 1996 by and between Ryan
Properties, Inc. and McLeod, Inc.
10.60 -- Assignment of Purchase Agreement dated August 14, 1996 by and between Ryan
Properties, Inc. and McLeod, Inc.
10.61 -- Asset Purchase Agreement dated September 4, 1996 by and between Total
Communication Services, Inc. and McLeod Telemanagement, Inc.
10.62 -- First Amendment to Asset Purchase Agreement dated September 30, 1996 by and
between Total Communication Services, Inc. and McLeod Telemanagement, Inc.
10.63 -- McLeod, Inc. Incentive Plan.
10.64 -- Amended and Restated Credit Agreement dated as of May 5, 1996 by and between
Telecom*USA Publishing Group, Inc., Telecom*USA Publishing Company and Telecom*USA
Neighborhood Directories, Inc. and Norwest Bank Iowa, National Association.
10.65 -- First Amendment to Amended and Restated Credit Agreement dated as of January 31,
1996 by and between Telecom*USA Publishing Group, Inc., Telecom*USA Publishing
Company and Telecom*USA Neighborhood Directories, Inc. and Norwest Bank Iowa,
National Association.
10.66 -- Lease Agreement dated as of September 26, 1994 between Ryan Properties, Inc. and
Ruffalo, Cody & Associates, Inc.
10.67 -- First Lease Amendment dated as of April 12, 1995 between Ryan Properties, Inc.
and Ruffalo, Cody & Associates, Inc.
</TABLE>
II-11
<PAGE> 157
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
10.68 -- Lease Agreement dated as of July 18, 1995 between 2060 Partnership, L.P. and
Telecom*USA Publishing Company.
10.69 -- Lease Agreement dated April 26, 1995 by and between A.M. Henderson and Telecom*USA
Publishing Company.
10.70 -- License Agreement dated as of April 19, 1994, between Ameritech Information
Industry Services and Telecom*USA Publishing Company.
10.71 -- License Agreement dated September 13, 1993 between U S WEST Communications, Inc.
and Telecom*USA Publishing Company.
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 (Filed as Exhibit 27 to Quarterly Report on Form 10-Q,
File No. 0-20763, and incorporated herein by reference).
99.1 -- Purchase Agreement dated as of August 15, 1996 between Iowa Land and Building
Company and Ryan Properties, Inc.
99.2 -- Purchase Agreement dated as of June 28, 1996 between Donald E. Zvacek, Dennis E.
Zvacek and Robert J. Zvacek and Ryan Properties, Inc.
</TABLE>
- ---------------
* To be filed by amendment.
+ 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.
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.
II-12
<PAGE> 158
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-13
<PAGE> 159
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 10th day of October, 1996.
McLEOD, INC.
By /s/ CLARK E. MCLEOD
-----------------------------------
Clark E. McLeod
Chairman and Chief Executive Officer
----------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clark E. McLeod, Stephen C. Gray and Blake O.
Fisher, Jr., jointly and severally, each in his own capacity, his true and
lawful attorneys-in-fact, with full power of substitution, for him and his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Registration Statement or a Registration Statement filed pursuant to Rule
462 under the Securities Act, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents with full power and
authority to do so and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on this
10th day of October, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
<C> <S>
/s/ CLARK E. MCLEOD Chairman, Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
Clark E. McLeod
/s/ STEPHEN C. GRAY President, Chief Operating Officer and
- --------------------------------------------- Director
Stephen C. Gray
/s/ BLAKE O. FISHER, JR. Chief Financial Officer, Executive Vice
- --------------------------------------------- President, Corporate Administration and
Blake O. Fisher, Jr. Treasurer (Principal Financial Officer)
/s/ JAMES L. CRAM Chief Accounting Officer and Director
- --------------------------------------------- (Principal Accounting Officer)
James L. Cram
/s/ RUSSELL E. CHRISTIANSEN Director
- ---------------------------------------------
Russell E. Christiansen
/s/ THOMAS M. COLLINS Director
- ---------------------------------------------
Thomas M. Collins
/s/ PAUL D. RHINES Director
- ---------------------------------------------
Paul D. Rhines
/s/ LEE LIU Director
- ---------------------------------------------
Lee Liu
</TABLE>
II-14
<PAGE> 160
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> 161
MCLEOD, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
---------------------
BALANCE CHARGED CHARGED BALANCE
AT TO TO AT
COLUMN A BEGINNING COST AND OTHER 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> 162
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
Ruffalo, Cody & Associates, 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
February 9, 1996
<PAGE> 163
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-------------------
BALANCE CHARGED CHARGED BALANCE
AT TO TO AT
BEGINNING COST AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------------------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993:
Allowance for doubtful accounts............. $50,000 $ -- $ -- $ -- $50,000
======== ======= ======== ======= =======
Year Ended December 31, 1994:
Allowance for doubtful accounts............. $50,000 $38,072 $ -- $ -- $88,072
======== ======= ======== ======= =======
Year Ended December 31, 1995:
Allowance for doubtful accounts............. $88,072 $ -- $ -- $38,072 $50,000
======== ======= ======== ======= =======
</TABLE>
<PAGE> 164
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
Telecom*USA Publishing Group, 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
September 27, 1996
<PAGE> 165
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
---------------------
BALANCE CHARGED CHARGED BALANCE
AT TO TO AT
BEGINNING COST AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended August 31, 1994:
Allowance for doubtful
accounts and adjustments..... $1,662,481 $1,340,069 $ -- $1,131,470 $1,871,080
========== ========== ======== ========== ==========
Year Ended August 31, 1995:
Allowance for doubtful
accounts and adjustments..... $1,871,080 $1,669,478 $ -- $1,206,402 $2,334,156
========== ========== ======== ========== ==========
Year Ended August 31, 1996:
Allowance for doubtful accounts
and adjustments.............. $2,334,156 $2,636,421 $ -- $1,867,654 $3,102,923
========== ========== ======== ========== ==========
</TABLE>
<PAGE> 166
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
*1.1 -- Form of Underwriting Agreement among McLeod, Inc., Salomon Brothers Inc, Bear,
Stearns & Co. Inc., Morgan Stanley & Co. Incorporated, and certain stockholders
of the Company.
2.1 -- Agreement and Plan of Reorganization dated April 28, 1995 among Midwest Capital
Group Inc., MWR Telecom, Inc. and McLeod Inc. (Filed as Exhibit 2.1 to
Registration Statement on Form S-1, File No. 333-3112 ("Initial Form S-1"), and
incorporated herein by reference).
2.2 -- Agreement and Plan of Reorganization dated July 15, 1996 among Ruffalo, Cody &
Associates, Inc., certain shareholders of Ruffalo, Cody & Associates, Inc. and
McLeod, Inc. (Filed as Exhibit 2 to Current Report on Form 8-K, File No. 0-20763,
and incorporated herein by reference).
2.3 -- Agreement and Plan of Reorganization dated September 20, 1996 among Telecom*USA
Publishing Group, Inc. and McLeod, Inc. (Filed as Exhibit 2 to Current Report on
Form 8-K, File No. 0-20763, and incorporated herein by reference).
3.1 -- Amended and Restated Certificate of Incorporation of McLeod, Inc. (Filed as
Exhibit 3.1 to Initial Form S-1, and incorporated herein by reference).
3.2 -- Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to Initial Form
S-1, and incorporated herein by reference).
4.1 -- Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as Exhibit 4.1 to
Initial Form S-1, and incorporated herein by reference).
4.2 -- 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. (Filed as Exhibit 4.8 to Initial Form S-1, and
incorporated herein by reference).
*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. (Filed as Exhibit 10.1 to Initial Form S-1,
and incorporated herein by reference).
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. (Filed as
Exhibit 10.2 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as
Exhibit 10.3 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as Exhibit 10.4 to Initial Form S-1, and incorporated herein by
reference).
</TABLE>
<PAGE> 167
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
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. (Filed as Exhibit 10.5 to Initial Form S-1, and incorporated herein by
reference).
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. (Filed as Exhibit 10.6 to Initial Form S-1, and incorporated herein by
reference).
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. (Filed as Exhibit 10.7 to
Initial Form S-1, and incorporated herein by reference).
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. (Filed as Exhibit 10.8 to Initial Form S-1,
and incorporated herein by reference).
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. (Filed as
Exhibit 10.9 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as
Exhibit 10.10 to Initial Form S-1, and incorporated herein by reference).
10.11 -- Agreement Regarding Support Agreement dated December 1994 between McLeod, Inc.
and IES Diversified Inc. (Filed as Exhibit 10.11 to Initial Form S-1, and
incorporated herein by reference).
10.12 -- Agreement Regarding Guarantee dated May 16, 1994 between McLeod, Inc. and IES
Diversified Inc. (Filed as Exhibit 10.12 to Initial Form S-1, and incorporated
herein by reference).
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. (Filed as Exhibit
10.13 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as
Exhibit 10.14 to Initial Form S-1, and incorporated herein by reference).
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.
(Filed as Exhibit 10.15 to Initial Form S-1, and incorporated herein by
reference).
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. (Filed as Exhibit 10.16 to
Initial Form S-1, and incorporated herein by reference).
10.17 -- Agreement for Construction Related Services dated as of October 17, 1995 between
City Signal Fiber Services, Inc. and McLeod Network Services, Inc. (Filed as
Exhibit 10.17 to Initial Form S-1, and incorporated herein by reference).
</TABLE>
<PAGE> 168
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
10.18 -- Construction Services Agreement dated March 27, 1996 between City Signal Fiber
Services, Inc. and McLeod Network Services, Inc. (Filed as Exhibit 10.18 to
Initial Form S-1, and incorporated herein by reference).
10.19 -- Fiber Optic Use Agreement dated as of February 14, 1996 between McLeod Network
Services, Inc. and Galaxy Telecom, L.P. (Filed as Exhibit 10.19 to Initial Form
S-1, and incorporated herein by reference).
10.20 -- Agreement dated as of July 11, 1994 between McLeod Network Services, Inc. and KLK
Construction. (Filed as Exhibit 10.20 to Initial Form S-1, and incorporated
herein by reference).
10.21 -- Lease Agreement dated September 5, 1995 between State of Iowa and MWR Telecom,
Inc. (Filed as Exhibit 10.21 to Initial Form S-1, and incorporated herein by
reference).
10.22 -- Lease Agreement dated September 5, 1995 between State of Iowa and McLeod Network
Services, Inc. (Filed as Exhibit 10.22 to Initial Form S-1, and incorporated
herein by reference).
10.23 -- Contract dated September 5, 1995 between Iowa Telecommunications and Technology
Commission and MWR Telecom, Inc. (Filed as Exhibit 10.23 to Initial Form S-1, and
incorporated herein by reference).
10.24 -- Contract dated June 27, 1995 between Iowa National Guard and McLeod Network
Services, Inc. (Filed as Exhibit 10.24 to Initial Form S-1, and incorporated
herein by reference).
10.25 -- Addendum Number One to Contract dated September 5, 1995 between Iowa National
Guard and McLeod Network Services, Inc. (Filed as Exhibit 10.25 to Initial Form
S-1, and incorporated herein by reference).
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. (Filed as Exhibit
10.26 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as Exhibit
10.27 to Initial Form S-1, and incorporated herein by reference).
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. (Filed as Exhibit 10.28 to Initial Form S-1, and incorporated
herein by reference).
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. (Filed as Exhibit 10.29 to Initial Form S-1, and incorporated
herein by reference).
10.30 -- Lease Agreement dated as of May 24, 1995 between 2060 Partnership and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.30 to Initial Form S-1, and
incorporated herein by reference).
10.31 -- Lease Agreement dated October 31, 1995 between I.R.F.B. Joint Venture and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.31 to Initial Form S-1, and
incorporated herein by reference).
</TABLE>
<PAGE> 169
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
10.32 -- First Amendment to Lease Agreement dated as of November 20, 1995 between I.R.F.B.
Joint Venture and McLeod Telemanagement, Inc. (Filed as Exhibit 10.32 to Initial
Form S-1, and incorporated herein by reference).
10.33 -- Uniform Purchase Agreement dated July 22, 1993 between McLeod, Inc. and Hill's
Maple Crest Farms Partnership. (Filed as Exhibit 10.33 to Initial Form S-1, and
incorporated herein by reference).
10.34 -- Master Right-of-Way Agreement dated July 27, 1994 between McLeod Network
Services, Inc. and IES Industries Inc. (Filed as Exhibit 10.34 to Initial Form
S-1, and incorporated herein by reference).
10.35 -- Master Right-of-Way and Tower Use Agreement dated February 13, 1996 between IES
Industries Inc. and McLeod, Inc. (Filed as Exhibit 10.35 to Initial Form S-1, and
incorporated herein by reference).
10.36 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between
MidAmerican Energy Company and McLeod, Inc. (Iowa and South Dakota). (Filed as
Exhibit 10.36 to Initial Form S-1, and incorporated herein by reference).
10.37 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between
MidAmerican Energy Company and McLeod, Inc. (Illinois). (Filed as Exhibit 10.37
to Initial Form S-1, and incorporated herein by reference).
10.38 -- Settlement Agreement dated March 18, 1996 between U S WEST Communications, Inc.
and McLeod Telemanagement, Inc. (Filed as Exhibit 10.38 to Initial Form S-1, and
incorporated herein by reference).
10.39 -- Agreement dated August 4, 1995 between Vadacom, Inc. and McLeod Telemanagement,
Inc. (Filed as Exhibit 10.39 to Initial Form S-1, and incorporated herein by
reference).
10.40 -- McLeod Telecommunications, Inc. 1992 Incentive Stock Option Plan. (Filed as
Exhibit 10.40 to Initial Form S-1, and incorporated herein by reference).
10.41 -- McLeod, Inc. 1993 Incentive Stock Option Plan. (Filed as Exhibit 10.41 to Initial
Form S-1, and incorporated herein by reference).
10.42 -- McLeod, Inc. 1995 Incentive Stock Option Plan. (Filed as Exhibit 10.42 to Initial
Form S-1, and incorporated herein by reference).
10.43 -- McLeod Telecommunications, Inc. Director Stock Option Plan. (Filed as Exhibit
10.43 to Initial Form S-1, and incorporated herein by reference).
10.44 -- Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and McLeod, Inc.
(Filed as Exhibit 10.44 to Initial Form S-1, and incorporated herein by
reference).
10.45 -- Promissory Note dated March 29, 1996 between Stephen K. Brandenburg and McLeod,
Inc. (Filed as Exhibit 10.45 to Initial Form S-1, and incorporated herein by
reference).
10.46 -- Agreement dated April 28, 1995 among McLeod, Inc., McLeod Telecommunications,
Inc., McLeod Telemanagement, Inc., McLeod Network Services, Inc. and Clark E.
McLeod. (Filed as Exhibit 10.46 to Initial Form S-1, and incorporated herein by
reference).
+10.47 -- Telecommunications Services Agreement dated March 14, 1994 between WilTel, Inc.
and McLeod Telemanagement, Inc., as amended. (Filed as Exhibit 10.47 to Initial
Form S-1, and incorporated herein by reference).
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. (Filed as Exhibit 10.48 to Initial Form S-1, and incorporated herein by
reference).
</TABLE>
<PAGE> 170
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
10.49 -- Construction Services Agreement dated June 30, 1995 between MFS Network
Technologies, Inc. and MWR Telecom, Inc. (Filed as Exhibit 10.49 to Initial Form
S-1, and incorporated herein by reference).
10.50 -- First Amendment to Agreement Regarding Support Agreement dated May 14, 1996 among
McLeod, Inc., IES Diversified Inc. and IES Investments Inc. (Filed as Exhibit
10.50 to Initial Form S-1, and incorporated herein by reference).
10.51 -- First Amendment to Agreement Regarding Guarantee dated May 14, 1996 among McLeod,
Inc., IES Diversified Inc. and IES Investments Inc. (Filed as Exhibit 10.51 to
Initial Form S-1, and incorporated herein by reference).
10.52 -- Amended and Restated Directors Stock Option Plan of McLeod, Inc. (Filed as
Exhibit 10.52 to Initial Form S-1, and incorporated herein by reference).
10.53 -- Forms of Employment, Confidentiality and Non-Competition Agreement between
McLeod, Inc. and certain employees of McLeod, Inc. (Filed as Exhibit 10.53 to
Initial Form S-1, and incorporated herein by reference).
10.54 -- Form of Change-of-Control Agreement between McLeod, Inc. and certain employees of
McLeod, Inc. (Filed as Exhibit 10.54 to Initial Form S-1, and incorporated herein
by reference).
10.55 -- McLeod, Inc. 1996 Employee Stock Option Plan, as amended.
10.56 -- McLeod, Inc. Employee Stock Purchase Plan. (Filed as Exhibit 10.56 to Initial
Form S-1, and incorporated herein by reference).
10.57 -- Form of Indemnity Agreement between McLeod, Inc. and certain officers and
directors of McLeod, Inc. (Filed as Exhibit 10.57 to Initial Form S-1, and
incorporated herein by reference).
10.58 -- License Agreement dated April 24, 1996 between PageMart, Inc. and MWR Telecom,
Inc. (Filed as Exhibit 10.58 to Initial Form S-1, and incorporated herein by
reference).
10.59 -- Assignment of Purchase Agreement dated August 15, 1996 by and between Ryan
Properties, Inc. and McLeod, Inc.
10.60 -- Assignment of Purchase Agreement dated August 14, 1996 by and between Ryan
Properties, Inc. and McLeod, Inc.
10.61 -- Asset Purchase Agreement dated September 4, 1996 by and between Total
Communication Services, Inc. and McLeod Telemanagement, Inc.
10.62 -- First Amendment to Asset Purchase Agreement dated September 30, 1996 by and
between Total Communication Services, Inc. and McLeod Telemanagement, Inc.
10.63 -- McLeod, Inc. Incentive Plan.
10.64 -- Amended and Restated Credit Agreement dated as of May 5, 1996 by and between
Telecom*USA Publishing Group, Inc., Telecom*USA Publishing Company and Telecom*USA
Neighborhood Directories, Inc. and Norwest Bank Iowa, National Association.
10.65 -- First Amendment to Amended and Restated Credit Agreement dated as of January 31,
1996 by and between Telecom*USA Publishing Group, Inc., Telecom*USA Publishing
Company and Telecom*USA Neighborhood Directories, Inc. and Norwest Bank Iowa,
National Association.
10.66 -- Lease Agreement dated as of September 26, 1994 between Ryan Properties, Inc. and
Ruffalo, Cody & Associates, Inc.
10.67 -- First Lease Amendment dated as of April 12, 1995 between Ryan Properties, Inc.
and Ruffalo, Cody & Associates, Inc.
</TABLE>
<PAGE> 171
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
10.68 -- Lease Agreement dated as of July 18, 1995 between 2060 Partnership, L.P. and
Telecom*USA Publishing Company.
10.69 -- Lease Agreement dated April 26, 1995 by and between A.M. Henderson and Telecom*USA
Publishing Company.
10.70 -- License Agreement dated as of April 19, 1994, between Ameritech Information
Industry Services and Telecom*USA Publishing Company.
10.71 -- License Agreement dated September 13, 1993 between U S WEST Communications, Inc.
and Telecom*USA Publishing Company.
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 (Filed as Exhibit 27 to Quarterly Report on Form 10-Q,
File No. 0-20763, and incorporated herein by reference).
99.1 -- Purchase Agreement dated as of August 15, 1996 between Iowa Land and Building
Company and Ryan Properties, Inc.
99.2 -- Purchase Agreement dated as of June 28, 1996 between Donald E. Zvacek, Dennis E.
Zvacek and Robert J. Zvacek and Ryan Properties, Inc.
</TABLE>
- ---------------
* To be filed by amendment.
+ Confidential treatment has been granted. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
<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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
9. OPTION AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
10. OPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
11. TERM AND EXERCISE OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
11.1. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
11.2. Exercise by Optionee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
11.3. Option Period and Limitations on Exercise . . . . . . . . . . . . . . . . . . . . . 6
11.4. Method of Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
12. TRANSFERABILITY OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
13. TERMINATION OF EMPLOYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
14. RIGHTS IN THE EVENT OF DEATH OR DISABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 7
14.1. Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
14.2. Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
15. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
16. SECURITIES LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
17. EXCHANGE ACT: RULE 16b-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
17.1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
17.2. Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
17.3. Restriction on Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . . . . 9
17.4. Requirement of Stockholders' Approval . . . . . . . . . . . . . . . . . . . . . . 10
18. AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
19. EFFECT OF CHANGES IN CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
19.1 Changes in Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
19.2. Reorganization With Corporation Surviving . . . . . . . . . . . . . . . . . . . . 11
19.3. Other Reorganizations; Sale of Assets or Stock . . . . . . . . . . . . . . . . . . 11
19.4. Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
19.5. No Limitations on Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 12
20. WITHHOLDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
21. DISCLAIMER OF RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
22. NONEXCLUSIVITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
23. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</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 continue to service the Corporation. 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.
2.7 "Employer" means McLeod, Inc. or other Affiliate which employs
the designated recipient of an Option.
<PAGE> 5
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.
2.17 "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.
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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 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 (i) 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) or
(ii) any other individual whose participation in the Plan is determined to be
in the best interests of the Corporation by the Committee and who is not
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<PAGE> 7
subject to Section 16 of the Exchange Act. 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 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
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<PAGE> 8
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 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.
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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.
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
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<PAGE> 10
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.
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
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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 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,
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registration or qualification of any shares subject to the Option upon any
securities exchange or 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.
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.
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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.
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
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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, 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
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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 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.
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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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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.
------------------------
Casey D. Mahon, Esq.
Secretary
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EXHIBIT 10.59
ASSIGNMENT OF PURCHASE AGREEMENT
This Assignment is made and entered into this 15th day of August, 1996
by and between Ryan Properties, Inc. ("Assignor") and McLeod, Inc. ("Assignee").
1. By execution hereof, Assignor does hereby assign to Assignee all of
its right, title and interest in and to that certain Purchase
Agreement by and between Assignor and Iowa Land and Building Company
dated August 15, 1996.
2. By execution hereof, Assignee hereby accepts the assignment from
Assignor and agrees to assume any and all obligations of Assignee
under the Purchase Agreement as assigned.
3. This Assignment shall inure to the benefit of and be binding upon the
successors and assigns of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
on the date and in the year first above written.
RYAN PROPERTIES, INC.
BY: /s/ JEFF A. SMITH
---------------------------------
JEFF A. SMITH, Vice President
MCLEOD, INC.
BY: /s/ JAMES CRAM
---------------------------------
NAME
Chief Accounting Officer
---------------------------------
TITLE
By execution hereof, Iowa Land and Building Company acknowledges the
above Assignment.
IOWA LAND AND BUILDING COMPANY
BY: /s/ THOMAS L. ALLER
---------------------------------
THOMAS L. ALLER, Vice President
<PAGE> 1
EXHIBIT 10.60
ASSIGNMENT OF PURCHASE AGREEMENT
This Assignment is made and entered into this 14th day of August, 1996
by and between Ryan Properties, Inc. ("Assignor") and McLeod, Inc.
("Assignee").
1. By execution hereof, Assignor does hereby assign to Assignee all of
its right, title and interest in and to that certain Purchase
Agreement by and between Assignor and Donald E. Zvacek, Dennis E.
Zvacek and Robert J. Zvacek dated June 28, 1996.
2. By execution hereof, Assignee hereby accepts the assignment from
Assignor and agrees to assume any and all obligations of Assignee
under the Purchase Agreement as assigned.
3. This Assignment shall inure to the benefit of and be binding upon the
successors and assigns of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
on the date and in the year first above written.
RYAN PROPERTIES, INC.
BY: /s/ JEFF A. SMITH
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JEFF A. SMITH, Vice President
MCLEOD, INC.
BY: /s/ JAMES CRAM
-----------------------------------
NAME
Chief Accounting Officer
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TITLE
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EXHIBIT 10.61
ASSET PURCHASE AGREEMENT
THIS AGREEMENT is made and entered into this 4th day of September,
1996, by and between TOTAL COMMUNICATION SERVICES, INC., a corporation
organized and existing under the laws of the State of Iowa, ("Seller") and
MCLEOD TELEMANAGEMENT, INC., an Iowa corporation with its principal place of
business in Cedar Rapids, Iowa ("Buyer"), and joined in by the shareholders and
management of Seller listed on Exhibit "B" to this Agreement for the limited
purpose of agreeing not to compete, all as hereinafter set forth in this
Agreement.
RECITALS
A. Seller desires to sell and Buyer desires to purchase certain
of the assets of Seller on the terms herein stated and;
B. Seller and Buyer have reached certain agreements and
understandings relative thereto, including terms relating to
price, method of payment, delivery and wish to reduce such
agreements to writing.
The parties agree as follows:
1. ASSETS SOLD AND PURCHASED. Buyer agrees to purchase from
Seller and Seller agrees to sell, convey, transfer and deliver to Buyer, free
and clear of all liens and encumbrances, the following assets of Seller, which
are more fully described on Exhibit A attached (the "Assets"):
(a) The Seller's customer base which shall include 1320 Centrex
local and long distance lines, 123 long distance only lines,
and 135 local lines only, excluding any customer with a Past
Due Account (as defined in subparagraph 1(f) of this
Agreement);
(b) All Customer deposits and the documentation related to Centrex
services, to include: customer lists including addresses,
customer files including copies of Letters of Agency and PIC
forms, LEC orders, LEC records, LEC correspondence, install
date, billing records, internal order forms, customer contact
lists, and if applicable an electronic file of all customer
stored data ("Customer Data");
(c) Ninety-nine (99) installed Dialers;
(d) One-hundred Fifty-four (154) toll-free 800/888 numbers
(e) All calling cards;
(f) All voice mail accounts, all ISDN lines, all T-Span lines and
all 56K lines, if any are owned by Seller on the date of
Closing; and
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(g) Account receivables due in less than 60 days after the
invoice date on the date of Closing ("Receivables"). Seller
shall commence disconnect procedures with respect to any
customer whose account is over 60 days past due ("Past Due
Account(s)"), in accordance with Iowa Utilities Board rules.
Buyer shall not be obligated to service such Past Due
Accounts, and Buyer shall be under no obligation or duty to
pursue collection of Past Due Accounts. However, if Buyer
receives payment for any such Past Due Accounts, Buyer shall
forward such payment to Seller. All Receivables are being
sold free and clear of liens and encumbrances.
All other assets of Seller not listed above or on Exhibit A are specifically
excluded. BUYER IS NOT ASSUMING ANY LIABILITIES OF SELLER.
2. PURCHASE PRICE. The total Purchase Price for the Assets shall
equal the sum of Five Hundred Thirty-Two Thousand Five Hundred Thirty Dollars
($532,530.00) (the "Purchase Price"), adjusted as follows:
(a) Increase in Customer Base. The Purchase Price shall be
increased if the Seller's customer base for any of the
following Assets: (1) Centrex local and long distance lines;
(2) long distance only lines, and (3) 800/888 numbers, has
increased by five percent or more from the respective customer
base as identified in paragraph 1 of this Agreement. If any
such an increase has occurred, Seller shall pay Buyer for each
additional active customer telephone number which exceeds the
five percent (5%) threshold of the applicable customer base:
(i) an additional $290 for each additional active
customer telephone number which subscribes to local
and long distance service, which is installed prior
to Closing.
(ii) an additional $130 for each additional active
customer telephone number which subscribes to only
long distance service which is installed prior to
Closing.
(iii) an additional $260 for each additional active 800/888
customer telephone number which is installed prior to
Closing.
(b) Decrease in Customer Base. The Purchase Price shall be
reduced if the Seller's customer base for any of the following
Assets: (1) Centrex local and long distance lines; (2) long
distance only lines, and (3) 800/888 numbers, has decreased by
five percent or more from the respective customer base as
identified in paragraph 1 of this Agreement. If any such
decrease has occurred, the Purchase Price shall be reduced for
each additional active
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customer telephone number which exceeds the five percent (5%)
threshold of the applicable customer base:
(i) a reduction of $290 for each active customer
telephone number which subscribes to local and long
distance service, which is no longer part of the
Seller's customer base at Closing.
(ii) a reduction of $130 for each active customer
telephone number which subscribes to only long
distance service, which is no longer part of the
Seller's customer base at Closing.
(iii) a reduction of $260 for each active 800/888 customer
telephone number which is no longer part of the
Seller's customer base at Closing.
(c) Active Account. An active account is one that has been
installed with U.S. West as a customer of Seller.
(d) Price for Receivables. The Purchase Price shall be increased
to reflect the value of the Seller's Receivables which are
being purchased. Buyer shall pay Seller an additional $0.95
for each $1.00 of Receivables.
The "Final Purchase Price" shall be equal to the Purchase Price, as
adjusted in accordance with subparagraphs (a) (b) and (c) above.
3. PAYMENT OF PURCHASE PRICE. Buyer has deposited One Hundred
Sixty-Six Thousand Dollars ($166,000) in escrow ("Escrow Funds") with Moyer &
Bergman, P.L.C. pursuant to an Escrow Agreement dated August 26, 1996. At the
Closing, the Final Purchase Price shall be paid in cash or in other immediately
available funds, reduced by the amount of the Escrow Funds (excluding any
interest on the Escrow Funds) and the Escrow Fund and interest earned shall be
paid to Seller.
Buyer does not accept or assume and will not accept or assume any
liability or obligation of Seller of any kind or nature currently existing or
incurred by Seller at any time in the future, including, but not limited to,
Seller's bank debt, trade accounts payable, accrued salary and vacation, and
any actual or contingent liabilities (known or unknown) associated with the
conduct of Seller's business arising from acts occurring prior to or continuing
after Closing, including but not limited to commission payments and billing
disputes.
4. SELLER'S CREDITORS. Seller agrees to be responsible for and
pay promptly all creditors of the Seller and to defend, indemnify, and hold
Buyer harmless for the full amount of any claim made against Buyer by creditors
of Seller.
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5. CLOSING.
(a) The transaction which is the subject of this Agreement shall
be closed on September 30, 1996 ("Closing"), or sooner by mutual agreement of
the parties, at the offices of Shuttleworth & Ingersoll, P.C., 500 Firstar Bank
Building, Cedar Rapids, Iowa 52401. However, the parties acknowledge that the
Closing may be delayed up to ninety (90) days after submittal of the parties
joint application relating to the items required by subparagraphs 5(b)(iv) and
5(b)(v) of this Agreement if the IUB does not waive the 90 day notice
requirement.
(b) At the Closing Seller will deliver to Buyer the following:
(i) A Bill of Sale and other instruments of transfer
sufficient and effective to vest Buyer with good and
marketable title to the Assets.
(ii) An assignment of the letters of agency relating to
the Assets.
(iii) All Customer Data.
(iv) An assignment and transfer of the Certificate of
Public Convenience and Necessity from the Iowa
Utilities Board (the "Certificate") to provide local
land line and local telephone service in Iowa.
(v) Approval from the Iowa Utilities Board of Seller's
application to discontinue service to its Iowa
customers located in those cities and towns listed on
the attached Exhibit "D".
(vi) A Certificate of Incumbency identifying the then
current officers, directors and shareholders of
Seller.
(vii) A certified copy of all resolutions and actions of
the Seller's board of directors and shareholders
authorizing the transaction contemplated by this
Agreement.
(viii) Releases of all Security Agreements and UCC filings
against the Assets.
(ix) Written consent of US West to the assignment of the
following agreements from Seller to Buyer:
(1) "US West Intrastate Network Service Master
Agreement Between Total Communication Service, Inc.
and US West Communications, Inc." dated October
6, 1994; and
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(2) "Settlement Agreement" between U S WEST
Communications, Inc. and Total Commununication
Services, Inc. dated April 30, 1996.
Such consent shall state that U S West will honor the
Iowa Utility Board's approval of Seller's request to
discontinue service, and specifically acknowledge the
transition of Seller's customers to Buyer's network
and billing system.
(x) All necessary governmental approvals, including any
certificate of convenience and necessity.
(xi) Documentation substantiating that Seller has made
payment for accrued services related to customer
telephone numbers being purchased by Buyer.
(c) At Closing, the parties listed in Exhibit B shall deliver to
Buyer a Covenant not to Compete Agreement in a form identical to that attached
hereto as Exhibit C, restricting all such parties' activities relating to the
resale of Centrex and local land line services for a period of three (3) years
in all cities or towns in which any affiliate of the Buyer currently conducts
business or proposes to conduct business within the State of Iowa as shown on
Exhibit D, except such activities which relate to Seller's provision of T-1s and
DS-3s as necessary to companies that are associated with the "Link" or "Link of
Iowa" group that now, or in the future, may have offices located in the
communities listed on Exhibit D, but only for the purpose of providing
telemarketing services.
(d) At the Closing, Buyer will deliver to Seller with delivery of
the items referred to in subparagraphs (b) and (c) above, its certified check
or cashier's check payable to Seller in the amount of the Final Purchase Price,
reduced by the amount of Escrow Funds.
6. SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents
and warrants as follows:
(a) Existence; Good Standing; Corporate Authority; Compliance With
Law. Seller is a corporation duly organized, validly existing
and in good standing under the laws of the State of Iowa and
has the corporate power to own its property and carry on its
business as it is now being conducted and is duly qualified to
do business and is in good standing in each jurisdiction in
which the character of its properties owned by it therein or
in which the transaction of its business makes such
qualification necessary. Seller is not in default with
respect to any order of any court, governmental authority or
arbitration board or tribunal to which Seller is a party or is
subject, and to its knowledge, Seller is not in violation of
any laws, ordinances, governmental rules or regulations to
which it is subject.
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(b) Authority. Seller has full power, right and authority to
enter into, and perform its obligations under, this Agreement.
The execution, delivery and performance of this Agreement by
Seller have been duly and properly authorized by proper
corporate action in accordance with applicable law and with
the Articles of Incorporation and By-laws of Seller and this
Agreement constitutes a valid and binding obligation of
Seller, enforceable against it in accordance with its terms.
(c) Seller's Title. Seller holds good, valid and marketable title
to all of the Assets free and clear of any liens, mortgages,
charges and encumbrances of every kind, nature and description
(except those liens and encumbrances that will be released
prior to or at Closing), and has the full power, right and
authority to sell the Assets in accordance with the terms of
this Agreement.
(d) Receivables. The Receivables are valid, genuine and existing,
arose out of the performance of services, are collectible in
the ordinary course of business and are subject to no
defenses, set-offs or counterclaims.
(e) Customer Service and Notification. Seller shall continue to
provide adequate and reliable service to the customers listed
on Exhibit A until regulatory approval for discontinuance of
service is obtained from the Iowa Utilities Board. At Closing
Seller and Buyer shall agree upon a letter to be sent to the
customers identified on Exhibit A which will be signed by both
Buyer and Seller.
(f) Licenses, Permits and Assessments. Seller has obtained all
licenses, permits, governmental approvals and other
authorizations, and has taken all actions required by
applicable laws or governmental regulations, necessary or
appropriate in the conduct of its business. Seller has
complied in all material respects with and has not violated
any law or regulation applicable to the conduct of its
business, and has filed all reports and paid all regulatory
fees and assessments attributable to Seller's business
operations involving the Assets which are due or accrue prior
to the date of Closing.
(g) Transaction Not a Breach. Neither the execution and delivery
of this Agreement nor its performance will conflict with or
result in a breach of the terms, conditions or provisions of
the Articles of Incorporation or By-laws of Seller or any
contract, agreement, mortgage, trust deed, note, bond
indenture or other instrument or obligation of any nature to
which Seller is a party or by which Seller is bound or by
which Seller, the business, or the Assets may be affected.
(h) Customer Lists and Other Data. All customer lists, receivable
listings, and other data provided to Buyer are, in all
material respects, true, correct and
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accurate as of the date of Closing. The customer base listed
on Exhibit A only reflects customers and lines located in Iowa
and/or Illinois, and such customer accounts are current,
active and have not been terminated nor does Seller have any
knowledge of any intent of any such customer to modify or
terminate the current contract. There are no duplicate
numbers in the customer lists, 800/888 telephone numbers or
the calling cards which comprise the Assets.
(i) Liabilities. With respect to the Assets, Seller has not
incurred any debts, liabilities or obligations of any nature
whether accrued, absolute, contingent, direct, indirect,
perfected or otherwise and whether due or to become due except
liabilities incurred for services rendered or goods supplied
in the ordinary course of business, liabilities on account of
taxes and governmental charges and obligations or liabilities
incurred by virtue of the execution of this Agreement.
(j) Tax Returns. Seller has filed all federal, state, county, and
local tax returns which it is required to have filed, and such
returns are true and correct. Seller has paid or made adequate
provision for the payment of all taxes, interest, penalties,
assessments, or deficiencies which have, or may become due
pursuant to said returns, or pursuant to any assessment
received with respect thereto.
(k) Litigation. To the knowledge of Seller, there is no suit,
action, arbitration proceeding, or investigation pending or
threatened against Seller, or to which Seller is otherwise a
party, and which may affect the Assets, before any court, or
before any governmental department (including OSHA),
commission, board, agency, or instrumentality.
(1) Trade Secrets. To the knowledge of the Seller, the Seller has
the right to use, free and clear of any claims or rights of
others, all trade secrets and client lists employed in
carrying on the Seller's business in the manner presently
conducted. To the knowledge of the Seller, Seller is not
using or in any way making use, without appropriate
permission, of any confidential information, confidential
formula, computer programs, or trade secrets of any third
party, including, without limitation, any former employer of
any present or past employee of Seller or of any former or
present employee of Seller.
(m) Services. Seller shall pay for all services provided in
connection with the Assets, whether actually billed or accrued
and unbilled, prior to Closing. Seller shall provide Buyer
documentation that payments have been made for accrued
services related to the Assets. Buyer and Seller shall
mutually agree to the process to be utilized to determine
customer billing cut-off dates consistent with the date of
Closing, taking into account that a portion
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is billed in advance and a portion is billed in arrears, and
to allocate revenues to Seller and Buyer in an efficient
manner which is fairly consistent with the payment for
services made by Seller pursuant to this Agreement.
(n) ERISA. Seller currently sponsors or maintains no "employee
pension benefit plans" as that term is defined in Section 3(2)
of ERISA; and has not, at any time in the past, sponsored or
maintained any such plan or terminated any such plan.
(o) Seller's Local Service. For a period of six (6) months after
Closing, Seller shall keep at least 33 of the Seller's local
lines with Buyer's local service program, but only if Seller
is still located in Buyer's service area.
The foregoing representations and warranties of Seller shall survive
the Closing for period of two (2) years.
7. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer hereby
represents and warrants as follows:
(a) Organization. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Iowa and has the corporate power to own its property and carry
on its business as it is now being conducted and is duly
qualified to do business and is in good standing in each
jurisdiction in which the character of its properties owned by
it therein or in which the transaction of its business makes
such qualification necessary.
(b) Authority. Buyer has full power, right and authority to enter
into, and perform its obligations under, this Agreement. The
execution, delivery and performance of this Agreement by Buyer
have been duly and properly authorized by proper corporate
action in accordance with applicable law and with the Articles
of Incorporation and By-laws of Buyer and this Agreement
constitutes a valid and binding obligation of Buyer,
enforceable against it in accordance with its terms.
(c) No Breach. Neither the execution and delivery of this
Agreement nor its performance will conflict with or result in
a breach of the terms, conditions or provisions of any
contract, agreement, mortgage or other instrument or
obligation of any nature to which Buyer is a party or by which
Buyer is bound.
(d) Services. Buyer shall pay for all services related to the
customer telephone numbers listed on Exhibit A which are
incurred on the date of Closing or thereafter.
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8. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. All obligations
of Buyer under this Agreement with respect to the Closing are subject to the
fulfillment of each of the following conditions:
(a) Each and every representation and warranty of Seller contained
in this Agreement shall be true in all material respects at
the Closing.
(b) Seller shall have performed and complied in all material
respects with all covenants and conditions required by this
Agreement to be performed or complied with by it prior to or
at the Closing, including, but not limited to, the approval of
the transaction contemplated by this Agreement by Seller's
Board of Directors in a manner consistent with the Iowa
Business Corporation Act.
(c) The execution of the Covenant not to Compete Agreement
referred to in paragraph 5(c) above.
(e) Iowa Utilities Board approval of the Transfer of the
Certificate and Seller's discontinuance of service.
(f) Release of any and all liens against the Assets.
(g) Buyer shall have been furnished with a certificate executed by
the President and Secretary of Seller dated as of the Closing
restating and reconfirming as of the date of Closing all
Seller's warranties and representations set forth in this
Agreement and otherwise certifying the fulfillment of the
conditions set forth in Paragraphs (a) and (b) hereof.
(h) No suit or action by any party nor any investigation, inquiry
or proceeding by any governmental authority nor any legal or
administrative proceeding shall have been instituted or
threatened on or before the Closing which:
(i) questions the validity or legality of any transaction
contemplated hereby or
(ii) seeks to enjoin any transaction contemplated hereby
or
(iii) seeks material damages on account of the consummation
of any transaction contemplated hereby.
(i) Written consent of US West to the assignment of the following
agreements from Seller to Buyer:
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(1) "U S West intrastate Network Service Master
Agreement Between Total Communication Service, Inc.
and U S West Communications, Inc." dated October
6, 1994; and
(2) "Settlement Agreement" between U S West
Communications, Inc. and Total Communication
Services, Inc. dated April 30, 1996.
Such consent shall state that U S West will honor the Iowa
Utility Board's approval of Seller's request to discontinue
service, and specifically acknowledge the transition of
Seller's customers to Buyer's network and billing system.
(j) Approval of any necessary governmental authorities, including,
but not limited to, the Iowa Utilities Board, the Federal
Trade Commission and the United States Department of Justice.
The cost and expense of obtaining such approval (except for
the cost and expense of obtaining the transfer of the
Certificate) shall be paid by Buyer.
In the event that any of the conditions set forth in this Paragraph 8
have not been fulfilled as of the Closing, Buyer, may, at its option, by
written notice to Seller render its obligations hereunder null and void, and
thereupon this Agreement shall be of no further force or effect whatsoever. By
proceeding with the Closing, Buyer shall be conclusively deemed to have
accepted or waived fulfillment of all of said conditions, but shall not be
deemed to have waived the requirement that Seller's representations and
warranties shall survive the Closing.
9. ADDITIONAL REPRESENTATIONS OF SELLER. Seller further
represents that it will not, between the date of this Agreement and the
Closing, except with the prior written consent of Buyer, which consent will not
be unreasonably withheld:
(a) Change materially or adversely the general character of the
Assets.
(b) Create, incur or permit any mortgage, pledge, lien, charge or
encumbrance of any kind on the Assets now owned or hereafter
acquired.
(c) Enter into, engage in, or become a party to, directly or
indirectly, any transaction with respect to the Assets other
than in the ordinary course of business.
(d) Perform or omit to perform any act, which act or omission
would cause any of Seller's warranties and representations in
this Agreement to be untrue if made as of the Closing.
(e) Seller further represents that between the date of this
Agreement and the Closing that it will:
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(f) Give to Buyer and its representatives full access to all of
the properties, contracts, records, books, and accounts
relating to the Assets and furnish to Buyer and its said
representatives such information relative to the Assets as
they shall at any time, or from time to time, reasonably
request.
(g) Use its best efforts to continue to operate the business with
respect to the Assets in the ordinary course and maintain the
goodwill of each of Seller's customers.
(h) Maintain its books and records in the usual, regular and
ordinary manner on a basis consistent with prior years.
(i) Use its best efforts to cause fulfillment of all of the
conditions to which the obligations of the parties hereto are
subject, if, any.
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. All of the
obligations of Seller hereunder are subject to the fulfillment of each of the
following conditions:
(a) Each and every representation and warranty of Buyer contained
in this Agreement shall be true in all respects at the
Closing.
(b) Buyer shall have performed or complied with all covenants and
conditions required by this Agreement to be performed or
complied with by it prior to or at Closing.
(c) Seller shall have been furnished with a certificate executed
by Buyer dated as of the Closing restating and reaffirming as
of the date of Closing all Buyer's warranties and
representations set forth in this Agreement and otherwise
certifying the fulfillment of the conditions set forth in
paragraphs (a) and (b) hereof.
(d) No suit or action by any party nor any investigation, inquiry
or proceeding by any governmental authority nor any legal or
administrative proceeding shall have been instituted or
threatened on or before the Closing which:
(i) questions the validity or legality of any transaction
contemplated hereby or
(ii) seeks to enjoin any transaction contemplated hereby
or
(iii) seeks material damages on account of the consummation
of any transaction contemplated hereby.
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(e) Approval of any necessary governmental authorities, including,
but not limited to, the Iowa Utilities Board, the Federal
Trade Commission and the United States Department of Justice.
The cost and expense of obtaining such approval (except for
the cost and expense of obtaining the transfer of the
Certificate) shall be paid by Buyer.
In the event that any of the conditions set forth in this Paragraph 10
have not been fulfilled as of the Closing, Seller may at its option, by
written notice to Buyer, render its obligations hereunder null and void. By
proceeding with the Closing, Seller shall be conclusively deemed to have
accepted or waived fulfillment of all of said conditions.
11. INDEMNIFICATION.
(a) Seller agrees to defend, indemnify and hold Buyer forever
harmless from and against any and all liabilities, demands, claims, actions, or
causes of action, assessments, losses, costs, damages or expenses, including
reasonable attorneys' fees, sustained or incurred by the Buyer resulting from
or arising out of or by virtue of:
(i) Any material inaccuracy in any representation or warranty made
herein by Seller or non-compliance with or breach by Seller of
any of the covenants, undertakings or obligations of this
agreement to be performed by Seller;
(ii) Any claims, liability or obligation of Seller of any kind or
nature currently existing or incurred by Seller at any time in
the future, including, but not limited to, Seller's bank debt,
trade accounts payable, accrued salary and vacation, and any
actual or contingent liabilities (known or unknown) associated
with the conduct of Seller's business arising from acts
occurring prior to or continuing after Closing, including but
not limited to commission payments and billing disputes.
(b) Buyer hereby agrees to defend, indemnify and hold Seller
forever harmless from and against any and all liabilities, claims, demands,
actions or causes of action, assessments, losses, costs, damages or expenses,
including reasonable attorneys' fees sustained or incurred by Seller resulting
from or arising out of or by virtue of
(i) any material inaccuracy in any representation or warranty
made herein by Buyer or non-compliance with or breach by
Buyer of any of the covenants of this Agreement to be
performed by Buyer;
(ii) Buyer's ownership, operation, or use of the Assets following
the Closing, excluding any claims, liability or obligation of
Seller of any kind or nature currently existing or incurred by
Seller at any time in the future, including, but not limited
to, Seller's bank debt, trade accounts payable, accrued salary
and vacation, and any actual or contingent liabilities (known
or unknown) associated with the Assets and/or conduct of
Seller's business arising from
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acts occurring prior to or continuing after Closing, including
but not limited to commission payments and billing disputes.
(c) In the event that subsequent to the Closing any claim is
asserted against a party hereto as to which such party is entitled to
indemnification hereunder, such party (the "indemnified party") shall within
ten (10) days after learning of such claim notify the party obligated to
indemnify it (the "indemnifying party") thereof in writing. The indemnifying
party shall have the right, upon written notice to the indemnified party within
ten (10) days after receipt from the indemnified party of notice of such claim,
to conduct at its expense the defense against such claim in its own name, or if
necessary in the name of the indemnified party. In the event that the
indemnifying party shall fail to give such notice, it shall be deemed to have
elected not to conduct the defense of the subject claim, and in such event the
indemnified party shall have the right to conduct such defense and to
compromise and settle the claim without prior consent of the indemnifying
party. In the event that the indemnifying party does elect to conduct the
defense of the subject claim, the identified party will cooperate with and make
available to the indemnifying party such assistance and materials as may be
reasonably requested by it, all at the expense of the indemnifying party, and
the indemnified party shall have the right at its expense to participate in the
defense, provided that the indemnified party shall have the right to compromise
and settle the claim only with the prior written consent of the indemnifying
party. Any judgment entered or settlement agreed upon in the manner provided
herein shall be binding upon the indemnifying party, and shall conclusively be
deemed to be an obligation with respect to which the indemnified party is
entitled to indemnification hereunder.
12. MISCELLANEOUS.
(a) Any notices from Buyer to Seller hereunder shall be deemed
sufficiently given upon delivery, refusal by addressee or notice to Buyer from
the Post Office that such notice is undeliverable, if such notice has been
mailed by United States registered or certified mail, postage prepaid,
addressed to:
Total Communication Services, Inc.
P.O. Box 96
204 Main Street
Van Horne, IA 52346-0096
Attn: Don Whipple
Copy to: Michael G. Kulik, Esq.
666 Walnut Street, Suite 2500
Des Moines, IA 50309
or at such other, address or addresses as Seller may from time to time specify
by notice in writing to Buyer, given in the manner provided in this paragraph.
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(b) Any notice from Seller to Buyer hereunder shall be deemed
sufficiently given upon delivery, refusal by addressee or notice to Seller
from the Post Office that such notice is undeliverable if such notice has been
mailed by United States registered or certified mail, postage prepaid,
addressed to:
McLeod Telemanagement, Inc.
Town Centre, Suite 500
221 Third Avenue S.E.
Cedar Rapids, IA 52401
ATTN: Casey Mahon, General Counsel
or at such other address or addresses as Buyer may from time to time specify by
notice in writing to Seller, given in the manner provided in this paragraph.
(c) Severability. The unenforceability or invalidity of any
provision of this Agreement shall not affect the enforceability or validity of
any other provision.
(d) Successors. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors, assigns,
heirs and personal representatives.
(e) Confidentiality. In the event that the transaction which is
the subject of this Agreement is not consummated, Buyer agrees that it will
return to Seller and Seller agrees that it will return to Buyer all records and
other documents of the other then in that party's possession and will not
itself use, or disclose, directly or indirectly, to any person any Business
Information with respect to the other party or the business learned by that
party during the period between the date hereof and termination of this
agreement. The term "Business Information" as used herein means all
information of a business or technical nature relevant to Seller's business
which is not generally known to or by those persons generally knowledgeable
about the Seller's type of business. The Seller and Buyer further agree that
all terms and conditions of the transaction contemplated by this Agreement,
including, but not limited to, the Purchase Price and other consideration,
shall remain confidential, except to the extent disclosure is required by law.
The remaining terms, conditions, and obligations of a certain Confidentiality
Agreement entered into by Seller and Buyer and dated on or about May 16, 1994,
shall survive the Closing.
(f) Entire Agreement. This agreement sets forth the entire
understanding of the parties and may be modified only by instruments signed by
both of the parties hereto. This Agreement supersedes and hereby cancels the
letter of intent dated as of August 14, 1996, by and between the parties.
(g) Counterparts. This Agreement may be executed simultaneously in
one or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
14
<PAGE> 15
(h) Expenses. Each party shall pay its own legal and accounting
costs and expenses incurred in negotiating and preparing this agreement and in
closing and carrying out the transactions contemplated by this Agreement.
(i) Governing Law. This agreement shall be construed and governed
in accordance with the laws of the State of Iowa.
(j) Headings. The subject headings of paragraphs and
subparagraphs of this agreement are included for purposes of convenience only
and shall not affect the construction or interpretation of any of its
provisions.
(k) Further assurances. Each party hereto shall cooperate, shall
take such further action and shall execute and deliver such further documents
as may be reasonably requested by any other party in order to carry out the
provisions and purposes of this Agreement, including but not limited to the
endorsement of checks received after Closing in payment of the Accounts
Receivable being purchased by Buyer.
(l) Arbitration. Any disputes relating to the interpretation of
this Agreement or the duties and obligations of either party hereunder shall be
resolved by arbitration in accordance with the rules and procedures of the
American Arbitration Association.
(m) Release of Information. Neither party shall disclose any of the
terms of the transaction contemplated by this Agreement, except as may be
required by law, and the contents of any press releases concerning the
transaction contemplated by this Agreement shall be determined by mutual
agreement of the parties.
(n) Media Inquiries. All media inquiries relating to this
Agreement and the transactions contemplated shall all be referred to Buyer and
all responses and comments shall be provided solely by Buyer, except that any
reference to Seller or information regarding Seller will be submitted to and
subject to the prior review by Seller. Seller may respond to media inquiries
relative to the transaction contemplated by this Agreement by indicating that
the Seller shall continue other lines of business and limit any further
response to Seller's other lines of business.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
TOTAL COMMUNICATION SERVICES, MCLEOD TELEMANAGEMENT, INC.
INC. ("SELLER") ("BUYER")
By: /s/ DONALD G. WHIPPLE By: /s/ STEPHEN C. GRAY
-------------------------- --------------------------
Its: Board Chairman Its: President
------------------------- -------------------------
15
<PAGE> 16
The shareholders and management of Seller listed on the attached Exhibit "B"
execute this Agreement for the limited purpose of agreeing to execute a
Non-Competition Agreement pursuant to the terms of this Agreement:
/s/ DONALD WHIPPLE /s/ CHARLES ELDRED
- --------------------------- ----------------------------
Donald Whipple Charles Eldred
/s/ JOHN BRADY /s/ DUANE ANDREW
- --------------------------- ----------------------------
John Brady Duane Andrew
/s/ BRIAN RAMMELSBERG
- --------------------------- ----------------------------
Brian Rammelsberg Michael Knight
I.S.H., INC. BENTON MARKETING GROUP, L.C.
By: By:/s/ DONALD G. WHIPPLE
------------------------ -------------------------
Its: Its: Chairman
----------------------- ------------------------
ATTACHED EXHIBITS
Exhibit A List of Assets
Exhibit B List of Parties Executing Non-Competition Agreement
Exhibit C Non-Competition Agreement
Exhibit D Non-Competition Area
16
<PAGE> 17
The shareholders and management of Seller listed on the attached Exhibit "B"
execute this Agreement for the limited purpose of agreeing to execute a
Non-Competition Agreement pursuant to the terms of this Agreement
- --------------------------- ----------------------------
Donald Whipple Charles Eldred
- --------------------------- ----------------------------
John Brady Dwayne Andrew
/s/ MICHAEL KNIGHT
- --------------------------- ----------------------------
Brian Rammelsberg Michael Knight
I.S.H., INC. BENTON MARKETING GROUP, L.C.
By: [SIG] By:
------------------------ -------------------------
Its: President Its:
----------------------- ------------------------
ATTACHED EXHIBITS
Exhibit A List of Assets
Exhibit B List of Parties Executing Non-Competition Agreement
Exhibit C Non-Competition Agreement
Exhibit D Non-Competition Area
16
<PAGE> 1
EXHIBIT 10.62
FIRST AMENDMENT TO
ASSET PURCHASE AGREEMENT
THIS AMENDMENT made and entered into this 30th day of September, 1996,
by and between TOTAL COMMUNICATION SERVICES, INC., a corporation organized and
existing under the laws of the State of Iowa, ("Seller") and MCLEOD
TELEMANAGEMENT, INC., an Iowa corporation with its principal place of business
in Cedar Rapids, Iowa ("Buyer"), is the First Amendment to that Asset Purchase
Agreement dated September 5, 1996 executed by Seller and Buyer ("Agreement"),
and is joined in by the shareholders and management of Seller listed on Exhibit
"B" to the Agreement for the limited purpose of agreeing not to compete, all as
set forth in the Agreement.
1. FIRST AMENDMENT. Buyer and Seller agree that the Closing Date
provided in Paragraph 5 of the Agreement is hereby extended from no later than
September 30, 1996 to no later than October 31, 1996. Buyer and Seller agree
to read all other dates or terms contained in the Agreement and its Exhibits A,
B, C and D and which affect the Closing Date to be modified to be consistent
with a Closing Date not later than October 31, 1996.
2. RATIFICATION. Except as modified by this First Amendment, the
Agreement is hereby ratified and confirmed and shall remain in full force and
effect according to the terms of the Agreement.
3. SIGNATURES. Buyer and Seller agree that the execution of this
Amendment may be made by facsimile signatures and facsimile signatures shall be
as binding on the respective parties as original signatures.
IN WITNESS WHEREOF, Buyer and Seller have executed this First
Amendment to Agreement effective as of the date first above written.
TOTAL COMMUNICATION SERVICES, MCLEOD TELEMANAGEMENT, INC.
INC. ("SELLER") ("BUYER")
By: /s/ DONALD WHIPPLE By: /s/ CASEY D. MAHON
----------------------------- ---------------------------
Its: Chairman Its: Senior Vice President
----------------------------- --------------------------
& General Counsel
THE SHAREHOLDERS AND MANAGEMENT OF SELLER LISTED ON EXHIBIT "B" ATTACHED TO THE
AGREEMENT FOR THE LIMITED PURPOSE OF AGREEING TO EXECUTE A NON-COMPETITION
AGREEMENT PURSUANT TO THE TERMS OF THE AGREEMENT:
/s/ DONALD WHIPPLE /s/ CHARLES ELDRED
- --------------------------------- ------------------------------
Donald Whipple Charles Eldred
<PAGE> 2
/s/ DWAYNE ANDREW
- -------------------------------- -------------------------------
John Brady Dwayne Andrew
- -------------------------------- -------------------------------
Brian Rammelsberg Michael Knight
I.S.H., INC. PENTON MARKETING GROUP, L.C.
By: By: /s/ DONALD WHIPPLE
----------------------------- ----------------------------
Its: Its: Chairman
---------------------------- ---------------------------
<PAGE> 3
- -------------------------------- -------------------------------
John Brady Dwayne Andrew
/s/ BRIAN RAMMELSBERG
- -------------------------------- -------------------------------
Brian Rammelsberg Michael Knight
I.S.H., INC. PENTON MARKETING GROUP, L.C.
By: By: /s/ DONALD WHIPPLE
----------------------------- ----------------------------
Its: Its: Chairman
---------------------------- ---------------------------
<PAGE> 4
- -------------------------------- -------------------------------
John Brady Dwayne Andrew
/s/ MICHAEL KNIGHT
- -------------------------------- -------------------------------
Brian Rammelsberg Michael Knight
I.S.H., INC. PENTON MARKETING GROUP, L.C.
By: [SIG] By: /s/ DONALD WHIPPLE
----------------------------- ----------------------------
Its: President Its: Chairman
---------------------------- ---------------------------
<PAGE> 5
/s/ JOHN BRADY
- -------------------------------- -------------------------------
John Brady Dwayne Andrew
- -------------------------------- -------------------------------
Brian Rammelsberg Michael Knight
I.S.H., INC. PENTON MARKETING GROUP, L.C.
By: By: /s/ DONALD WHIPPLE
----------------------------- ----------------------------
Its: Its: Chairman
---------------------------- ---------------------------
<PAGE> 1
EXHIBIT 10.63
MCLEOD, INC.
INCENTIVE PLAN
ARTICLE I
PLAN
1.1. PURPOSE.
The purpose of the McLeod, Inc. Incentive Plan (the "Plan")
is to provide a means whereby McLeod, Inc. (the "Company") can
(i) provide Participants with additional incentives and (ii)
reward actions which enhance the profitable growth of the
Company and its subsidiaries.
1.2. PLAN.
The Plan is a non-qualified incentive plan which does not
defer the receipt of income to retirement or past the
termination of employment. Therefore, the Plan is not and is
not intended to be an Employee Benefit Plan as defined by
ERISA Section 3.
1.3. EFFECTIVE DATE.
The Plan is effective as of September 20, 1996.
1.4. APPENDICES.
The Plan may be amplified or modified from time to time by
appendices. Each such appendix shall form a part of the Plan
and shall supersede Plan provisions in accordance with its
terms.
ARTICLE II
DEFINITIONS
2.1. DEFINITIONS.
For purposes of this Plan, the following words and phrases
have the following meanings, unless the context clearly
indicates otherwise:
a. "Account" means the account maintained by the
Administrator on behalf of a Participant under the
terms of the Plan.
<PAGE> 2
b. "Account Balance" means the value of a Participant's
Account which on any given day shall equal the total
value of all Units contributed to the Plan on behalf
of a Participant which have not previously been
distributed, and all earnings thereon.
C. "Administrator" means the Company or such other
person or persons as may be appointed from time to
time to administer the Plan.
d. "Beneficiary" means the person or persons the
Employee has designated in writing to the Company as
the Beneficiary in the event of the death of the
Participant. If the Employee has not named a
Beneficiary, then the Beneficiary shall be the
Employee's Spouse, if living and if the Spouse is not
living, then the Estate of the Employee.
e. "Board" means the Board of Directors of the Company.
f. "Effective Date" means September 20, 1996, the
effective date of the merger between McLeod Reverse
Merging Company and Telecom*USA Publishing Group,
Inc.
g. "Employee" means any employee of Telecom*USA
Publishing Group, Inc. or Telecom*USA Publishing
Company.
h. "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
i. "ISO" means the Telecom*USA Publishing Group, Inc.
and Telecom*USA Publishing Company Incentive Stock
Option Plan.
j. "ISO Agreement" means the agreements entered into by
and between Telecom*USA Publishing Group, Inc. and
Telecom*USA Publishing Company and certain of its
eligible employees and sales representatives who were
granted Options pursuant to the terms of the ISO.
k. "Operating Earnings" means operating income or loss
as determined by generally accepted accounting
principles used in the Telecom*USA Publishing Group,
Inc. ("Telecom") financial statements as of August
31, 1996, adjusted for any amortization of good will
or other intangibles created as a result of the
merger of Telecom with McLeod Reverse Merging Co.,
any costs/disbursements of the Plan and any special
items or projects as designated by the Chief
Executive Officer of Telecom and the Company.
2
<PAGE> 3
l. "Option" means a right to purchase one share of
Telecom*USA Publishing Group, Inc. common stock which
is granted pursuant to the ISO.
m. "Participant" means any employee who participates in
the Plan in accordance with the provisions of Article
III.
n. "Spouse" means the individual to whom the Employee is
legally married at the time of the Employee's death.
o. "Unit" means a unit of participation in the Plan.
2.2. CONSTRUCTION.
A pronoun or adjective in the masculine gender includes the
feminine gender, and the singular includes the plural, unless
the context clearly indicates otherwise.
ARTICLE III
PARTICIPATION
3.1. ELIGIBLE EMPLOYEES.
All Employees who held non-vested Options in the ISO on the
Effective Date are eligible to participate in the Plan on the
Effective Date. No other Employees will become eligible to
participate in the Plan.
3.2. DURATION OF PARTICIPATION.
A Participant shall remain a Participant until the earlier of:
(i) the date he receives distribution of his entire Account
Balance under the Plan, or (ii) the date his employment with
the Company terminates; provided, however, that if a
Participant terminates his employment after he vests in Units
of his Account Balance as provided in Section 5.1, but prior
to receipt of payment of such vested amounts, he shall remain
a Participant in the Plan until such payments are made as
specified in Article VI.
ARTICLE IV
CONTRIBUTIONS
4.1. UNITS.
For each non-vested Option a Participant holds on the
Effective Date, he will receive a Unit in the Plan. On the
Effective Date of the Plan, the "Unit Value" of
3
<PAGE> 4
each such Unit will equal $12.75 less the option exercise
price of the corresponding non-vested Option as specified in
the Participant's ISO Agreement. Therefore, each
Participant's Account Balance on the Effective Date will equal
the total number of Units received by such Participant
pursuant to this section 4.1 multiplied by their applicable
Unit Values.
4.2. EARNINGS.
Each Participant's Account Balance in the Plan will accrue
earnings at a rate of six percent (6%) annually; in addition,
if Telecom*USA Publishing Group, Inc. has Operating Earnings
for any calendar year, which exceed the Operating Earnings for
the Base Year, earnings will accrue on each Participant's
Account Balance at a rate of six percent (6%) plus an
"Additional Percentage." For purposes of this Section, the
Additional Percentage shall be equal to the lesser of (i) the
percentage of increase in Operating Earnings for the current
calendar year compared to the prior calendar year or (ii) the
percentage of increase in Operating Earnings for the current
calendar year compared to the "Base Calendar Year;" provided,
however, if the prior calendar year was a year in which
Operating Earnings were 0 or less, the Additional Percentage
shall be calculated per subparagraph 4.2(ii) above. For
purposes of this section the "Base Calendar Year" means the
1996 calendar year. Further, in no event, will the Additional
Percentage exceed twenty-five percent (25%) for any year.
4.3. FUNDING.
A Participant's or Beneficiary's interest in the Plan is an
unsecured claim against the general assets of the Company and
neither the Participant or Beneficiary has any right against
the Account until it has been distributed pursuant to the
terms of the Plan. All amounts credited to an Account shall
remain a general, unpledged and unrestricted asset of the
Company.
ARTICLE V
VESTING
5.1. VESTING.
Each Unit shall vest on January 1 of the year following the
year in which the corresponding Option would have vested
pursuant to the applicable ISO Agreement. The vesting
schedule for each Participant is set forth in Appendix A.
4
<PAGE> 5
5.2. FORFEITURES.
Any Participant whose employment with the Company terminates
shall forfeit all of the Units in his Account Balance in which
he is not vested as provided in Section 5.1.
ARTICLE VI
PAYMENT OF BENEFITS
6.1. TIMING AND METHOD OF DISTRIBUTION.
Distribution of each vested Unit and the earnings thereon will
be made as soon as administratively feasible after the
applicable January 1 vesting date of such Unit.
All distributions will be made to Participants or
Beneficiaries in lump-sum cash payments subject to applicable
withholding.
6.2. PAYMENT ON ACCOUNT OF DEATH.
If a Participant dies prior to receiving payment of his vested
Account Balance, distribution will be made to the
Participant's Beneficiary in accordance with the provisions of
Section 6.1.
ARTICLE VII
AMENDMENT AND TERMINATION
The Company reserves the right to terminate or amend the Plan
at any time by resolution of its Board. The Board will
determine the effective date of the amendment or termination.
ARTICLE VIII
ADMINISTRATION
The Plan shall be administered by the Company or the
Administrator appointed by the Board for this purpose. The
Administrator shall have the sole responsibility for and the
sole control of the operation and administration of the Plan,
and shall have the power and authority to take all action and
make all decisions and interpretations which may be necessary
or appropriate in order to administer the Plan. All expenses
incurred in the administration of the Plan shall be paid by
the Company.
5
<PAGE> 6
ARTICLE IX
MISCELLANEOUS
9.1. BENEFITS NOT ASSIGNABLE.
Neither the Participant nor Beneficiary may assign, transfer
or pledge the benefits under this Plan, except as otherwise
provided in Section 6.2, in the event of the Participant's
death. Any attempt to assign, transfer or pledge a
Participant's benefits under this Plan is void.
9.2. GOVERNING LAW.
This Plan shall be construed, administered, and enforced in
accordance with the laws of the State of Iowa.
9.3. PLAN NOT A CONTRACT.
The Plan shall not be deemed to be a contract between the
Company and any Employee or to be consideration or an
inducement for the employment of any Employee. No Participant
shall acquire any right to be retained in the Company's employ
by virtue of the Plan, nor, upon his dismissal or upon his
voluntary termination of employment, shall he have any right
or interest in the Plan other than as specifically provided
herein.
9.4. SUCCESSORS.
This Plan shall not be terminated by a transfer or sale of the
assets of the Company or by the merger or consolidation of the
Company into or with any other corporation or entity, but the
Plan shall be continued after such sale, merger or
consolidation and the transferee, purchaser or successor
entity shall be required as part of the sale, merger or
consolidation to agree to such continuation.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed in
its name and behalf on this 20th day of September, 1996, by its duly authorized
officer.
MCLEOD, INC.
By /s/ BLAKE O. FISHER, JR.
-----------------------------------------
Blake O. Fisher, Jr.
Chief Financial Officer and Treasurer
6
<PAGE> 1
EXHIBIT 10.64
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT is dated as of the
5th day of May, 1995, and is by and between TELECOM*USA PUBLISHING GROUP, INC.,
an Iowa corporation ("TPG"), TELECOM*USA PUBLISHING COMPANY ("TPC") and
TELECOM*USA NEIGHBORHOOD DIRECTORIES, INC. ("TND") (TPG, TPC and TND shall be
together referred to as the "Borrower"), and NORWEST BANK IOWA, NATIONAL
ASSOCIATION, a national banking association with offices located in Cedar
Rapids, Iowa (the "Bank").
RECITALS:
WHEREAS, the Borrower desires to maintain and increase a
revolving credit line in the principal amount of TWELVE MILLION DOLLARS
($12,000,000.00) (the "Credit") for working capital purposes, acquisitions,
and/or for the issuance of letters of credit; and,
WHEREAS, the Bank is willing to make the Credit available to
the Borrower subject to the provisions of this Credit Agreement; and
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements herein, the parties agree that the Credit Agreement dated as
of January 31, 1994 is hereby amended and restated as follows:
SECTION 1 Definitions
In addition to those terms defined in the above recitals, as
used herein:
1.1 "Accounts," "Contract Rights," "Equipment," "General
Intangibles," and "Inventory" shall have the same respective meanings as are
given to those terms in the Uniform Commercial Code of the State of Iowa.
1.2 "Agreement" shall mean this Credit Agreement and all
amendments and supplements hereto which may from time to time become effective
hereafter in accordance with the terms hereof.
1.3 "Banking Day" shall mean any day other than a Saturday, Sunday
or legal holiday on which banks in Cedar Rapids, Iowa are authorized or
required to be closed.
1.4 "Base Rate" shall mean the "base" or "prime" rate of interest
as announced by Norwest Bank Iowa, National Association, at its principal
office located in Des Moines, Iowa, as in effect from time to time.
1.5 "Borrowed Money" shall mean funds obtained by incurring
contractual indebtedness and shall not include trade accounts payable or money
borrowed from the Bank.
<PAGE> 2
1.6 "Closing Date" shall mean the date of this Agreement.
1.7 "Current Maturities of Long Term Debt" shall mean that portion
of all long term debt with the Bank, plus seller financing on acquisitions,
including Phone Directories Company, Inc., Utah; Metropolitan Publishing Corp.,
Missouri; the Gruenemeir noncompete debt; or any other debt properly classified
as long term debt under generally accepted accounting principles (excluding
future seller debt on acquisitions) which are due and payable in the upcoming
fiscal year.
1.8 "Current Note" shall mean the promissory note of the Borrower
in the form of Exhibit A, evidencing borrowings under Section 2.1 hereof.
1.9 "Notes" shall mean the Current Note and all Term Notes.
1.10 "Events of Default" shall mean any and all events of default
described in Section 8 hereof.
1.11 "Maturity Date" shall mean January 31, 1996.
1.12 "Permitted Liens" shall mean:
A. Liens in favor of the Bank;
B. Purchase money liens;
C. Existing liens disclosed to the Bank in
writing prior to the date of this Agreement; and,
D. Liens for taxes not delinquent or which
Borrower is contesting in good faith.
1.13 "Private Placement Debt" shall mean the existing convertible
debt of the Borrower, plus any new debt issues that are subordinated to the
Bank.
1.14 "Security Agreement" shall mean the existing Security
Agreement dated November 20. 1990, pursuant to which, among other things, TPC
has granted Bank a security interest in the collateral described in Section 4.1
hereof.
1.15 "Subsidiary" shall mean any corporation of which more than
fifty percent (50%) of the outstanding voting securities shall, at the time of
determination, be owned directly, or indirectly through one or more
intermediates, by the Borrower.
1.16 "Term Note" shall mean a promissory note of the Borrower in
the form of Exhibit B, evidencing a term loan under Section 2.3 hereof.
-2-
<PAGE> 3
1.17 "Unfinanced Capital Expenditures" shall mean all capital expenditures
except those capital expenditures financed through purchase money financing.
SECTION 2 Borrowings and Conditions of Lending
2.1 The Credit. The Bank may lend to the Borrower from time to time from
the date of this Agreement until the Maturity Date sums not to exceed TWELVE
MILLION AND NO/100 DOLLARS ($12,000,000.00) in the aggregate principal amount
at any one time outstanding. Each borrowing under this Section 2.1 will be
requested in writing or in person by an authorized officer of the Borrower, or
telephonically by any person reasonably believed by the Bank to be an
authorized officer of the Borrower. Advances under this Section 2.1 will be at
the sole discretion of the Bank. Each borrowing under this Section 2.1 will be
evidenced by a notation on the Bank's records, which shall be conclusive
evidence of such borrowing, and by the Current Note. Within the limits of the
Credit and subject to the terms and conditions hereof, the Borrower may borrow,
prepay pursuant to Section 2.4 hereof and reborrow pursuant to this Section
2.1.
A. Interest on the first $6,000,000.00 of unpaid
principal outstanding under the Current Note, less amounts
outstanding under the Term Notes, if any, shall be calculated
at an annual rate equal to the Base Rate in effect from time
to time. Interest on unpaid principal outstanding under the
Current Note in excess of $6,000,000.00, less amounts
outstanding under the Term Notes, if any, shall be calculated
at an annual rate of three-quarters of one percent (0.75%) in
excess of the Base Rate in effect from time to time. Interest
shall be calculated on the basis of the actual number of days
elapsed in a year of 360 days, and shall change as and when
the Base Rate changes.
B. Interest on the Current Note shall be payable
monthly, commencing as set forth in the Current Note, and
continuing on the same day of each succeeding month until the
Current Note is paid in full.
C. The principal of the Current Note shall be
repayable in full on the Maturity Date.
2.2 Letters of Credit. Subject to the other provisions of this
Agreement, upon delivery to the Bank of a written application for letter of
credit, the Bank will issue Letters of Credit from time to time. The face
amount of each Letter of Credit shall reduce, on a dollar-for-dollar basis, the
amount available to the Borrower under the Current Note. In no event shall the
Bank issue a Letter of Credit if, after giving effect to such issuance, the sum
of the aggregate outstanding letters of credit plus the outstanding principal
balance of the Current Note would exceed the amount available under Section
2.1. In no event shall the expiry date of any Letter of Credit be more than one
year from the date of issuance nor extend beyond a date that is 30 days prior
to the Maturity Date.
A. The Borrower shall pay the following fees
with respect to each Letter of Credit: (i) a Letter of Credit
fee equal to 1.75% of the stated amount of the letter of
credit, payable
-3-
<PAGE> 4
on or before the issuance of such letter of credit; and (ii)
all other charges customarily charged by the Bank with respect
to the letters of credit.
B. If any change in any law or regulation or in
the interpretation or implementation thereof by any court or
administrative governmental authority charged with the
administration thereof shall either (i) impose, modify or deem
applicable any reserve, special deposit or similar requirement
against letters of credit issued by, or assets held by, or
deposits in or for the account of the Bank, or (ii) impose on
the Bank any other condition regarding this Agreement or any
letter of credit, and the result of any event referred to in
the preceding clause (i) or (ii) shall be to increase the cost
to the Bank of issuing or maintaining any letter of credit
hereunder (which increase in cost shall be determined by the
Bank's reasonable allocation of the aggregate of such cost
increases resulting from such events), then, upon demand by
the Bank, the Borrower shall immediately pay to the Bank, from
time to time as specified by the Bank, additional amounts
which shall be sufficient to compensate the Bank for such
increased cost, together with interest on each such amount
from the date demanded until payment in full thereof at the
rate provided in Section 2.1.
2.3 Term Loans. To the extent that advances under the Credit are
used to finance acquisitions with a total cost of more than $1,000,000, the
Bank and the Borrower agree that such advances shall be converted to Term
Loans, such conversion to occur on the earlier of twelve months following the
closing of the acquisition or the on date of the first publication of a
directory related to such acquisition.
A. At the time of the making of each
Term Loan, the Borrower will execute and deliver a Term Note
to the Bank, in the form of Exhibit B.
B. The interest on each Term Note shall be
calculated at an annual rate equal to the Base Rate in effect
from time to time, unless the aggregate principal outstanding
under the Term Notes exceeds $6,000,000.00, in which case the
rate on all amount above $6,000,000.00 shall be equal to an
annual rate of three-quarters of one percent (0.75%) in excess
of the Base Rate in effect from time to time. Interest shall
be calculated on the basis of the actual number of days
elapsed in a year of 360 days.
C. The principal and interest of each Term
Note will be repaid in monthly installments of principal and
interest, in an amount sufficient to fully amortize the
principal outstanding over a term of five years.
D. Each Term Note delivered under this
Section 2.3 shall reduce the maximum amount available under
the Credit by the original principal amount of such Term Note.
2.4 The Borrower may at any time prepay the Notes in whole or from
time to time in part without premium or penalty.
-4-
<PAGE> 5
SECTION 3 Conditions Precedent
3.1 The Borrower shall deliver the following to the Bank on or
before the Closing Date:
A. The Current Note, duly executed by each Borrower;
B. An opinion of counsel to the Borrower as to the
perfection of the Bank's security interest and such other
matters as the Bank may request.
3.2 The Borrower acknowledges that the following documents
previously delivered to the Bank continue to be in full force and effect:
A. The Security Agreement;
B. The landlord's waiver previously delivered to the
Bank;
C. A certified copy of each of the Borrowers'
Articles of Incorporation and By-laws;
D. A certified copy of resolutions of each of the
Borrowers' board of directors authorizing the execution,
delivery and performance of this Agreement, the Note, the
Security Agreement, and each other document to be delivered
pursuant hereto;
E. A certificate of each of the Borrowers' corporate
secretary as to the incumbency and signatures of the officers
of the Borrower signing this Agreement, the Notes, the
Security Agreement, and each other document to be delivered
pursuant hereto; and,
F. Certificates of insurance, in form and substance
acceptable to Bank, indicating that Borrower is in compliance
with the covenant contained in Section 6.5 hereof.
3.3 The Bank shall not be obligated to lend hereunder on the
occasion for any borrowing unless:
A. The representations and warranties contained in
Section 5 hereof are true and accurate on and as of such date;
and,
B. No Event of Default, and no event which might
become an Event of Default after the lapse of time or the
giving of notice and the lapse of time, has occurred and is
continuing or will exist upon the disbursement of such loan.
-5-
<PAGE> 6
SECTION 4 Security
4.1 The Notes and the performance of the Borrower's additional
obligations as set forth hereunder shall be secured by the Security Agreement
granting to the Bank a first security interest in Inventory, Accounts,
Equipment, and General Intangibles, now owned or hereafter acquired.
4.2 As additional security for the prompt satisfaction of all
obligations of Borrower under the Note and Security Agreement, the Borrower
hereby assigns, transfers and sets over to the Bank all of its right, title and
interest in and to, and grants the Bank a lien on and a security interest in,
all amounts that may be owing from time to time by the Bank to the Borrower in
any capacity, including, but without limitation, any balance or share belonging
to the Borrower, of any deposit or other account with the Bank, which lien and
security interest shall be independent of any right of set-off which the Bank
may have.
4.3 The foregoing liens shall be first and prior liens except for
Permitted Liens.
4.4 At any time requested by the Bank, the Borrower shall execute
and deliver or cause to be executed and delivered to the Bank such additional
documents as the Bank may consider to be necessary or desirable to evidence or
perfect the security interests referred to in Sections 4.1 through 4.2 hereof.
SECTION 5 Representations and Warranties
To induce the Bank to enter into this Agreement, the Borrower
represents and warrants to the Bank as follows:
5.1 Each of the Borrowers is a corporation duly organized,
existing and in good standing under the laws of the State of lowa.
5.2 Each of the Borrowers is duly qualified to do business and is
in good standing in any additional jurisdictions where, on advice of legal
counsel, registration was deemed necessary.
5.3 The execution, delivery and performance of this Agreement and
the Note by each of the Borrowers are within its corporate powers, have been
duly authorized, and are not in contravention of law, or the terms of each
Borrower's Articles of Incorporation or By-Laws or of any undertaking to which
either Borrower is a party or by which it is bound.
5.4 The property of the Borrower is not subject to any lien except
Permitted Liens.
5.5 No litigation or governmental proceeding is pending or, to the
knowledge of the officers of the Borrower, threatened against the Borrower
which could have a material adverse effect on the Borrower's financial
condition or business.
-6-
<PAGE> 7
5.6 a) The present value of all benefits vested under all
"Employee Pension Benefit Plans" (as such term is defined in Section 3.2 of
ERISA) from time to time maintained by Borrower did not as of the date of the
signing of this Agreement, exceed the value of the assets of such "Employee
Benefit Plans" allocable to such vested benefits.
b) To the best of the Borrower's knowledge, no Pension Plan
from time to time maintained by Borrower or trust created thereunder, or any
trustee or administrator thereof has engaged in any "Prohibited Transaction"
(as such term is defined in Section 406 or Section 2003(a) of ERISA) which
would subject such Pension Plan or any other Pension Plan, any trust created
thereunder, or any trustee or administrator thereof, or any party dealing with
any Pension Plan or any such trust to a material tax or material penalty on
Prohibited Transactions.
c) No Pension Plan or trust created thereunder has been
terminated, and there have been no "Reportable Events" (as such term is defined
in Section 301 of ERISA) whether or not waived, since the effective date of
ERISA.
5.7 To the best of the knowledge of Borrower, there has been no
disposal, release or threatened release of any hazardous materials, as defined
by any applicable state or federal hazardous substance law, on, from, or under
any property of Borrower during the period of its ownership thereof, where such
disposal, release or threatened release could have a materially adverse effect
on the business, assets, operations or condition of Borrower, and the Borrower
has no knowledge of any presence, disposal, release or threatened release of
any hazardous materials on, from, or under any property of Borrower that may
have occurred prior to Borrower's acquisition of title thereto, which could
have a material adverse effect on the business, assets, operations or condition
of Borrower. There are no pending or threatened actions, suits,
investigations, or other proceedings, or any rulings, orders, or citations
against the Borrower or its properties under any federal or state hazardous
substance law.
5.8 All financial statements delivered to Bank by or on behalf of
Borrower, including any schedules and notes pertaining thereto, have been
prepared in accordance with generally accepted accounting principles
consistently applied, and fully and fairly present the financial condition of
the Borrower at the dates thereof and the results of operations for the periods
covered thereby, and there have been no material adverse changes in the
consolidated financial condition or business of the Borrower from February 28,
1995, to the date hereof.
SECTION 6 Affirmative Covenants
Each Borrower individually, and with respect to financial
covenants, on a consolidated basis, covenants and agrees that so long as any
indebtedness remains outstanding hereunder, unless the Bank shall otherwise
consent in writing, it will:
6.1 Pay, when due, all taxes assessed against it or its property
except to the extent and so long as contested in good faith.
-7-
<PAGE> 8
6.2 Maintain its corporate existence and comply with all laws and
regulations applicable thereto.
6.3 Furnish to the Bank:
A. Within 90 days after the end of each fiscal year
of the Borrower (i) a detailed, unqualified report of audit of
the Borrower for such fiscal year, on a consolidated basis,
including the balance sheet of the Borrower as of the end of
such fiscal year and the statements of profit and loss and
surplus of the Borrower for the fiscal year then ended,
prepared by independent certified public accountants
satisfactory to the Bank, and (ii) a certificate of such
accountants stating whether, in making their audit, they have
become aware of any Event of Default, or of any event which
might become an Event of Default after the lapse of time or
the giving of notice and the lapse of time, which has occurred
and is then continuing and, if any such event has occurred and
is continuing, specifying the nature and period of existence
thereof.
B. Within 30 days after the end of each month, (i)
the balance sheet of the Borrower, on a consolidated basis, as
of the end of such month, and (ii) the statement of profit and
loss and surplus of the Borrower, on a consolidated basis,
from the beginning of such fiscal year to the end of such
month. All of the foregoing shall be unaudited, but certified
as correct (subject to year end adjustments) by an appropriate
officer of the Borrower.
C. Within 30 days after the end of each month, a
summary listing of Borrower's Accounts Receivable certified as
correct by an appropriate officer of the Borrower.
6.4 Maintain its inventory, equipment, real estate and other
properties in good condition and repair (normal wear and tear excepted), and
pay and discharge or cause to be paid and discharged when due, the cost of
repairs to or maintenance of the same, and pay or cause to be paid all rental
or mortgage payments due on such real estate.
6.5 Cause its properties of an insurable nature to be adequately
insured by reputable and solvent insurance companies against Loss or damages
customarily insured against by persons operating similar properties, and
similarly situated, and carry such other insurance (including business
interruption insurance) as usually carried by persons engaged in the same or
similar businesses and similarly situated, with the Bank named as loss payee on
all such policies of insurance.
6.6 Keep true, complete and accurate books, records and accounts
in accordance with generally accepted accounting principles consistently
applied.
6.7 Permit any of Bank's duly authorized employees or agents the
right, at any reasonable time and from time to time, to visit and inspect the
properties of Borrower and to examine and take abstracts from its books and
records.
-8-
<PAGE> 9
6.8 Continue to conduct the same general type of business as is
now being carried on in compliance with all applicable statutes, laws, rules
and regulations.
SECTION 7 Negative Covenants
Each Borrower individually, and with respect to financial
covenants, on a consolidated basis, covenants and agrees that so long as any
indebtedness remains outstanding hereunder, unless the Bank shall otherwise
consent in writing, it will not:
7.1 Permit any lien including, without limitation, any pledge,
assignment, mortgage, title retaining contract or other type of security
interest to exist on its property, real or personal, except Permitted Liens.
7.2 Declare or pay any dividends or make any distribution on any
shares of common stock of either Borrower, and not exceeding $125,000.00 per
year on preferred stock, except dividends of TPC payable to TPG, provided that
such dividends shall not be paid by TPG to its shareholders.
7.3 Permit the redemption of any preferred stock of the Borrower,
other than 200,000 shares of preferred stock owned by Teleconnect Company.
7.4 Enter into any transaction of merger or consolidation, or
transfer, sell, assign, lease or otherwise dispose of (other than sales in the
ordinary course of business) all or a substantial part (which shall be 10% or
more) of its properties or assets, or any of its notes or accounts receivable,
or any stock, or any assets or properties necessary or desirable for the proper
conduct of its business, or change the nature of its business, or wind up,
liquidate or dissolve, or agree to do any of the foregoing.
7.5 Create, incur, assume or suffer to exist, contingently or
otherwise, indebtedness for Borrowed Money, except indebtedness disclosed to
the Bank in writing as existing at the time of execution of this Agreement.
7.6 Become or remain a guarantor or surety, or pledge its credit
or become liable in any manner (except by endorsement for deposit in the
ordinary course of business) on undertakings of another.
7.7 Purchase any telephone directory or otherwise acquire all or
substantially all of the assets of any person, firm, corporation or other
entity.
7.8 Purchase or otherwise invest in or hold securities,
non-operating real estate or other non-operating assets, except: (i) direct
obligations of the United States of America; (ii) certificates of deposits in
national or state banks with over $50,000,000.00 in assets.
-9-
<PAGE> 10
7.9 Make any loan or advance to any officer, shareholder, director
or employee of the Borrower or any subsidiary, except for temporary advances in
the ordinary course of business.
7.10 Permit its ratio of Debt less Private Placement Debt to
Tangible Net Worth plus Private Placement Debt to exceed 2.5 to 1.0 for the
fiscal year ending August 31, 1995 and each fiscal year end thereafter. "Debt"
shall mean total liabilities. "Tangible Net Worth" shall mean Net Worth
(defined below) minus the aggregate amount of the Borrower's items properly
shown as the following types of assets on its balance sheet, determined in
accordance with generally accepted accounting principles consistently applied:
(i) goodwill, patents, copyrights, mailing lists, trade names, trademarks,
servicing rights, organizational and franchise costs, bond underwriting costs,
and other like assets properly classified as intangible; (ii) leasehold
improvements; (iii) receivables, loans and other amounts due from any
shareholder, director, officer, or employee of the Borrower, and receivables,
loans and other amounts due from any other related or affiliated person,
corporation, partnership, trust, or other entity of the Borrower; and (iv) the
$500,000.00 option on Frontier Directory Company, Inc. "Net Worth" shall mean
the aggregate amount of the Borrower's items properly shown as assets on its
balance sheet minus the aggregate amount of the Borrower's items properly shown
as liabilities on its balance sheet, determined in accordance with generally
accepted accounting principles consistently applied. For the purpose of this
calculation, the preferred stock owned by Teleconnect Company will be
considered equity.
7.11 Permit its Cash Flow Coverage Ratio to be less than 1.25 to
1.0 for the fiscal year ending August 31, 1995 and each fiscal year end
thereafter. "Cash Flow Coverage Ratio" shall mean the sum of (a) net income,
(b) depreciation, (c) amortization, and (d) interest expense divided by the sum
of (i) current maturities of long-term debt, (ii) interest expense, and (iii)
Unfinanced Capital Expenditures.
7.12 Permit the aggregate amount of Borrower's expenditures for
fixed assets or leased equipment to exceed $850,000.00 during the fiscal year
ending August 31, 1995 and each fiscal year thereafter.
7.13 Permit the aggregate directors fees to exceed $25,000.00 in
any year.
7.14 Make a material change in its accounting procedures, whether
for tax purposes or otherwise, including, but not limited to making a
Subchapter S election under the United States Internal Revenue Code.
SECTION 8 Events of Default
8.1 Upon the occurrence of any of the following Events of
Default:
A. Default in any payment of interest or of principal on
either of the Notes when due, and continuance thereof for 10
calendar days;
-10-
<PAGE> 11
B. Default in the observance or performance of any other
agreement of the Borrower set forth herein or in the Security
Agreement and continuance thereof for 10 days following
written notice from the Bank except in the case of Sections
7.10 through 7.12 such period shall be 30 days;
C. Default by the Borrower in the payment of any other
indebtedness for Borrowed Money or in the observance or
performance of any term, covenant or agreement of the Borrower
in any agreement relating to any indebtedness of the Borrower,
and the holder of such indebtedness has declared the same due
prior to the date fixed for its payment under the terms
thereof;
D. Any representation or warranty made by the Borrower
herein, or in any statement or certificate furnished by the
Borrower hereunder, is untrue in any material respect; or,
E. The occurrence of any litigation or governmental
proceeding which is pending or threatened against the
Borrower, which could have a material adverse effect on the
Borrower's financial condition or business and in the
reasonable judgment of the Bank, there is reasonable grounds
for such litigation or proceeding, and which is not remedied
within a reasonable period of time after notice thereof to the
Borrower;
then, or at any time thereafter, unless such Event of Default is remedied, the
Bank or the holder of the Note may, by notice in writing to the Borrower,
terminate the Credit and the Term Loan or declare the Notes to be due and
payable, or both, whereupon the Credit and the Term Loan shall terminate
forthwith or the Notes shall immediately become due and payable, or both, as
the case may be.
8.2 Upon the occurrence of any of the following Events of Default:
The Borrower becomes insolvent or bankrupt, or makes an
appointment for the benefit of creditors or consents to the
appointment of a custodian, trustee or receiver for itself or
for the greater part of its properties; or a custodian,
trustee or receiver is appointed for the Borrower, or for the
greater part of its properties without its consent and is not
discharged within 30 days; or bankruptcy, reorganization or
liquidation proceedings are instituted by or against the
Borrower and, if instituted against it, are consented to by it
or remain undismissed for 30 days;
then the Credit and the Term Loan shall automatically terminate and the Notes
shall automatically become immediately due and payable, without notice.
SECTION 9 Miscellaneous
9.1 The provisions of this Agreement shall be in addition to those
of any guaranty, pledge or security agreement, note or other evidence of
liability held by the Bank, all of which shall be
-11-
<PAGE> 12
construed as complementary to each other. Nothing herein contained shall
prevent the Bank from enforcing any or all other notes, guaranties, pledges or
security agreements in accordance with their respective terms.
9.2 From time to time, the Borrower will execute and deliver to
the Bank such additional documents and will provide such additional information
as the Bank may reasonably require to carry out the terms of this Agreement and
be informed of the Borrower's status and affairs.
9.3 The Borrower will pay all expenses, including the reasonable
fees and expenses of legal counsel for the Bank, incurred in connection with
the preparation, administration, amendment, modification or enforcement of this
Agreement and the Security Agreement, and the collection or attempted
collection of the Notes. Notwithstanding the payment by the Borrower of the
legal expenses of the Bank, the Bank's counsel is engaged solely to represent
the Bank and does not and cannot represent the Borrower.
9.4 Any notices or consents required or permitted by this
Agreement shall be in writing and shall be deemed delivered if delivered in
person or if sent by certified mail, postage prepaid, return receipt requested,
or telegraph, as follows, unless such address is changed by written notice
hereunder:
A. If to TPG: Telecom*USA Publishing Group, Inc.
201 Third Avenue SE
Suite 500
P.O. Box 3162
Cedar Rapids, Iowa 52406-3162
Attention: Arthur L. Christoffersen
James A. Haddad
B. If to TPC: Telecom*USA Publishing Company
201 Third Avenue SE
Suite 500
P.O. Box 3162
Cedar Rapids, Iowa 52406-3162
Attention: Arthur L. Christoffersen
James A. Haddad
-12-
<PAGE> 13
C. If to TND: Telecom*USA Neighborhood
Directories, Inc
201 Third Avenue SE
Suite 500
P.O. Box 3162
Cedar Rapids, Iowa 52406-3162
Attention: Arthur L. Christoffersen
James A. Haddad
D. If to the Bank: Norwest Bank Iowa,
National Association
101 Third Avenue Southwest
Cedar Rapids, Iowa 52406
Attention: R. Troy Hansen
9.5 The substantive Laws of the State of Iowa shall govern the
construction of this Agreement and the rights and remedies of the parties
hereto.
9.6 This Agreement shall inure to the benefit of, and shall be
binding upon, the respective successors and permitted assigns of the parties
hereto. The Borrower has no right to assign any of its rights or obligations
hereunder without the prior written consent of the Bank. This Agreement, and
the documents executed and delivered pursuant hereto, constitute the entire
agreement between the parties, and may be amended only by a writing signed on
behalf of each party.
9.7 If any provision of this Agreement shall be held invalid under
any applicable Laws, such invalidity shall not affect any other provision of
this Agreement that can be given effect without the invalid provision, and, to
this end, the provisions hereof are severable.
9.8 IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT
SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE.
NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE
LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER
WRITTEN AGREEMENT.
9.9 By execution below, the Borrower acknowledges receipt of a
copy of this Agreement.
-13-
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
TELECOM*USA PUBLISHING GROUP, INC.
By: /s/ JAMES A. HADDAD
-------------------------------
James A. Haddad
Its: Treasurer
TELECOM*USA PUBLISHING COMPANY
By: /s/ JAMES A. HADDAD
--------------------------
James A. Haddad
Its: Vice President of Finance
TELECOM*USA NEIGHBORHOOD
DIRECTORIES, INC,
By: /s/ JAMES A. HADDAD
--------------------------
James A. Haddad
Its: Vice President of Finance
NORWEST BANK IOWA,
NATIONAL ASSOCIATION
By: /s/ R. TROY HANSEN
-------------------------
R. Troy Hansen
Its: Vice President
-14-
<PAGE> 1
EXHIBIT 10.65
FIRST AMENDMENT
TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT is made and entered into as of the 31st day of
January, 1996 by and between TELECOM*USA PUBLISHING GROUP, INC., an Iowa
corporation ("TPG") and TELECOM*USA PUBLISHING COMPANY ("TPC") (TPG and TPC
shall be together referred to as the "Borrower"), and NORWEST BANK IOWA,
NATIONAL ASSOCIATION, a national banking association (the "Bank").
RECITALS:
A. Borrower and the Bank have entered into an Amended and
Restated Credit Agreement dated as of May 5, 1995 (the "Credit Agreement").
B. The Bank and the Borrower now desire to convert a portion of
the Credit to a Term Loan and to modify certain provisions of the Credit
Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, Borrower and the Bank agree as follows:
1. Section 1.11 of the Credit Agreement is hereby amended to
extend the Maturity Date from January 31, 1996 to January 31, 1997.
2. Section 2.1 of the Credit Agreement is hereby amended to
reduce the maximum available amount of the Credit from $12,000,000.00 to
$9,764,000.00.
3. The Borrower and the bank agree that $2,236,000.00 currently
outstanding under the Credit shall be converted to a Term Loan effective the
date of this Amendment, pursuant to Section 2.3 of the Credit Agreement. Such
Term Loan will be evidenced by a Term Note in the form of Exhibit A to this
Amendment and shall be subject to the following additional terms and
conditions:
A. The interest on the Term Note shall be calculated at an
annual rate equal to the Base Rate in effect from time to time,
calculated on the basis of the actual number of days elapsed in a
year of 360 days.
B. The principal of the Term Note will step down quarterly in
the amount of $111,800 each quarter, commencing on April 30, 1996
and on the last day of each July, October, January, and April
thereafter. Accrued interest shall be payable monthly on the
20th day of each month, commencing on February 20, 1996. On
January 31, 2001, all remaining outstanding principal plus
accrued interest shall be payable in full.
C. The Term Note may be prepaid only if no amounts are then
outstanding under the Current Note. Following any prepayment,
amounts prepaid may be readvanced,
<PAGE> 2
on a reducing, revolving basis, subject to the quarterly
reductions in the maximum principal amount as set forth in B.
above. If the Term Note has been prepaid to less than the
maximum principal then available, no advances will be permitted
on the Current Note until the Term Note has first been readvanced
up to the maximum principal then available.
4. Section 7.11 of the Credit Agreement is hereby amended to read
as follows:
7.11 Permit its Cash Flow Coverage Ratio to be less than
1.1 to 1.0 for the fiscal year ending August 31, 1996 and each
fiscal year end thereafter. "Cash Flow Coverage Ratio" shall
mean the sum of (a) net income, (b) depreciation, (c)
amortization, and (d) interest expense divided by the sum of (i)
current maturities of long-term debt, (ii) interest expense, and
(iii) Unfinanced Capital Expenditures.
5. Section 7.12 of the Credit Agreement is hereby amended to read
as follows:
7.12 Permit the aggregate amount of Borrower's
expenditures for fixed assets or leased equipment to exceed
$1,400,000 during the fiscal year ending August 31, 1996 and each
fiscal year thereafter.
6. The Borrower hereby represents and warrants to the Bank as
follows:
A. The Credit Agreement as amended by this Amendment
remains in full force and effect.
B. The execution, delivery and performance of this
Amendment and the Term Note are within its powers, have been duly
authorized and are not in contravention of law or the terms of any
Borrower's articles of incorporation or bylaws, or of any undertaking
to which any Borrower is a party or by which it is bound.
C. All representations and warranties contained in
Section 5 of the Credit Agreement remain true and correct on the date
of this Amendment.
D. No Event of Default has occurred and is continuing,
and no event has occurred and is continuing that, with the giving of
notice or passage of time or both, would be an Event of Default.
7. Simultaneously with the execution of this First Amendment, the
Borrower shall execute and deliver to the Bank a Term Note in the form of
Exhibit A to this Amendment, and a replacement Current Note in the form of
Exhibit B to this Amendment, which Current Note shall be in renewal and
replacement of the existing Current Note.
8. Other than as set forth herein, all terms and conditions of
the Credit Agreement shall remain in full force and effect. Nothing in this
Amendment shall constitute a waiver or modification of any covenant or
provision of the Credit Agreement or the related documents
<PAGE> 3
unless expressly waived or modified herein. The Bank shall retain its right to
enforce the terms and conditions of the Credit Agreement and the related
documents.
9. Capitalized terms not defined herein shall have the meaning
assigned to such term in the Credit Agreement.
10. The Bank and the Borrower acknowledge that Telecom*USA
Neighborhood Directories, Inc. is no longer a party to the Credit Agreement.
IN WITNESS WHEREOF, Borrower and Bank have executed this Amendment as
of the day and year first written above.
TELECOM*USA PUBLISHING GROUP, INC.
By: /s/ JAMES A. HADDAD
------------------------
James A. Haddad
Its: Treasurer
TELECOM*USA PUBLISHING COMPANY
By: /s/ JAMES A. HADDAD
------------------------
James A. Haddad
Its: Vice President of Finance
NORWEST BANK IOWA,
NATIONAL ASSOCIATION
By: /s/ R. TROY HANSEN
------------------------
R. Troy Hansen
Its: Vice President
<PAGE> 4
- --------------------------------------------------------------------------------
[NORWEST BANKS LOGO] Commercial Note
EXHIBIT A
Telecom*USA Publishing Group, Inc.
- --------------------------------------------------------------------------------
NAME Telecom*USA Publishing Company DATE
[INITIALS] January 31, 1996
- --------------------------------------------------------------------------------
Choose one of the following
/ / On the earlier of demand or ______________, 19 _______; or /X/ on January
31, 2001; or / / ___ days after date, the resulting choice being the "Due
Date," which also means the date, if any, on which this note is accelerated.
For value received, the undersigned (if more than one, jointly, and severally)
promise(s) to pay to the order of Norwest Bank Iowa, National Association (the
"Bank") at P O Box 1887 Cedar Rapids, IA 52406 **See Attached Exhibit
or at any other place designated at any time by the holder of this Note, in
lawful money of the United States of America, the principal sum of Two
Million Two Hundred Thirty-Six Thousand ------------- and no/100 Dollars
($2,236,000.00**), or as much as has been disbursed and remains outstanding on
this Note at the Due Date, as is shown by the Bank's records, together with
interest (calculated on the basis of actual days elapsed in a year of 360 days)
on the unpaid principal of this Note from the Date until this Note is fully
paid, at the following rate:
(Choose one of the following):
/ / an annual rate of ________ % (the "Note Rate").
/ / an annual rate equal to __________ % in excess of the Base Rate, each
change in the interest rate to become effective on the day the
corresponding change in the Base Rate becomes effective (the "Note
Rate").
/X/ an annual rate equal to 00.00% in excess of the Base Rate, with an
initial rate to be tied to the Base Rate in effect on the date this
Note is signed and the rate for each month thereafter to be tied to
the Base Rate in effect on the ______ day of the immediately
preceeding month (the "Note Rate").
/ / an annual rate _________________________ (the "Note Rate").
"Base Rate" means the rate of interest established by Norwest Bank Iowa, N.A.
from time to time as its "base" or "prime" rate or "_________________________"
rate.
If this / / is checked, the Note Rate shall never be less than ____% and shall
never be greater than ____%.
After the Due Date, the unpaid principal and interest on this Note shall bear
interest until paid at the rate of _____% per annum in excess of the Note Rate
in effect on the Due Date except that, if the Bank is located in Minnesota and
the original principal amount of this Note is less than $100,000.00, or the
Bank is located in North Dakota, this Note shall bear the same interest rate
after its Due Date as was in effect on the Due Date. The interest rate on this
Note shall never exceed the maximum rate permitted by law.
/ / Interest shall be payable on the Due Date.
/X/ Interest shall be payable monthly, commencing February 20, 1996, and on
the same day of each succeeding month, and on the Due Date.
If this / / is checked, if any payment required by this Note is not paid within
___ days after the payment is due, Borrower will make an additional payment to
the Bank of (Choose one) / / $____________________; or / /____________% of the
amount of the late payment (the "Late Fee").
The undersigned may, at any time, prepay this Note, in whole or from time to
time in part: (Choose one)
/x/ without premium or penalty, upon written or telephonic notice to the
Bank; or,
/ / provided that, upon prepayment, the Bank will be entitled to receive a
prepayment penalty equal to ________% of the principal amount to be
prepaid.
/ / In addition, the undersigned shall pay to the Bank a nonrefundable: (Mark
the applicable fee type(s)) / / commitment fee,
/ / facility fee, / / documentation fee, / / application and loan
processing fee of (Choose one) / / $ _________________;
/ / _________% of the principal amount of this Note, at the time this Note
is signed.
(Check if applicable)
/X/ The undersigned may borrow, prepay and reborrow under this Note until the
Due Date within the limits of this Note and subject to the terms and
conditions in any other agreement between the undersigned and the Bank.
/ / Any advances made under this Note shall be at the sole discretion of the
Bank and the Bank is not obligated to make any advance.
This Note is Secured by: / / a Mortgage dated ___________, 19 ______.
/ / a Mortgage dated ___________, 19 ______ and other
collateral.
/X/ This Note is given in substitution and replacement for (and not in payment
of) a previous Note of the undersigned, payable to the Bank, dated May 5, 1995.
This Note / / evidences indebtedness in addition to the indebtedness evidenced
by the previous Note, or /X/ evidences only a portion of the debt evidenced by
the previous Note.
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT AND ANY RELATED
DOCUMENTS SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE
ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THE WRITTEN
CONTRACT(S) MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THE
AGREEMENT(S) ONLY BY ANOTHER WRITTEN AGREEMENT. THIS NOTICE ALSO APPLIES TO
ANY OTHER CREDIT AGREEMENTS (EXCEPT CONSUMER LOANS OR OTHER EXEMPT
TRANSACTIONS) NOW IN EFFECT BETWEEN YOU AND THE LENDER.
The undersigned acknowledges receipt of a copy of this document.
THE REVERSE SIDE OF THIS NOTE CONTAINS IMPORTANT, ADDITIONAL PROVISIONS, ALL OF
WHICH ARE MADE A PART HEREOF.
The proceeds of this loan will be used for business or agricultural purposes
only.
- --------------------------------------------------------------------------------
NAME BY:
Telecom*USA Publishing Group, Inc.
- --------------------------------------------------------------------------------
ITS: James A Haddad, Treasurer
Telecom*USA Publishing Company
- --------------------------------------------------------------------------------
STREET ADDRESS BY
P O Box 3162
- --------------------------------------------------------------------------------
ITS: James A Haddad, V P of Finance
[INITIALS]
- --------------------------------------------------------------------------------
CITY, STATE AND ZIP
Cedar Rapids, IA 52406
- --------------------------------------------------------------------------------
<PAGE> 5
EXHIBIT A
This exhibit is hereby made a part of the commercial note dated January 31,
1996 in the amount of $2,236,000.00 executed by Telecom *USA Publishing Group,
Inc et al.
The aggregate principal outstanding shall not exceed $2,236,000.00 during the
period commencing January 31, 1996 thru April 30, 1996. Thereafter, the
maximum available balance shall be reduced automatically, without further
notice to the Borrower, on the last day of each quarter by $111,800.00
beginning on April 30, 1996. Principal payments are required on the date of
each step-down (last day of quarter) to reduce the amount outstanding to the
maximum available as shown on the schedule below. Amounts may be borrowed
and/or reborrowed up to the maximum available balance. On January 31, 2001, all
outstanding principal and unpaid accrued interest shall be immediately due and
payable in full.
<TABLE>
<CAPTION>
DATE MAXIMUM DATE MAXIMUM
AVAILABLE AVAILABLE
BALANCE BALANCE
<S> <C> <C> <C>
4-30-96 $2,124,200.00 1-31-99 $894,400.00
7-31-96 $2,012,400.00 4-30-99 $782,600.00
10-31-96 $1,900,600.00 7-31-99 $670,800.00
1-31-97 $1,788,800.00 10-31-99 $559,000.00
4-30-97 $1,677,000.00 1-31-00 $447,200.00
7-31-97 $1,565,200.00 4-30-00 $335,400.00
10-31-97 $1,453,400.00 7-31-00 $223,600.00
1-31-98 $1,341,600.00 10-31-00 $111,800.00
4-30-98 $1,229,800.00 1-31-01 -00-
7-31-98 $1,118,000.00
10-31-98 $1,006,200.00
</TABLE>
Telecom *USA Publishing Group, Inc. et al
By /s/ JAMES A HADDAD
--------------------------------------
James A Haddad Treasurer & VP of Finance
<PAGE> 6
- --------------------------------------------------------------------------------
[NORWEST BANKS LOGO] Commercial Note
EXHIBIT B
Telecom*USA Publishing Group, Inc.
- --------------------------------------------------------------------------------
NAME Telecom*USA Publishing Company DATE
[INITIALS] January 31, 1996
- --------------------------------------------------------------------------------
Choose one of the following
/ / On the earlier of demand or ______________, 19 _______; or /X/ on
January 31, 1997; or / / ___ days after date, the resulting choice being the
"Due Date," which also means the date, if any, on which this note is
accelerated. For value received, the undersigned (if more than one, jointly,
and severally) promise(s) to pay to the order of Norwest Bank Iowa, National
Association (the "Bank") at P O Box 1887 Cedar Rapids, IA 52406 or at any
other place designated at any time by the holder of this Note, in lawful money
of the United States of America, the principal sum of Nine Million Seven
Hundred Sixty-Four Thousand ------------- and no/100 Dollars ($9,764,000.00),
or as much as has been disbursed and remains outstanding on this Note at the
Due Date, as is shown by the Bank's records, together with interest (calculated
on the basis of actual days elapsed in a year of 360 days) on the unpaid
principal of this Note from the Date until this Note is fully paid, at the
following rate:
(Choose one of the following):
/X/ an annual rate of **% (the "Note Rate"). See Attached Addendum
/ / an annual rate equal to __________ % in excess of the Base Rate, each
change in the interest rate to become effective on the day the
corresponding change in the Base Rate becomes effective (the "Note
Rate").
/ / an annual rate equal to _____% in excess of the Base Rate, with an
initial rate to be tied to the Base Rate in effect on the date this
Note is signed and the rate for each month thereafter to be tied to
the Base Rate in effect on the ______ day of the immediately
preceeding month (the "Note Rate").
/ / an annual rate _________________________ (the "Note Rate").
"Base Rate" means the rate of interest established by Norwest Bank Iowa, N.A.
from time to time as its "base" or "prime" rate or "_________________________"
rate.
If this / / is checked, the Note Rate shall never be less than ____% and shall
never be greater than ____%.
After the Due Date, the unpaid principal and interest on this Note shall bear
interest until paid at the rate of _____% per annum in excess of the Note Rate
in effect on the Due Date except that, if the Bank is located in Minnesota and
the original principal amount of this Note is less than $100,000.00, or the
Bank is located in North Dakota, this Note shall bear the same interest rate
after its Due Date as was in effect on the Due Date. The interest rate on this
Note shall never exceed the maximum rate permitted by law.
/ / Interest shall be payable on the Due Date.
/X/ Interest shall be payable monthly, commencing February 20, 1996, and on
the same day of each succeeding month, and on the Due Date.
If this / / is checked, if any payment required by this Note is not paid within
___ days after the payment is due, Borrower will make an additional payment to
the Bank of (Choose one) / / $____________________; or / /____________% of the
amount of the late payment (the "Late Fee").
The undersigned may, at any time, prepay this Note, in whole or from time to
time in part: (Choose one)
/x/ without premium or penalty, upon written or telephonic notice to the
Bank; or,
/ / provided that, upon prepayment, the Bank will be entitled to receive a
prepayment penalty equal to ________% of the principal amount to be
prepaid.
/ / In addition, the undersigned shall pay to the Bank a nonrefundable: (Mark
the applicable fee type(s)) / / commitment fee,
/ / facility fee, / / documentation fee, / / application and loan
processing fee of (Choose one) / / $ _________________;
/ / _________% of the principal amount of this Note, at the time this Note
is signed.
(Check if applicable)
/ / The undersigned may borrow, prepay and reborrow under this Note until the
Due Date within the limits of this Note and subject to the terms and
conditions in any other agreement between the undersigned and the Bank.
/X/ Any advances made under this Note shall be at the sole discretion of the
Bank and the Bank is not obligated to make any advance.
This Note is Secured by: / / a Mortgage dated ___________, 19 ______.
/ / a Mortgage dated ___________, 19 ______ and other
collateral.
/X/ This Note is given in substitution and replacement for (and not in payment
of) a previous Note of the undersigned, payable to the Bank, dated May 5, 1995.
This Note / / evidences indebtedness in addition to the indebtedness evidenced
by the previous Note, or /X/ evidences only a portion of the debt evidenced by
the previous Note.
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT AND ANY RELATED
DOCUMENTS SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE
ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THE WRITTEN
CONTRACT(S) MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THE
AGREEMENT(S) ONLY BY ANOTHER WRITTEN AGREEMENT. THIS NOTICE ALSO APPLIES TO
ANY OTHER CREDIT AGREEMENTS (EXCEPT CONSUMER LOANS OR OTHER EXEMPT
TRANSACTIONS) NOW IN EFFECT BETWEEN YOU AND THE LENDER.
The undersigned acknowledges receipt of a copy of this document.
THE REVERSE SIDE OF THIS NOTE CONTAINS IMPORTANT, ADDITIONAL PROVISIONS, ALL OF
WHICH ARE MADE A PART HEREOF.
The proceeds of this loan will be used for business or agricultural purposes
only.
- --------------------------------------------------------------------------------
NAME BY:
Telecom*USA Publishing Group, Inc. /s/ JAMES A HADDAD
- --------------------------------------------------------------------------------
ITS: James A Haddad, Treasurer
Telecom*USA Publishing Company
- --------------------------------------------------------------------------------
STREET ADDRESS BY
P O Box 3162 /s/ JAMES A HADDAD
- --------------------------------------------------------------------------------
ITS: James A Haddad, V P of Finance
- --------------------------------------------------------------------------------
CITY, STATE AND ZIP
Cedar Rapids, IA 52406
- --------------------------------------------------------------------------------
<PAGE> 7
EXHIBIT B
ADDENDUM TO COMMERCIAL NOTE DATED JANUARY 31, 1996
Interest on the first $6,000,000.00 of unpaid principal outstanding under the
Current Note, less amounts outstanding under the Term Note, if any, shall be
calculated at an annual rate equal to the Base Rate in effect from time to
time. Interest on unpaid principal outstanding under the Current Note in
excess of $6,000,000.00, less amounts outstanding under the Term Notes, if any,
shall be calculated at an annual rate of three-quarters (0.75%) in excess of
the Base Rate in effect from time to time.
Telecom*USA Publishing Group, Inc.
By /s/ JAMES A HADDAD
----------------------------------
James A Haddad, Treasurer
Telecom*USA Publishing Company
By /s/ JAMES A HADDAD
----------------------------------
James A Haddad, V P of Finance
Date January 31, 1996
----------------
<PAGE> 1
EXHIBIT 10.66
RYAN PROPERTIES, INC., A MINNESOTA CORPORATION
Landlord
and
RUFFALO, CODY & ASSOCIATES, INC., AN IOWA CORPORATION
Tenant
----------------------
LEASE AGREEMENT
----------------------
Dated as of September 26, 1994
------------------
<PAGE> 2
TABLE OF CONTENTS
SECTION PAGE
1. Leased Property; Fixed Term.............................................1
2. Basic Rent, etc.........................................................2
2.1. Basic Rent.........................................................2
2.2. Basic Rent; Manner of Payment......................................2
3. Additional Rent.........................................................2
4. Net Lease; No Counterclaim, Abatement, etc..............................2
5. Condition and Use of Property...........................................2
6. Maintenance and Repairs...............................................2-3
7. Alterations and Additions, etc..........................................3
8. Tenant's Equipment......................................................3
9. Utility Services........................................................3
10. No Claims Against Landlord, etc.........................................3
11. Indemnification by Tenant.............................................3-4
12. Inspection, etc.........................................................4
13. Payment of Taxes, etc.................................................4-5
14. Compliance with Legal and Insurance Requirements, Instruments...........5
15. Liens, Easements, etc...................................................5
16. Permitted Contests....................................................5-6
17. Insurance.............................................................6-7
17.1. Risks to be Insured...............................................6
17.2. Policy Provisions.................................................7
17.3. Delivery of Policies, Insurance Certificates......................7
i
<PAGE> 3
18. Hazardous Materials...................................................7-8
19. Damage to or Destruction of Property....................................8
19.1. Tenant to Give Notice.............................................8
19.2. Restoration.......................................................8
19.3. Total Destruction.................................................8
19.4. Application of Insurance Proceeds...............................8-9
20. Taking of Property.................................................. 9-10
20.1. Tenant to Give Notice; Assignment of Awards, etc..................9
20.2. Partial Taking....................................................9
20.3. Total Taking...................................................9-10
20.4. Application of Awards, etc.......................................10
21. Certificate as to No Event of Default, etc.; Financial Statements...11-12
21.1. Certification of Tenant as to No Event of Default, etc...........11
21.2. Certificate of Landlord..........................................11
21.3. Financial Statements..........................................11-12
22. Right of Landlord to Perform Tenant's Covenants, etc...................12
23. Assignments, Subleases, Mortgages, etc.................................12
23.1. Assignments, Subleases, etc. by Tenant...........................12
23.2. Assignments, Mortgages, etc. by Landlord......................12-13
24. Events of Default; Termination......................................13-14
25. Repossession, etc......................................................14
26. Survival of Tenant's Obligations; Damages...........................14-15
26.1. Termination of Lease Not to Relieve Tenant of Obligations.....14-15
26.2. Current Damages..................................................15
26.3. Final Damages....................................................15
27. Tenant's Waiver of Statutory Rights....................................15
28. No Waiver by Landlord..................................................16
29. Remedies Cumulative....................................................16
30. Modification, Acceptance of Surrender..................................16
ii
<PAGE> 4
31. End of Lease Term......................................................16
32. Notices, etc........................................................16-17
33. Short Form or Memorandum...............................................17
34. Quiet Enjoyment........................................................17
35. Miscellaneous..........................................................18
36. Definitions.........................................................18-21
Exhibit A: Description of Property;, Permitted Exceptions
Exhibit B: Plans and Specifications
Exhibit C: Basic Rent Schedule
Exhibit D: Enviromental Survey
iii
<PAGE> 5
LEASE AGREEMENT
THIS LEASE AGREEMENT (the "Lease"), dated as of September 26th, 1994,
between Ryan Properties, Inc., a Minnesota Corporation, (hereinafter referred
to as "Landlord"), and Ruffalo, Cody and Associates, Inc., an Iowa Corporation
(hereinafter referred to as "Tenant").
WITNESSETH THAT:
In consideration of the mutual agreements contained in this Lease,
Landlord and Tenant agree with each other as follows:
1. Leased Property, Term.
1.1 Leased Property, Fixed Term. Upon and subject to the
conditions and limitations set forth below, Landlord leases to Tenant, and
Tenant leases, and rents from Landlord, the following property ("Property")
described in Exhibit A attached hereto and made a part hereof, together with an
existing 32,565 square foot building to be renovated by Landlord and all
buildings, improvements and structures now or hereafter located on the Property
(the "Improvements") subject, however, to such of the Permitted Exceptions set
forth on Exhibit A hereto.
The Improvements shall be constructed by Landlord in a good and
workmanlike manner and in accordance with the plans and specifications for the
same identified on Exhibit B attached hereto and shall comply with all Legal
Requirements. Landlord and Tenant have each signed a set of such plans and
specifications identified on Exhibit B. The improvments are anticipated to be
completed by April 1st, 1995.
Landlord further agrees to provide during the first five (5) years
of the Fixed Term, parking spaces for the benefit of Tenant's employees,
customers and visitors. Such parking spaces shall be located off the Property
at a location reasonably acceptable to Tenant within four blocks of the
Property The monthly rate shall be TWENTY and no/100 Dollars ($20.00) per
parking space. Tenant's use of such parking spaces shall be subject to such
rules and regulations as may from time to time be put into effect by the
owner/operator of the parking facility.
TO HAVE AND TO HOLD the Property for a fixed term (the "Fixed Term")
commencing on the 1st day of April 1995, and expiring at midnight on the last
day of the calendar month which is 120 full calendar months following the
commencement of the Fixed Term, unless this Lease shall sooner terminate as
provided herein.
1
<PAGE> 6
The blank with respect to the commencement of the term shall be
completed as follows: A date thirty (30) days after Landlord or Landlord's
architect issues a Certificate of Substantial Completion of Landlord's work or
the date on which Tenant actually opens for business, whichever is earlier.
Landlord shall have the right to insert the commencement date as so determined
or the said date may be set by amendment hereto if requested by either party.
In the event a dispute occurs as to whether or not the Landlord's work in
construction of the Improvements is substantially completed, the certificate of
Landlord's architect that the Improvements are so completed shall be conclusive
and binding upon the parties hereto.
1.2 Extended Term. Tenant shall have the option to extend the term of
this Lease with respect to the entire Property for two (2) additional terms of
five (5) years each, collectively, the "Extended Terms", and individually, an
"Extended Term"; provided, however, that no Event of Default shall have
occurred and be continuing at the time of any such exercise. The Extended Term
shall be upon the same terms as provided in this Lease for the Fixed Term,
except for the Basic Rent which shall be as set forth on Exhibit C for the
Extended Term. The Tenant shall exercise to Landlord not less than 365 days
prior to the expiration of the Fixed Term or the then current Extended Term, as
the case may be. Should Tenant fail to exercise any option to extend the term
of this Lease within the time provided in this Section 2, all of the Tenant's
rights further to extend the term hereof shall expire.
2. Basic Rent.
2.1 Basic Rent. Net basic rental ("Basic Rent") shall be payable
during the Fixed Term in the amounts and at the times specified on Exhibit C
hereto.
2.2 Basic Rent Net; Manner of Payment. The Basic Rent and all other
sums payable to Landlord hereunder shall be payable in such currency of the
United States of America as at time of payment shall be legal tender for the
payment of public and private debts and shall be paid to Landlord at Landlord's
address set forth above or to such other person or address as Landlord from
time to time may designate. The Basic Rent shall be net to Landlord so that
this Lease shall yield to Landlord the full amount of the installments of
Basic Rent throughout the term of this Lease without deduction or setoff.
3. Additional Rent. Tenant will also pay, from time to time as provided
in this Lease or on demand of Landlord, as additional rent (the "Additional
Rent") (a) all other amounts, liabilities and obligations that Tenant
herein assumes or agrees to pay, and (b) interest at the rate of fifteen per
cent (15%) per annum on such of the foregoing amounts, liabilities and
obligations as are payable by Tenant that are not paid when due and that
Landlord shall have paid on behalf of Tenant, from the date of payment thereof
by Landlord until paid by Tenant and on all overdue installments of Basic Rent
and other sums payable under this Lease, from the due date thereof until
payment.
4. Net Lease; No Counterclaim, Abatement, etc. This Lease is a net
lease, and the Basic Rent, Additional Rent and all other sums payable hereunder
shall be paid without setoff or deduction. Except as otherwise expressly
provided in this Lease, Tenant shall at all times remain bound by this
2
<PAGE> 7
Lease and shall at all times remain obligated to pay the stated rentals
required by this Lease. Except as specifically set forth herein to the
contrary, Tenant shall in no event have any right to terminate this Lease.
5. Condition and Use of Property. Tenant upon acceptance of
possession acknowledges that Tenant will be fully familiar with the physical
condition of the Property and has received the same in good and clean order and
condition, and that the Property complies in all respects with all requirements
of this Lease. Tenant may use the Property for any office purpose and will not
do or permit any act or thing that is contrary to any Legal Requirement or
Insurance Requirement, or that may impair the value or utility of the Property
or any part thereof, or that constitutes a public or private nuisance or waste
of the Property or any part thereof.
6. Maintenance and Repairs. Tenant at its expense will keep the
Property and the adjoining sidewalks, curbs, and all means of access to the
Property in good and clean order and condition, subject to ordinary wear and
tear, and will promptly, at its own expense, make all necessary or appropriate
repairs, replacements and renewals thereof, whether interior or exterior,
ordinary or extraordinary, foreseen or unforeseen, provided however, Landlord
shall maintain footings, foundations, exterior walls, and roofing systems. All
repairs, replacements and renewals shall be at least equal in quality, utility
and class to the original condition of the Property. Tenant waives any right
created by any law now or hereafter in force to make repairs to the Property at
Landlord's expense. Landlord shall have no obligation to repair, rebuild or
maintain the Property.
7. Alterations and Additions, etc. Tenant at its expense may make
reasonable alterations of and additions to the Improvements or any part
thereof, provided, however, that any such alteration or addition (a) shall not
change the general character of the Improvements located on the Property, or
reduce the fair market value of any such Improvements immediately before such
alteration or addition (assuming the Property was then being maintained in
accordance with the terms of this Lease), (b) shall be effected with due
diligence, in a good and workmanlike manner and in compliance with all Legal
Requirements, Insurance Requirements and the provisions of Section 14 hereof,
and (c) shall be fully paid for by Tenant upon its construction or installation
on the Property. All alterations of and additions to the Improvements, other
than Tenant's Equipment, shall immediately become the property of Landlord and
shall constitute a part of the Property.
8. Tenants Equipment. All Tenant's Equipment shall be the
property of Tenant. Tenant will immediately repair at its expense all damage
to the Property caused by any removal of Tenant's Equipment therefrom, whether
effected by Tenant or Landlord.
9. Utility Services. Tenant will pay or cause to be paid all
charges of any nature for utilities, communications and other services rendered
at the Property.
10. No Claims Against Landlord, etc. Nothing contained in this
Lease shall constitute any consent or request by Landlord or any Mortgagee,
express or implied, for the performance of any labor or services or the
furnishing of any materials or other property in respect of the Property or any
part
3
<PAGE> 8
thereof, nor as giving Tenant any right, power or authority to contract for or
permit the performance of any labor or services or the furnishing of any
materials or other property in such fashion as would permit the making of any
claim against Landlord or any Mortgagee in respect thereof.
11. Indemnification by Tenant. Tenant will (to the full extent permitted by
applicable law) protect, indemnify and save harmless Landlord, any beneficiary
of Landlord, any officer, director or shareholder of any of the foregoing and
Mortgagee of the Property (each an "Indemnified Party") from and against all
liabilities, obligations, claims, damages, penalties, causes of action, costs
and expenses (including, without limitation, reasonable attorneys' fees and
expenses) imposed upon or incurred by or asserted against any Indemnified Party
or against the Property or any interest of such Indemnified Party therein by
reason of the occurrence or existence of any of the following, during the
term of this Lease, unless caused solely by the willful misconduct or
negligence of such Indemnified Party: (1) any accident, injury to or death of
any person or persons or loss of or damage to property occurring on or about
the Property or any part thereof or the adjoining sidewalks, curbs, streets or
ways, (b) any use, non-use or condition of the Property or any part thereof, or
of the adjoining sidewalks, curbs, streets or ways, including, without
limitation, claims or penalties arising from violation of any Legal Requirement
or Insurance Requirement, any claim as to which the applicable insurance is
inadequate, and any claim in respect of any adverse environmental impact or
effect which is due solely to the Tenant's conduct or operation after the
commencement of the Lease and is not the result of any pre-exisiting condition
which is later discovered, (c) any failure on the part of Tenant to perform or
comply with any of the terms of this Lease, (d) any negligent or tortuous act
on the part of Tenant or any of its agents, contractors, servants, employees,
licensees or invitees, or (e) any negligent or tortious act on the part of any
assignee or sublessee of Tenant, or of any agents, contractors, servants,
employees, licensees or invitees of any assignee or sublessee of Tenant. Any
Indemnified Party seeking indemnification hereunder shall give notice to Tenant
of the existence of any claim giving rise to the need for such indemnification
within thirty (30) Business Days after the date on which such Indemnified Party
shall have obtained actual knowledge of such claim; provided, however, that no
Indemnified Party shall have any such obligation with respect to any claim
whose existence is actually or constructively known to Tenant. In case any
action, suit or proceeding is brought against any Indemnified Party by reason
of any occurrence referred to above, Tenant, upon the request of such
Indemnified Party, will at Tenant's expense resist and defend such action,
suit or proceeding or cause the same to be resisted and defended by counsel
designated by Tenant and reasonably acceptable to such Indemnified Party.
12. Inspection, etc. Landlord and its authorized representatives may enter
the Property at all reasonable times (provided that no such entry shall be made
without reasonable advance notice or shall unreasonably interfere with the
conduct of Tenant's business) for the purpose of (a) inspecting the same, (b)
exhibiting the Property for the purpose of sale or mortgage or other financing,
(c) at any time within six (6) months prior to the expiration of the term of
this Lease, exhibiting the Property for the purpose of leasing same, and (d) at
any time after Tenant shall have abandoned the Property, displaying thereon
advertisements for sale or letting. Landlord shall not have any duty to make any
such inspection and shall not incur any liability or obligation for not making
any such inspection. No such entry shall constitute an eviction of Tenant.
4
<PAGE> 9
13. Payment of Taxes, etc. Subject to the provisions of Section 16
hereof, Tenant will pay, promptly as and when the same shall become due and
payable all taxes (including, without limitation, real estate taxes, personal
or other property taxes and all sales, value added, use and similar taxes),
assessments (including, without limitation, all assessments for public
improvements or benefits, whether or not commenced or completed prior to the
date hereof and whether or not to be completed within the term hereof)
installments of which become due during the term hereof, or in any case a
prorate share thereof, water, sewer or other rents, rates and charges, excises,
review, license fees, permit fees, or any future inspection fees and other
authorization fees which may be created or imposed and other charges, in each
case whether general or special, ordinary or extraordinary, or foreseen or
unforeseen, of every character that may be assessed, levied, confirmed or
imposed on or in respect of the Property or any rent therefrom (all of the
foregoing being hereinafter collectively referred to as "Taxes").
Notwithstanding the foregoing or any other provision of this Lease, Tenant
shall not be required to pay any income, profits or revenue tax upon the net
income of Landlord, nor any franchise, excise, corporate, estate, inheritance,
succession, capital levy or transfer tax of Landlord, nor any interest,
additions to tax or penalties in respect thereof, unless such tax is imposed,
levied or assessed in substitution for any Taxes that Tenant is required to pay
pursuant to this Section 13. Tenant will furnish to Landlord, upon request,
official receipts or other proof reasonably satisfactory to Landlord evidencing
payment of any Taxes in accordance with the requirements of this Section 13.
14. Compliance with Legal and Insurance Requirements. Instruments.
Subject to the provisions of Section 16 hereof, Tenant at its expense will
promptly (a) comply with all Legal Requirements and Insurance Requirements, and
(b) procure, maintain and comply with all permits, licenses and other
authorizations required for any use of the Property.
15. Liens, Easements, etc. Tenant will not directly or indirectly
create or permit to be created or to remain, and will discharge, any mortgage,
lien, or encumbrance with respect to the Property or any part thereof or
Tenant's interest therein, or the Basic Rent, Additional Rent or any other sum
payable under this Lease.
16. Permitted Contests. Tenant at its expense may contest by
appropriate legal proceedings conducted in good faith and with due diligence,
the amount or validity or application, in whole or in part, of any Taxes or
lien therefor or any Legal Requirement or Insurance Requirement or the
application of any instrument of record affecting the Property or any part
thereof or any claims of mechanics, materialmen, suppliers or vendors or lien
therefor, and if permitted by law, may withhold payment of the same pending
such contest; provided, however, that (a) such proceedings shall suspend the
collection thereof from Landlord, the Property and any sums payable hereunder,
(b) neither the Property nor any part thereof or interest therein (or any sums
payable hereunder) would be in any danger of being sold, forfeited or lost, nor
would the use or occupancy of the Property (or any part thereof) be adversely
affected, (c) Landlord shall not be in any danger of any civil or criminal
liability by reason thereof and neither the Property nor any part thereof or
interest therein (or any sums payable hereunder) would be subject to the
imposition of any lien as a result of such failure, and (d) Tenant shall have
either (i) paid the disputed amount under protest, or (ii) furnished to
Landlord such security as Landlord may deem reasonably necessary to insure the
ultimate payment of the contested amount
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and to prevent the forfeiture of any sums payable to Landlord or any Mortgagee
hereunder. Tenant shall give prompt written notice to Landlord of the
commencement of any contest referred to in the preceding sentence, providing a
reasonably detailed description thereof, and Landlord shall, at Tenant's
expense, cooperate with Tenant with respect to any such contest. Tenant agrees
that each such contest shall be promptly prosecuted to final conclusion, and
Tenant shall indemnify and save Landlord and any Mortgagee harmless from and
against any and all losses, judgments, decrees and costs (including, without
limitation, reasonable attorneys' fees and expenses) incurred in connection
therewith. Tenant agrees that it will, promptly after final determination of
each such contest, fully pay and discharge the amounts which shall finally be
levied, assessed, charged or imposed or determined to be payable, together with
all penalties, fines, interest, costs and expenses incurred in connection
therewith, and perform all acts the performance of which shall be finally
ordered or decreed as a result thereof.
17. Insurance.
17.1. Risks to be Insured. Tenant, at its expense, will
maintain with insurers authorized to issue insurance in the State of Iowa and
having an A.M. Best rating of "A" or better or otherwise approved by Landlord
and any Mortgagee (a) insurance with respect to the Improvements against loss or
damage by fire, lightning and other risks from time to time included under
"all-risk" policies and against loss or damage by sprinkler leakage, water
damage, collapse, vandalism and malicious mischief, in amounts sufficient to
prevent Landlord and Tenant from becoming co-insurers of any loss under the
applicable policies, and in any event in amounts not less than 100% of the
actual replacement costs of the Improvements (initially determined as of the
date on which such insurance is originally issued, and subsequently
re-determined on the basis on an annual review of the actual replacement cost
of the Improvement), as determined at the request of Landlord (such insurance
shall also include at least nine (9) months rental loss coverage), (b)
comprehensive general liability insurance against claims arising out of or
connected with the possession, use, leasing, operation or condition of the
Property in such amounts as are usually carried by persons operating similar
properties in the same general locality but in any event with a combined single
limit of not less than $5,000,000 for any single injury to a person and
$10,000,000 for all claims with respect to property damage and personal injury
and death with respect to any one occurrence, (c) explosion insurance in
respect of any steam and pressure boilers and similar apparatus located on the
Property in amounts not less than those required by subdivision (b) above, (d)
in the event that the Property shall at any time be used as anything other than
for office purposes such other insurance against such risks and in such amounts
as Landlord shall reasonably request. In addition, during any period of
repair, alteration or addition to the Property, Tenant shall obtain and keep in
effect Builder's Risk insurance in such amounts as Landlord shall reasonably
request. Tenant may effect any insurance not required by this Lease, but any
such insurance effected by Tenant on the Property shall be for the benefit of
Landlord, Tenant and any Mortgagee, as their interests may appear, and shall be
subject to all of the provisions of Section 17.2 hereof. The insurance
required under this Section 17.1 may be subject to a deductible in an amount
not exceeding $2,500.00 and may be effected under a blanket policy or policies
covering the Property and other property and assets not constituting part of
the Property; provided, however, that any such policy shall specify the portion
of the total coverage of such policy or policies that is allocated to the
Property and shall, in all other respects, comply with the requirements of this
Section 17.
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17.2 Policy Provisions. All insurance maintained by Tenant pursuant to
Section 17.1 hereof shall (a) name Landlord (individually and as a fiduciary),
Tenant and any Mortgagee as insured parties, (b) provide that all insurance
proceeds for losses of less than $10,000 shall, except in the case of
comprehensive general liability insurance be adjusted by and be payable to
Tenant to be used by Tenant, to the extent necessary, for Restoration, (c)
provide that all insurance proceeds for losses of $10,000 or more shall (except
in the case of comprehensive general liability insurance and workers'
compensation insurance) be adjusted by Landlord and Tenant jointly and shall be
payable to any Mortgagee by means of a standard mortgage loss payable
endorsement (or to Landlord, if there is not Mortgagee), to be held in trust
pursuant to the terms of this Lease, (d) provide that if all or any part of
such policy is canceled, terminated or expires, the insurer will forthwith give
notice thereof to each named insured party and loss payee and that no
cancellation, reduction in amount or material change in coverage thereof shall
be effective until at least 30 days after delivery to each named insured party
and loss payee of written notice thereof, and (e) be reasonably satisfactory in
all other respects to Landlord and any Mortgagee.
17.3 Delivery of Policies; Insurance Certificates. Tenant will deliver
to Landlord and any Mortgagee the originals of all insurance policies (or, in
the case of blanket policies, certificates thereof) and any amendments or
supplements thereto with respect to the Property that Tenant is required to
maintain pursuant to this Section 17, together with evidence as to the payment
of all premiums then due thereon, and not later than 30 days prior to the
expiration of any policy, a certificate of the insurer evidencing the
replacement or renewal thereof.
18. Hazardous Materials. Tenant shall not (either with or without
negligence) cause or permit the escape, disposal or release of any biologically
or chemically active or other hazardous substances, or materials. Tenant shall
not allow the storage or use of such substances or materials in any manner not
sanctioned by law or by the highest standards prevailing in the industry for the
storage and use of such substances or materials, nor allow to be brought into
the Property any such materials or substances except to use in the ordinary
course of Tenant's business, and then only after written notice is given to
Landlord of the identity of such substances or materials. Without limitation,
hazardous substances and materials shall include those described in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., any applicable state
or local laws and the regulations adopted under these acts. If any lender or
governmental agency shall ever require testing to ascertain whether or not
there has been any release of hazardous materials, then the reasonable costs
thereof shall be reimbursed by Tenant to Landlord upon demand as additional
charges if such requirement applies to the Property. In addition, Tenant shall
execute affidavits, representations and the like from time to time at
Landlord's request concerning Tenant's best knowledge and belief regarding the
presence of hazardous substances or materials on the Property. In all events,
Tenant shall indemnify Landlord in the manner elsewhere provided in this Lease
from any release of hazardous materials on the Property occurring while Tenant
is in possession, or elsewhere if caused by Tenant or persons acting under
Tenant. The within covenants shall survive the expiration or
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earlier termination of the Lease Term. Landlord has caused an environmental
survey of the property to be preformed by Shive Hattery and Associates attached
hereto as Exhibit D.
19. Damage to or Destruction of Property.
19.1. Tenant to Give Notice. In case of any damage to or destruction
of the Improvements located on the Property (or any part of such
Improvements), the Restoration of which is reasonably estimated to cost more
than $10,000.00, Tenant will promptly give notice thereof to Landlord,
generally describing the nature and extent of such damage or destruction and
setting forth Tenant's best estimate of the cost of Restoration.
19.2. Restoration. In case of any damage to or destruction of the
Improvements located on the Property (or any part of such Improvement), other
than a Total Destruction, Tenant, whether or not the insurance proceeds, if
any, on account of such damage or destruction shall be sufficient for the
purpose, at its expense will promptly commence and complete (subject to
Unavoidable Delays) Restoration of such Improvements.
19.3. Total Destruction. In case of (a) the destruction during the last
two years of the Fixed Term of all of the Improvements located on the Property,
or (b) the destruction during the last two years of the Fixed Term of such a
substantial part of the Improvements located on the Property that, in the good
faith judgment of the Board of Directors of Tenant, Restoration of such
Improvements is not economically feasible (any such destruction being
hereinafter referred to as a "Total Destruction"), Tenant may, by notice to
Landlord given within 60 days after the date of such destruction, terminate
this Lease.
In the event of such termination of this Lease by the Tenant as a result
of such Total Destruction, the obligation of the Tenant to pay Basic Rent and
all other obligations of the Tenant hereunder shall be prorated as of the date
of termination. The Tenant agrees that all insurance proceeds with respect to
the Property and the Improvements shall be automatically assigned and paid over
solely to the Landlord and the Tenant shall have no right, title or interest in
the same.
19.4. Application of Insurance Proceeds. Tenant hereby irrevocably
assigns to Landlord any compensation or insurance proceeds to which Tenant may
become entitled by reason of Tenant's interest in the Property if the Property
or any part thereof is damaged or destroyed by fire or other casualty. Any
compensation or insurance payment of more than $10,000 shall be paid to and
held in trust and applied in accordance with this Lease by Mortgagee or, if
there is no Mortgagee or if Mortgagee does not require that it hold such
compensation, by Landlord; provided, however, that any such compensation or
insurance payment which is not in excess of $10,000 shall be paid directly to
Tenant (if no Event of Default than exists hereunder) and shall be expended by
Tenant in connection with the Restoration of the Property (with the balance of
such proceeds, if any, being retained by Tenant upon the completion of such
Restoration).
20. Taking of Property.
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20.1. Tenant to Give Notice; Assignment of Awards, etc. In case of a
Taking, or the commencement of any proceedings or negotiations that might
result in a Taking, in respect of which the Restoration of the Property is
reasonably estimated to cost more than $10,000, Tenant will promptly give
notice thereof to Landlord, generally describing the nature and extent of such
Taking or the nature of such proceedings or negotiations and the nature and
extent of the Taking that might result therefrom. Tenant hereby irrevocably
assigns, transfers and sets over to Landlord all rights of Tenant to any award
or payment on account of any Taking of Tenant's Leasehold and irrevocably
authorizes and empowers Landlord, with full power of substitution, in the name
of Tenant or otherwise, to file and prosecute what would otherwise be Tenant's
claim for any such award or payment and to collect, receipt for and retain the
same.
20.2. Partial Taking. In the case of a Taking other than a Total Taking,
(a) this Lease shall remain in effect as to the portion of the Property
remaining immediately after such Taking, without any abatement or reduction of
Basic Rent, Additional Rent or any other sum payable hereunder, and without any
change or reduction in the amount of insurance required pursuant to Section 17
hereof, and (b) Tenant, whether or not the awards or payments, if any, on
account of such Taking shall be sufficient for the purpose, at its expense will
promptly commence and complete (subject to Unavoidable Delays) Restoration of
the Property, except for any reduction in area of the Property caused by such
Taking; provided, however, that in case of Taking for temporary use ("Temporary
use" being defined for all purposes herein as any taking for less than nine
consecutive months) Tenant shall not be required to effect any Restoration
until such Taking is terminated.
20.3. Total Taking. In case of the Taking during the Fixed Term of the
Property in its entirety (or all of the Improvements located thereon) or the
Taking during the Fixed Term (other than for temporary use) of such a
substantial part of the Property (or the Improvements located thereon) that, in
the good faith judgment of the Board of Directors of Tenant, either (a) the
portion of the Property (or the Improvements located thereon) remaining after
such Taking is (and after Restoration would be) unsuitable for use by Tenant in
the operation of its business, or (b) Restoration of the Property (or the
Improvements located thereon) is not economically feasible, this Lease shall
terminate as of the date of such Taking.
In the event of the termination of this Lease as a result of any such
Taking, the Tenant hereby releases all right, title, claim and interest in and
to any award or payments received or payable as a result of any such Taking of
the Improvements and/or the Property, except that the Tenant shall be entitled
to any separate award for the loss of its trade fixtures or equipment or moving
allowances, if any such separate award is made.
20.4. Application of Awards, etc. All awards and payments received by or
payable to Landlord on account of a Taking (less the actual costs, fees and
expenses incurred in connection with the collection thereof, for which the
Person incurring the same shall be reimbursed from such award or payment,
together with any interest or other income earned on such awards from the
investment thereof and any other interest paid on such awards prior to
disbursement hereunder) shall be paid to
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and held in trust and applied in accordance with this Lease by Mortgagee, or,
if there is no Mortgagee or if Mortgagee does not require that it hold
such award, by Landlord, and shall be applied or dealt with as follows:
(a) All such awards and payments actually received on account of a
Taking (other than a Total Taking) shall be applied as follows:
(i) Subject to subparagraph (ii) below, such awards and
payments shall be applied to pay the cost of the Restoration of the
Property, such application to be effected substantially in the same manner and
subject to the same conditions as provided in paragraph (a) of Section 19.4
hereof with respect to insurance proceeds; provided, however, that in case the
total amount of such awards and payments shall not exceed $5,000, such awards
and payments shall be paid over to Tenant, if no Event of Default then exists
hereunder, upon Tenant's request and without compliance with any of such
conditions.
(ii) In case of a Taking for a temporary use, such awards and
payments shall be paid to Tenant and there shall be no abatement in
Tenant's obligation to pay Basic Rent and Additional Rent hereunder during the
period of such temporary use; provided, however, that if any portion of such
awards and payments is made by reason of any damage to or destruction of the
Property (or the Improvements thereon) during such Taking for temporary use,
such portion shall be held and applied as provided in subparagraph (i) above
after such Taking is terminated.
(iii) The balance, if any, of such awards and payments not
required to be held or applied in accordance with subparagraphs (i) and (ii)
above, shall be paid to Landlord following completion of the Restoration.
(b) All such awards and payments received by or payable to Landlord on
account of a Total Taking with respect to the Property (or the Improvements
thereon) during the Fixed Term or any Extended Term shall, as contemplated by
Section 20.3 hereof, be paid over or assigned to Landlord.
21. Certificate as to No Event of Default, etc.; Financial Statements, etc.
21. 1. Certificate of Tenant as to No Event of Default, etc. Tenant
will deliver to Landlord within 10 days following Landlord's request
therefor (but in no event more often than three times in any twelve-month
period), (a) a Certificate of Tenant stating (i) that this Lease is unmodified
and in full force and effect (or, if there have been modifications, that this
Lease is in full force and effect, as modified, and stating the modifications),
(ii) the date to which the Basic Rent has been paid and that all Additional Rent
payable on or before the date of such Certificate has been paid, and (iii) that
no Event of Default exists hereunder, or, if any such Event of Default exists,
specifying the nature and period of existence thereof and what action Tenant is
taking or has taken with respect thereto, and (b) such information with respect
to Tenant and the Property or any part thereof as from time to time may
reasonably be requested.
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21.2. Certificate of Landlord. Within 10 days following Tenant's request
therefor, but in no event more often than three times in any twelve-month
period (which request shall (i) state that it is made pursuant to this Section
21.2 and that Tenant proposes, pursuant to Section 23.1 hereof, to assign its
interest in this Lease or sublet a portion of the Property to a Person
identified in such request, and (ii) be accompanied by a copy of this Lease and
each modification hereof or amendment hereto, if any, to and including the date
of such request, and a Certificate of Tenant stating that such copies are true,
correct and complete copies of this Lease and of all such modifications and
amendments), Landlord will deliver to Tenant a Certificate of Landlord stating
(a) that this Lease is unmodified and in full force and effect (or, if there
have been modifications, that this Lease is in full force and effect, as
modified, and stating the modifications), (b) the date to which Basic Rent has
been paid hereunder and (c) whether or not an Event of Default has been
declared by Landlord hereunder, it being agreed that (and any such Certificate
shall state that) no rights or remedies of Landlord hereunder or otherwise
resulting from any condition, event or circumstance that would entitle
Landlord to declare an Event of Default (and with respect to which condition,
event or circumstance no Event of Default has been declared on or before the
date of such Certificate) shall be waived, impaired or diminished in any
respect by reason of any such Certificate or any statement made therein. No
failure of Landlord to deliver any such Certificate shall release, discharge or
otherwise affect any of Tenant's or Landlord's rights or obligations hereunder.
21.3. Financial Statements. Tenant will deliver to Landlord as soon as
reasonably possible, and in any event within 120 days after the close of each
fiscal year of Tenant, a copy of (i) the consolidated balance sheet of Tenant
as of the end of such fiscal year, (ii) consolidated statements of income and
shareholders' equity for Tenant with respect to such fiscal year, and (iii)
consolidated statements of changes in financial position for Tenant with
respect to such fiscal year, setting forth in each case in comparative form the
corresponding figures for the previous fiscal year, all in reasonable detail,
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (except for any changes
required by the Financial Accounting Standards Board and other changes
consistent with generally accepted accounting principles) and accompanied by an
unqualified opinion of independent public accountants of recognized national
standing.
22. Right of Landlord to Perform Tenant's Covenants, etc. If Tenant shall
fail to make any payment or perform any act required to be made or performed by
it hereunder, Landlord, upon notice to Tenant (except in cases of emergency that
threaten bodily injury or material property damage), but without waiving or
releasing any obligation or default, may make such payment or perform such act
for the account and at the expense of Tenant, and may enter upon the Property
and the Improvements or any part thereof for such purpose and take all such
action thereon as, in the opinion of Landlord, may be necessary or appropriate
therefor. No such entry shall constitute an eviction of Tenant. All reasonable
payments so made by Landlord and all reasonable costs and expenses (including,
without limitation, attorneys' fees and expenses) incurred in connection
therewith or in connection with the performance by Landlord of any such act
shall constitute Additional Rent hereunder.
23. Assignments, Subleases, Mortgages, etc.
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23.1. Assignments, Subleases, etc. by Tenant. If no Event of Default
shall have occurred and be continuing Tenant may, after obtaining the written
consent of Landlord, at any time, sublet the Property or any part thereof, and
may assign its interest in this Lease; provided, however, that (a) Tenant shall
deliver to Landlord a fully executed counterpart of each such sublease or
assignment promptly after execution thereof, and (b) no assignment, whether by
operation of law, consolidation, merger, a sale of stock or otherwise,
shall be effective prior to the execution by the assignee and delivery to
Landlord of an instrument, reasonably satisfactory in form and substance to
Landlord, assuming all of the obligations of Tenant under this Lease. No
assignment or sublease made as permitted by this Section 23.1 shall affect or
reduce any obligations of Tenant or any rights of Landlord hereunder, and all
obligations of the Tenant originally named hereunder shall continue in full
force and effect as the obligations of a principal and not of a guarantor or
surety, to the same extent as though no assignment or subletting had been made.
23.2. Assignments, Mortgages, etc. by Landlord. The interest of Landlord
in this Lease and in and to the Property or any part thereof may, at any time
and from time to time, be sold, conveyed, assigned or otherwise transferred,
without the prior written consent of Tenant, and upon any sale or conveyance of
the Property as an entirety or any assignment or other transfer (other than for
the purpose of securing indebtedness) by any party lessor of its interest in
this Lease and in and to the Property, such party lessor shall be completely
relieved of and from any and all obligations not theretofore accrued under this
Lease or otherwise with respect to the Property, and such party lessor shall
have no further obligations whatsoever to any party lessee, except to the
extent that any such obligation accrued prior to the date of such sale,
conveyance, assignment or transfer, and Tenant shall thereupon look only to the
then owner of Landlord's estate in the Property for the performance of any
obligations of Landlord hereunder. Landlord may also from time to time
mortgage or assign, by way of pledge or otherwise, any or all of the rights, in
whole or in part, of Landlord under this Lease to any Person as security for
the indebtedness or other obligations of Landlord. From and after any such
mortgage or assignment and to the extent provided in the instrument effecting
such mortgage or assignment, (a) such Mortgagee may enforce any and all of the
terms of this Lease to the extent so assigned as though such Mortgage had been
a party hereto, (b) no action or failure to act on the part of Landlord shall
adversely affect or limit any rights of such Mortgagee, (c) no such assignment
shall constitute an assumption of any such obligations on the part of such
Mortgagee, and (d) a copy of all notices, demands, consents, approvals and
other instruments given by Tenant hereunder shall also be delivered to such
Mortgagee, if such Mortgagee shall have provided Tenant with written notice of
its address for such purposes.
24. Events of Default; Termination. If any one or more of the following
events ("Events of Default") shall occur (whatever the reason therefor, and
whether voluntary or involuntary or by operation of law or pursuant to or in
compliance with any judgment, decree or order of any court of any rule or
regulation of any administrative or governmental body):
(a) if Tenant shall fail to pay any installment of Basic Rent or
Additional Rent, or other sum required to be paid by Tenant hereunder on
the date the same becomes due and payable and such
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failure continues for more than five (5) Business Days following written notice
by Landlord to Tenant; or
(b) if Tenant shall fail to perform or comply with any term of this Lease
(other than those referred to in clause (a) above) or any term of any instrument
related hereto pursuant to which Tenant undertakes obligations or makes
agreements for the benefit of Landlord or any Mortgagee and, in any such case,
such failure shall continue for more than 30 days after an Officer of Tenant
received notice (from any source) or otherwise obtains knowledge of such
non-performance or noncompliance; provided, however, that in the case of any
such failure that is susceptible of being cured but that cannot with diligence
be cured within such 30-day period, if Tenant shall promptly commence to cure
the same and shall thereafter prosecute the curing thereof with diligence, the
period within which such failure may be cured shall be extended for such further
period as shall be necessary for the curing thereof with diligence, or
(c) if any material representation or warranty made by Tenant herein, in
any document or certificate furnished by Tenant or any Mortgagee in connection
herewith or therewith or pursuant hereto or thereto, or any material
representation or warranty made by Tenant in any assignment or reassignment by
Landlord of this Lease shall be incorrect in any material respect as of the
date when made; or
(d) if the Property or the Improvements shall be left vacant and without
maintenance and security; or
(e) if Tenant shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or taking possession
by any such official in an involuntary case or other proceeding commenced
against it, or shall make a general assignment for the benefit of creditors, or
shall fail generally to pay its debts as they become due, or shall take any
corporate action to authorize any of the foregoing; or
(f) if an involuntary case or other proceeding shall be commenced against
Tenant seeking liquidation, reorganization or other relief with respect to it
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part
of its property, and such involuntary case or other proceeding shall remain
undischarged and unstayed for a period of 90 days, or if an order for relief
shall be entered against Tenant under the federal bankruptcy laws as now or
hereafter in effect; or
(g) if a final judgment that, together with other outstanding final
judgments against Tenant, exceeds an aggregate of $30,000 shall be rendered
against Tenant, and if, within 120 days after the entry thereof, such judgment
shall not have been discharged or execution thereof stayed pending
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appeal or if within 120 days after the expiration of such stay, such judgment
shall not have been discharged;
then, and in any such event, Landlord may at any time thereafter, during the
continuance of any such Event of Default, give a written termination notice to
Tenant specifying a date (not less than five days from the date on which such
notice is given) on which this Lease shall terminate, and, on such date,
subject to the provisions of Section 26 hereof relating to the survival of
Tenant's obligations hereunder, the term of this Lease shall terminate by
limitation and all rights of Tenant under this Lease shall cease. All
reasonable costs and expenses incurred by or on behalf of Landlord (including,
without limitation, attorneys' fees and expenses) occasioned by any default by
Tenant under this Lease shall constitute Additional Rent hereunder.
25. Repossession, etc. If an Event of Default shall have occurred
and be continuing, Landlord, whether or not the term of this Lease shall, have
been terminated pursuant to Section 24 hereof, may enter upon and repossess the
Property or any part thereof by legal process, summary proceedings, ejectment
or otherwise, and may remove Tenant and all other persons and any and all
property therefrom. Landlord shall be under no liability for or by reason of
any such entry, repossession or removal.
26. Survival of Tenant's Obligations; Damages.
26.1. Termination of Lease Not to Relieve Tenant of Obligations.
No termination of the term of this Lease pursuant to Section 24 hereof, by
expiration or by operation of law or otherwise, and no repossession of the
Property or any part thereof pursuant to Section 25 hereof or otherwise, and no
reletting of the Property, shall relieve Tenant of its liabilities and
obligations hereunder, all of which shall survive such expiration, termination,
repossession or reletting.
26.2. Current Damages. In the event of any such termination,
repossession or reletting, Tenant will pay to Landlord the Basic Rent and all
Additional Rent and other sums required to be paid by Tenant up to the time of
such termination, repossession or relettng, and thereafter Tenant, until the
end of what would have been the term of this Lease (including the Fixed Term)
in the absence of such termination or repossession, and, whether or not the
Property or any part thereof shall have been relet, shall be liable to Landlord
for and shall pay to Landlord, as liquidated and agreed current damages for
Tenant's default, (a) the Basic Rent and all Additional Rent and other sums
that would be payable under this Lease by Tenant in the absence of such
termination or repossession, plus, (b) all reasonable expenses directly
incurred by Landlord in connection with such termination and repossession and
any reletting effected for the account of Tenant pursuant to Section 25 hereof
(including, without limitation, all, repossession costs, brokerage commissions,
legal expenses, attorney's fees, employees expenses, alteration costs and
expenses of preparing for such reletting), less (c) the proceeds, if any, of
such reletting. Tenant will pay such current damages monthly on the days on
which the Basic Rent would have been payable under this Lease in the absence of
such termination, repossession or reletting, and Landlord shall be entitled to
recover the same from Tenant on each such day.
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26.3. Final Damages. At any time after any such termination or
repossession, whether or not Landlord shall have collected any current damages
as aforesaid, Landlord shall be entitled to recover from Tenant and Tenant will
pay to Landlord on demand, as and for liquidated and agreed final damages
beyond the date of such demand, (a) an amount equal to the excess of (i) all
past due Basic Rent and Additional Rent plus the present value of all Basic
Rent and Additional Rent that would be payable under this Lease from the date
of such demand (or, if it be earlier, the date to which Tenant shall have
satisfied in full its obligations under Section 26.2 hereof to pay current
damages) for what would be the unexpired term of this Lease in the absence of
such termination or repossession, over (ii) the present value of the fair market
rental for the Property at the date of this Lease, which present value shall in
each case be determined by the application of a discount factor of 10% per
annum. Payment of final damages herein is limited to those damages not
accounted for and paid for under 26.2.
27. Tenant's Waiver of Statutory Rights. In the event of any
termination of the term of this Lease pursuant to Section 24 hereof or any
repossession of the Property or any part thereof pursuant to Section 25 hereof,
Tenant, so far as permitted by law, waives any right of redemption, re-entry or
repossession.
28. No Waiver by Landlord. No failure by Landlord to insist upon the
strict performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof, and no acceptance of full or partial rent
during the continuance of any such breach, shall constitute a waiver of any
such breach or of any such term. No waiver of any breach shall affect or alter
this Lease, which shall continue in full force and effect, or the rights of
Landlord with respect to any other then existing or subsequent breach. No
foreclosure, sale or other proceedings under any mortgage or other security
arrangement with respect to the Property shall discharge or otherwise affect
the obligations of Tenant hereunder.
29. Remedies Cumulative. Each right, power and remedy of Landlord
provided for in this Lease or now or hereafter existing at law or in equity or
by statute or otherwise shall be cumulative and concurrent and shall be
in addition to every other right, power or remedy provided for in this Lease or
now or hereafter existing at law or in equity or by statute or otherwise, and
the exercise or attempted exercise by Landlord of any one or more of the
rights, powers or remedies provided for in this Lease or now or hereafter
existing at law or in equity or by statute or otherwise shall not preclude the
simultaneous or later exercise by Landlord of any or all such other rights,
powers or remedies.
30. Modification, Acceptance of Surrender. No modification,
termination or surrender to Landlord of this Lease and no surrender of the
Property or any part thereof or of any interest therein shall be valid or
effective unless agreed to and accepted in writing by Landlord, and no act by
any representative or agent of Landlord, and no act by Landlord, other than
such a written agreement and acceptance by Landlord, shall constitute an
agreement thereto or acceptance thereof.
31. End of Lease Term. Upon the expiration or earlier termination of
this Lease, Tenant, at its expense, shall quit and surrender to Landlord the
Property in good order and condition, ordinary
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<PAGE> 20
wear and tear excepted, and, if requested by Landlord, shall remove, at
Tenant's expense, all of Tenant's Equipment therefrom and shall repair, at
Tenant's expense, all damage caused by such removal.
32. Notices, etc. All notices, offers, acceptances, rejections,
consents and other communications hereunder shall be in writing and shall be
deemed to have been given when delivered or mailed by first class registered or
certified mail, postage prepaid, or sent by a nationally recognized overnight
courier service, addressed:
If to Landlord:
Ryan Properties, Inc.
700 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402
or at such other address as Landlord shall have furnished to Tenant in writing;
and
If to Tenant:
Joe Cunningham
Ruffalo Cody & Associates, Inc.
221 Third Avenue SE
Cedar Rapids, IA 52401
with a copy to:
Bill Neppl
White & Johnson, P.C.
1715 lst Avenue SE
Cedar Rapids, IA 52402
or at such other address as Tenant shall have furnished to Landlord in writing.
33. Short Form or Memorandum. Landlord and Tenant shall execute and
deliver a short form or memorandum of this Lease, satisfactory in form and
substance to Landlord and Tenant, for recording in the proper office or offices
in each of the states in which the Property is located.
16
<PAGE> 21
34. Quiet Enjoyment. So long as Tenant shall pay the Basic Rent and
Additional Rent and any other sums payable hereunder as the same become due and
shall fully comply with all of the terms of this Lease and fully perform its
obligations hereunder, Tenant (and any subtenant of Lease permitted pursuant to
the terms of this Lease) shall peaceably and quietly have, hold and enjoy the
Property for the term hereof, subject, however, to all the terms of this Lease.
No failure by Landlord to comply with the foregoing covenants during the Fixed
Term shall give Tenant any right to cancel or terminate this Lease or to abate,
reduce or make a deduction from or offset against the Basic Rent or any
Additional Rent or any other sum payable under this Lease, or to fail to
perform any other obligation of Tenant hereunder. Notwithstanding anything
contained in this Lease to the contrary, it is specifically understood and
agreed that neither Landlord nor any beneficiary of Landlord, nor any officer,
director or shareholder of any of the foregoing, or any Mortgagee, shall have
any personal liability in respect of any of the terms, covenants, conditions or
provisions of this Lease. Nothing contained in this Section 34 shall prohibit
Landlord, or any Mortgagee, or their respective authorized representatives,
from entering the Property at reasonable times to inspect the same.
35. Miscellaneous. All rights, powers and remedies provided herein may
be exercised only to the extent that the exercise thereof does not violate any
applicable provision of law, and are intended to be limited to the extent
necessary so that they wili not render this Lease invalid, illegal or
unenforceable under the provisions of any applicable law. If any term of this
Lease or any application thereof shall be invalid or unenforceable, the
remainder of this Lease and any other application of such term shall not be
affected thereby. This Lease may be changed, waived, discharged or terminated
only by an instrument in writing, signed by each of the parties hereto. Subject
to Section 23.2 hereof, this Lease shall be binding upon and inure to the
benefit of and be enforceable by the respective successors and permitted
assigns of the parties hereto. This Lease shall be construed and enforced in
accordance with and governed by the laws of the State of Iowa. The headings in
this Lease are for the purposes of reference only and shall not limit or
otherwise affect the meaning hereof. This Lease may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same instrument. It is understood by both parties
that at the time of signing Landlord has not purchased the property. This
lease does not take full effect until the title is transferred to the Landlord
which is anticipated on October 7th, 1994. In any event, if such closing does
not take place by November 1st, 1994, this lease shall become null and void
with written notice from either party.
36. Definitions. As used in this Lease, the following terms shall
have the following respective meanings, applicable both to the singular and
plural forms of the terms so defined:
Additional Rent: the meaning specified in Section 3 hereof.
Basic Rent: the meaning specified in Section 2 hereof.
Business Day: any day other than a day on which banking institutions in
the State of Iowa are authorized by law to close.
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<PAGE> 22
Casualty Termination Date: the meaning specified in Section 19.3
hereof.
Certificate: with respect to any corporation, a certificate of such
corporation signed by the President or a Vice President and by the Treasurer,
Comptroller, Assistant Treasurer or Assistant Comptroller of such corporation.
Estoppel Certificate: the meaning specified in Section 21 hereof.
Event of Default: the meaning specified in Section 24 hereof.
Fixed Term: the meaning specified in Section 1 hereof.
Improvements: the meaning specified in Section 1 hereof.
Indemnified Party: the meaning specified in Section 11 hereof.
Insurance Requirements: all terms of any insurance policy covering
Tenant or covering or applicable to the Property or any part thereof, all
requirements of the issuer of any such policy, and all orders, rules,
regulations and other requirements of the national Board of First Underwriters
(or any other body exercising similar functions) applicable to or affecting the
Property or any part thereof or any use or condition of the Property or any part
thereof.
Legal Requirements: all laws, statutes, codes, acts, ordinances,
orders, judgments, decrees, injunctions, rules, regulations, permits, licenses,
authorizations, directions and requirements of all governments, departments,
commissions, boards, courts, authorities (including, without limitations,
environmental protection, planning and zoning authorities), agencies (and other
governmental or quasigovernmental units, whether Federal, state, count,
district, municipal, city or other), and any officials and officers thereof,
which now or at any time hereafter may be applicable to Tenant with respect to
the Property or to the Property or any part thereof (including any which may
apply to the repair, use or maintenance of the Property or any part thereof),
or any of the adjoining sidewalks, curbs, vaults and vault space, if any,
streets or ways, or any use or condition of the Property or any part thereof.
Mortgage: any mortgage or other similar instrument from time to time
providing for the assignment as security of Landlord's interest in the Property
or this Lease by the holder thereof.
Mortgagee: the mortgagee under any Mortgage.
Permitted Exceptions: the exceptions set forth on Exhibit A hereto.
Person: a corporation, an association, a partnership, an organization,
a trust, an individual, a government or political subdivision thereof or a
governmental agency.
Property: the meaning specified in Section 1 hereof.
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<PAGE> 23
Restoration: in case of damage to or destruction of the Property or of
the Improvements located thereon, the restoration, replacement or rebuilding of
the Property or the Improvements as nearly as possible to its value, condition
and character immediately prior to such damage, destruction or Taking, with
such alterations and additions as may be made at Tenant's election pursuant to
and subject to the conditions of Section 7 hereof, together with any temporary
repairs and property protection which may be required pending completion of
such work.
Taking: a temporary or permanent taking by a government or political
subdivision thereof or by a governmental agency during the term hereof of all
or part of the Property, or any interest therein or right accruing thereto, as
the result of or in lieu of or in anticipation of the exercise of the right of
condemnation or eminent domain, or a change of grade affecting the Property or
any part thereof. Such a taking shall be deemed to have occurred on the date on
which Tenant shall be legally required to relinquish possession of the
Property.
Taking Termination Date: the meaning specified in Section 20.3 hereof.
Taxes: the meaning specified in Section 13 hereof.
Tenant: Ruffalo, Cody and Associates, Inc., together with any entity or
entities succeeding to all or substantially all of the assets of it, by merger
or otherwise.
Tenant's Equipment: the trade fixtures and other similar items of
property.
Total Destruction: the meaning specified in Section 19.3 hereof.
Total Taking: the meaning specified in Section 20.3 hereof.
Unavoidable Delays: delays due to acts of God, governmental
restrictions, enemy actions, civil commotion, firs, unavoidable casualty,
strikes, shortages of supplies or other causes beyond the control of Tenant,
but lack of funds shall not be deemed a cause beyond the control of Tenant.
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<PAGE> 24
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be duly
executed as of the date first set forth above.
Landlord:
RYAN PROPERTIES, INC.
By /s/ JEFF A. SMITH
----------------------------
Its Vice President
-------------------------
Tenant:
RUFFALO, CODY AND ASSOCIATES, INC.
By /s/ ALBERT P. RUFFALO
-------------------------
Its President/CEO
----------------------
And
By /s/ JOSEPH P. CUNNINGHAM
----------------------------
Its Treasurer
-------------------------
20
<PAGE> 25
STATE OF IOWA)
)SS.
COUNTY OF LINN)
The foregoing was acknowledged before me this 26th day of Sept., 1994,
by Albert P. Ruffalo, the President/CEO of RUFFALO CODY & ASSOCIATES, a Iowa
corporation, on behalf of said corporation.
/s/ ANNE FABER SEIDL
-------------------------
STATE OF IOWA)
)SS.
COUNTY OF LINN)
The foregoing was acknowledged before me this 26th day of Sept., 1994,
by Joseph P. Cunningham, the Treasurer of RUFFALO CODY & ASSOCIATES, a Iowa
corporation, on behalf of said corporation.
/s/ ANNE FABER SEIDL
-------------------------
[SEAL] ANNE FABER SEIDL
MY COMMISSSION EXPIRES
11-2-95
21
<PAGE> 26
EXHIBIT C
BASIC RENT
Tenant agrees to pay Landlord:
I. for the period from the commencement of this Lease through the
sixtieth (60th) full month of the term a monthly base rent of
$29,851.25;
II. for the period from the sixty-first (61st) month of this Lease
through the one hundred-twentieth (120th) full month of the term a
monthly base rent of $32,429.31;
payable on the first day of each month in advance, without notice.
24
<PAGE> 1
EXHIBIT 10.67
FIRST LEASE AMENDMENT
This First Amendment of Lease dated as of this 12th day of April, 1995 (First
Amendment), between Ryan Properties, Inc., a Minnesota Corporation (Landlord)
and Ruffalo Cody and Associates, Inc., an Iowa Corporation (Tenant).
WITNESSETH, that:
WHEREAS, Landlord and Tenant have entered into an Agreement dated
September 26, 1994, (Lease), whereby Landlord has leased to Tenant certain
Premises located at 421 Fourth Avenue SE, in the City of Cedar Rapids, County
of Linn, State of Iowa, consisting of the Premises, as such Premises are
defined in the Lease; and
NOW, THEREFORE, Landlord and Tenant desire and intend hereby to further
amend the Lease as specifically hereinafter set forth and provided:
1. Landlord and Tenant agree to revise the commencement date to be
April 24, 1995. The Fixed Term shall be April 24, 1995 to April 30,
2005.
2. Landlord and Tenant agree to revising the following Basic Rent
schedule as previously outlined in Exhibit C of the Lease:
April 24, 1995 to April 30, 1995 $6,965.29
May 1, 1995 to April 30, 2000 $29,851.25/month
May 1, 2000 to April 30, 2005 $32,429.31/month
3. Landlord and Tenant agree to revise the first sentence Item 1.1,
third paragraph to read:
Landlord further agrees to provide during the first five (5)
years of the Fixed Term One Hundred Fifty (150) parking spaces
for the benefit of Tenant's employees, customers and visitors.
EXCEPT, as otherwise specifically set forth herein, the terms and
conditions of the September 26, 1994 Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the First Amendment is hereby executed and delivered
effective as of the date and year first above written.
LANDLORD: TENANT:
RYAN PROPERTIES, INC. RUFFALO, CODY AND ASSOCIATES, INC.
BY: /s/ JEFF SMITH BY:/s/ ALBERT P. RUFFALO
------------------ ------------------------
Jeff Smith Albert P. Ruffalo
Its: Vice President Its: President
------------------ ------------------------
Date: 4/12/95 Date: 4/11/95
------------------ ------------------------
AND
BY: JOSEPH P. CUNNINGHAM
------------------------
Joseph P. Cunningham
Its: Treasurer
------------------------
Date: 4/11/95
------------------------
<PAGE> 1
Exhibit 10.68
201
TOWN CENTRE
LEASE AGREEMENT
This LEASE AGREEMENT, made as of this 18th day of July 1995, between 2060
Partnership L.P., an Iowa Limited Partnership ("Landlord"), and Telecom * USA
Publishing Company, an Iowa corporation ("Tenant"),
WITNESSETH, THAT
1. PREMISES: Landlord, subject to the terms and conditions hereof,
hereby leases to Tenant certain premises (the "Premises") shown on the floor
Plan attached hereto as Exhibit A containing approximately 38,535 square feet of
useable area (48,438 square feet rentable area) on the Lower, Third, Fourth, and
Fifth floors, located in the building situated at 201 Third Avenue SE, Cedar
Rapids, Iowa (the "Building"), to be used by Tenant for general office uses and
purposes and for no other use or purpose. The Building, the land underlying and
contiguous thereto and all improvements thereon are hereinafter referred to as
the "Project".
2. TERM: Tenant takes the Premises from Landlord, upon the terms
and conditions contained herein, for the term (the "Term") of Ten (10) years
commencing on September 1, 1995 and ending on the 31st day of August, 2005,
unless terminated sooner as herein provided.
3. MONTHLY BASE RENT: Tenant agrees to pay Landlord during the Term
a Base Rent ("Base Rent") as follows:
<TABLE>
<CAPTION>
Rate
Dates Monthly Base Rent Per/RSF
-------------------------------- ----------------- -------
<S> <C> <C>
September 1, 1995 to December 31, 1995 $30,071.93/month $7.45
January 1, 1996 to December 31, 1996 $31,242.51/month $7.74
January 1, 1997 to December 2001 $31,807.62/month $7.88
January 1, 2002 to December 31, 2002 $33,301.13/month $8.25
January 1, 2003 to December 31, 2004 $35,319.38/month $8.75
January 1, 2005 to August 31, 2005 $37,337.63/month $9.25
</TABLE>
Base Rent is payable on the first day of each month in advance, without
deduction or set-off of any kind, to Landlord and delivered to Landlord at
Suite 700, 900 Second Avenue South, Minneapolis, Minnesota 55402, or at such
other place as may from time to time be designated by Landlord.
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<PAGE> 2
4. OPERATING COSTS: Tenant shall, for the entire Term, pay to
Landlord as additional rent without any set-off or deduction therefrom, Fifty
and 27/100 percent (50.27%) of all costs which Landlord may incur in owning,
maintaining, and operating the Project during the Term. Beginning with calendar
year 1996 and each subsequent year, Landlord and Tenant agree that for the
purpose of computing Tenant's share of Operating Costs, the Project Operating
Costs shall be deemed to be the lesser of actual Operating Costs or an amount
equal to 105% of the previous year's Operating Costs. Said costs are referred
to herein as "Operating Costs" and are hereby defined to include, but shall not
be limited to, all gross real estate taxes and annual installments of special
assessments with respect to the Project, reasonable management fees, insurance
premiums, utility costs, costs of wages, services, equipment and supplies, and
all other costs of any nature whatsoever which, for Federal tax purposes may be
expensed rather than capitalized, but exclusive only of leasing commissions,
depreciation, costs of tenant improvements and payments of principal and
interest on any mortgages covering the Project. Operating Costs shall also
include the yearly amortization of capital costs incurred by Landlord for
improvements, but not structural repairs or modifications to the Project
required to comply with any change in the laws, rules or regulations of any
governmental authority having jurisdiction, or for purposes of reducing
Operating Costs, which costs shall be amortized over the useful life of such
improvements or repairs as reasonably estimated by Landlord in accordance with
generally accepted accounting principles.
As soon as reasonably practicable prior to the commencement
of each calendar year during the Term, Landlord shall furnish to Tenant an
estimate of Tenant's share of Operating Costs for the ensuing calendar year and
Tenant shall pay, as additional rent hereunder, together with each installment
of monthly Base Rent, one-twelfth (1/12th) of its estimated annual share of
such Operating Costs. As soon as reasonably practicable after the end of each
calendar year during the Term, Landlord shall furnish to Tenant a certified
statement of the actual Operating Costs for the previous calendar year,
including Tenant's share of such amount, and within thirty (30) days thereafter
Tenant shall pay to Landlord the difference between such actual and estimated
Operating Costs paid by Tenant. Tenant's share of such Operating Costs for the
years in which this Lease commences and terminates shall be prorated based upon
the dates of commencement and termination of the Term. If Tenant overpaid such
Operating Costs, Landlord shall, at Tenant's option, refund the overpayment or
apply it to the next sums due under the Lease. Any such refund shall be
payable within thirty (30) days after Landlord becomes aware of such
overpayment.
Tenant shall have the right at any time to inspect Landlord's books
and records to verify the actual and estimated Operating Costs. The cost of
any such inspection shall be borne by Tenant unless Tenant discovers an error
in Landlord's books and records equal to five percent (5.0%) or more of the
total amount paid by Tenant for Operating Expenses during the applicable year,
in which case, the cost of such inspection (not to exceed $300) shall be borne
by Landlord.
Notwithstanding any other provision herein to the contrary, it is
agreed that in the event the Project is not fully occupied during any partial
year or any full calendar year, an adjustment shall be made in computing the
operating expenses for such year so that the Operating Costs shall be
2
<PAGE> 3
computed for such year as though the Project has been fully occupied during such
year and for real estate tax purposes as if fully occupied and assessed as a
completed project; provided however, in no event shall Tenant be required to pay
more than 50.27% of all Operating Costs as outlined above.
5. ADDITIONAL TAXES: Tenant shall pay as additional rent to
Landlord, together with each installment of Base Rent, the amount of any gross
receipts tax, sales tax or similar tax or any tax imposed in lieu of real
property taxes (but excluding therefrom any income tax) or arising out of
ownership, payable, or which will be payable, by Landlord, by reason of the
receipt of the Base Rent and adjustments thereto.
6. OBLIGATIONS OF LANDLORD: Landlord agrees that it shall:
A. Furnish heat and air conditioning to provide a
temperature condition required for comfortable
occupancy of the Premises under Tenant's normal
business operations. Wherever heat generating
machines or equipment are used in the Premises which
affect the temperature otherwise maintained by the air
conditioning system, Landlord reserves the right to
install supplementary air conditioning equipment in
the Premises, and the cost, operation and maintenance
thereof shall be paid by Tenant to Landlord on the
monthly rent payment dates at such rates as are
determined by Landlord, providing Tenant has the
option to review such plans prior to installation.
B. Provide passenger elevator service in common with
others during working days. Elevator service shall
be available at all other times subject to necessary
maintenance and repair work.
C. Provide janitor service in and about the Premises;
Saturdays, Sundays, and holidays excepted.
D. Make all normal repairs to the Premises, excluding
repairs to any special treatments of walls, floors or
ceilings made by or at the request of Tenant and
excluding repairs to any fixtures or other
improvements installed or made by or at the request
of Tenant.
E. Provide water for drinking, lavatory, and toilet
purposes drawn through fixtures installed by Landlord.
F. Provide venetian or similar type of blinds for
exterior windows. Tenant, at its own expense, may
install drapes and window coverings to the inside of
said blinds (and if installed shall maintain them in
attractive and safe condition); provided, however, in
the sole discretion of Landlord, they are in harmony
3
<PAGE> 4
with the exterior and interior appearance of the
Project and create no safety or fire hazard.
G. Make and install or provide for the installation of
Tenant's leasehold improvements in accordance with the
plans and specifications, terms and conditions set
forth in Exhibit B and Exhibit D.
It is understood that Landlord does not warrant that any of the services and
utilities referred to above will be free from interruption from causes beyond
the reasonable control of Landlord. Such interruption of service or utilities
shall never be deemed an eviction or disturbance of Tenant's use and possession
of the Premises or any part thereof or render Landlord liable to Tenant for
damages by abatement of rent or otherwise or relieve Tenant from performance of
Tenant's obligations under this Lease, unless such interruption of services is
caused by the negligence or willful misconduct of Landlord. If the interruption
of services continues for a period of 10 days in more than 25% of the Premises
for reasons under Landlord's reasonable control, Tenant shall have the right to
terminate this Lease upon written notice to Landlord.
7. COVENANTS OF TENANT: Tenant agrees that it shall:
A. Observe such governmental ordinances, laws and
regulations and rules and regulations as from time to
time may be put in effect by Landlord for the general
safety, comfort, and convenience of Landlord,
occupants, and to tenants of the Project; provided
however, Tenant shall not be required to make any
structural repairs or modifications to the Premises
that may be required by such governmental ordinances,
laws, or regulations.
B. Give Landlord access to the Premises at all
reasonable times, without charge or diminution of
rent, to enable Landlord to examine or exhibit the
same and to make such inspections, repairs, additions
and alterations as Landlord may deem advisable.
C. Keep the Premises in good order and condition; Tenant
shall be responsible for payment of all costs
incurred by Landlord in replacing all broken glass
with glass of the same quality, save only glass
broken by fire and extended coverage risks or caused
by others than Tenant, and commit no waste on the
Premises.
D. Pay for all replacement electric lamps and ballasts
used in the Premises.
E. Upon the termination of this Lease in any manner
whatsoever, remove Tenant's goods and effects and
those of any other person claiming under Tenant, and
quit and deliver the Premises to Landlord peaceably
and quietly in as good order and condition as the
same are now in or hereafter may be put in by
4
<PAGE> 5
Landlord or Tenant, reasonable use and wear thereof
excepted. Goods and effects not removed by Tenant at
the termination of this Lease, however terminated,
shall be considered abandoned and Landlord may
dispose of the same as it deems expedient at Tenant's
expense. Tenant shall be responsible for any
restoration of the Premises needed by virtue of the
removal of Tenant's goods and effects whether removed
by Tenant or Landlord.
F. Not assign this Lease or sublet all or any part of
the Premises (other than to its parent corporation or
a wholly owned subsidiary of such parent corporation
or Tenant) without first obtaining Landlord's written
consent thereto, which consent will not be
unreasonably withheld provided (i) the occupancy of
any such assignee or sublessee is not inconsistent
with the character of the Project, (ii) such
assignee or sublessee shall assume in writing the
performance of the covenants and obligations of
Tenant hereunder, and (iii) a fully executed copy of
any such assignment or sublease shall be immediately
delivered to Landlord but any such assignment or
subletting shall not be deemed to release Tenant from
the payment and performance of any of its obligations
under this lease; (iv) Tenant shall promptly disclose
and pay to Landlord as additional rent hereunder any
rent or other payments pursuant to any sublease which
exceed the amounts payable hereunder and any other
consideration paid, or to be paid, by reason of the
assignment or sublease. Tenant specifically may
sublet that portion of Fourth Floor totaling 3,878
useable square feet as designated on Exhibit A
without Landlord's consent providing all conditions
of this Lease are met.
G. Not place additional signs on or about the Premises
or Project without first obtaining Landlord's written
consent thereto which will not unreasonably be
withheld.
H. Not overload, damage or deface the Premises or the
Project or do any act which may make void or voidable
any insurance on the Premises or the Project, or
which may render an increased or extra premium
payable for insurance.
I. Not make any alterations or additions to the Premises
without the prior written consent of Landlord and
until payment and completion bonds therefore have
been approved by Landlord; and all alterations,
additions or improvements (including carpeting or
other floor covering) which may be made by either of
the parties hereto upon the Premises, except movable
office furniture and equipment shall at Landlord's
election be the property of Landlord, and shall
remain upon and be surrendered with the Premises, as
a part thereof, at the termination of this Lease.
5
<PAGE> 6
J. Tenant shall pay the cost of all separately metered
electricity supplied to or used in the Premises at
rates prevailing for Tenant's class of use as
established by the company providing the electrical
service.
Tenant's, obligation under this paragraph numbered 7 to do or not to do a
specified act shall extend to and include Tenant's obligation to see to it that
Tenant's employees, agents and invitees shall do or shall not do such acts, as
the case may be.
8. CASUALTY LOSS: In case of damage to the Premises or the Project
by fire or other casualty, Tenant shall give immediate written notice to
Landlord, who shall within 30 days of such notice give notice to Tenant that:
(1) Landlord elects to terminate this Lease as hereinafter provided, or (2)
Landlord will cause the damage to be repaired with reasonable speed, at the
expense of the Landlord, subject to delays which may arise by reason of
adjustment of loss under insurance policies and for delays beyond the reasonable
control of Landlord, but Landlord shall have no obligation to restore or replace
any property owned by Tenant; and to the extent that the Premises are rendered
untenantable, the rent shall proportionately abate, except in the event such
damage resulted from the act, fault or neglect of Tenant, Tenant's employees,
invitees or agents, in which event there shall be no abatement of rent. If the
damage shall be so extensive that the Landlord shall decide not to repair or
rebuild, this Lease shall, at the option of Landlord, be terminated as of the
date of such damage by written notice from Landlord to Tenant, and the rent
shall be adjusted to the date of such damage and Tenant shall thereupon promptly
vacate the Premises. If more than 50% of the Premises is rendered untenantable
for more than twenty (20) days, Tenant shall have the right to terminate this
Lease upon ten (10) days written notice to Landlord.
9. CONDEMNATION: If the entire Premises are taken by eminent
domain, this Lease shall automatically terminate as of the date of taking. If
fifty percent (50%) or more of the Premises are taken by eminent domain,
Landlord or Tenant shall have the right to terminate this Lease as of the date
of taking by giving written notice thereof to the other on or before the date
of taking. If neither Landlord or Tenant elect to terminate this Lease,
Landlord shall, at its expense, restore the Premises, exclusive of any
improvements or other changes made therein by Tenant, to as near the condition
which existed immediately prior to the date of taking as reasonably possible,
and to the extent that the Premises are rendered untenantable, the rent shall
proportionately abate. All compensation awarded or paid upon such eminent
domain shall belong to and be the property of Landlord, without any
participation by Tenant; provided, however, nothing contained herein shall be
construed to preclude Tenant from prosecuting any claim directly against the
condemning authority for loss of business, depreciation to, damage to and/or
cost of removal of and/or for value of stock and/or trade fixtures, furniture
and other personal property belonging to Tenant as along as such claim does not
diminish or otherwise adversely affect Landlord's award.
10. DELAY IN POSSESSION: If the Premises shall on the scheduled
date of commencement of the Term not be ready for occupancy by the Tenant due
to the possession or occupancy thereof by any person not lawfully entitled
thereto, or because construction has not yet been
6
<PAGE> 7
completed, or by reason of any building operations, repair or remodeling to be
done by Landlord, Landlord shall use due diligence to complete such
construction, building operations, repair or remodeling and to deliver
possession of the Premises to Tenant. The Landlord, using such due diligence,
shall not in any way be liable for failure to obtain possession of the Premises
for Tenant or to timely complete such construction, building operations, repair
or remodeling, but the Base Rent and other charges payable by Tenant hereunder
shall abate until the Premises shall, on Landlord's part, be ready for the
occupancy of Tenant, this Lease remaining in all other respects in full force
and effect and the Term not thereby extended provided, however, if the Premises
are not ready for occupancy due to Landlord's negligence within 45 days of the
scheduled date of commencement of the Term, Tenant may terminate this Lease by
written notice to Landlord.
11. LIABILITY: Tenant agrees that Landlord and its officers,
agents and employees shall not be liable to Tenant for any damage to or loss of
personal property in the Premises unless such damage or loss is the result of
the negligence or willful misconduct of Landlord or its officers, agents and
employees.
12. DEFAULT: If Tenant shall fail to:
A. Pay, within five (5) days of its due date, any
Monthly Base Rent or Operating Costs, or
B. Pay any other sum payable hereunder within ten (10)
days after written notice has been given to Tenant, or
C. Keep, observe or perform any of the other terms,
covenants or conditions herein to be kept, observed
or performed by Tenant for more than thirty (30) days
after written notice is given to Tenant specifying
the nature of such default, or if such default so
specified shall be of such a nature that the same
cannot be reasonably cured or remedied within said
thirty (30) day period, than, if Tenant shall not in
good faith have commenced the curing or remedying of
such default within such thirty (30) day period and
is not thereafter continuously and diligently
proceeding therewith to completion;
then in any such event, Landlord, in addition to all other rights and remedies
available to Landlord, by law or by other provisions hereof, may, with due
process, re-enter immediately into the Premises and remove all persons and
property therefrom, and at Landlord's option, annul and cancel this Lease as to
all future rights of Tenant, and Tenant hereby expressly waives the service of
any notice in writing of intention to re-enter as aforesaid. Tenant further
agrees that in case of any such termination or re-entry Tenant will indemnify
the Lessor against all loss of rents and other damage which Landlord may incur
by reason of such termination, or re-entry, including but not being limited to,
costs of restoring and repairing the Premises and putting the same in rentable
condition, costs of renting the Premises to another tenant, loss or diminution
of rents and other damages which Landlord may incur by reason of
7
<PAGE> 8
such termination or re-entry, and all reasonable attorney's fees and expenses
incurred in enforcing any of the terms of this Lease. Neither acceptance of
rent by Landlord, with or without knowledge of breach, nor failure of Landlord
to take action on account of any breach hereof or to enforce its rights
hereunder shall be deemed a waiver of any breach, any absent written notice or
consent, said breach shall be a continuing one.
13. NOTICES: All bills, statements, notices or communications
which Landlord may desire or be required to give to Tenant shall be deemed
sufficiently given or rendered if in writing and either delivered to Tenant
personally or sent by registered or certified mail return receipt request
addressed to Tenant at the Premises and the time of rendition thereof or the
giving of such notice or communication shall be deemed to be the time when the
same is delivered to Tenant or deposited in the mail as herein provided. Any
notice by Tenant to Landlord shall be deemed sufficiently given or rendered if
in writing and either delivered to Landlord personally or sent by registered or
certified mail return receipt requested addressed to Landlord at the address
where the last previous rental hereunder was payable, or in case of subsequent
change upon notice given, to the latest address furnished, and the time of
rendition thereof or the giving of such notice or communication shall be deemed
to be the time when the same is delivered to Landlord or deposited in the mail
as herein provided.
14. HOLDING OVER: Should Tenant continue to occupy the Premises
after expiration or termination of the Term or any renewal or renewals thereof,
with Landlord's consent, such tenancy shall be from month to month and in no
event from year to year or for any longer term, and shall be on all the terms
and conditions hereof applicable to a month to month tenancy except that Base
Rent shall equal 150% of the Base Rent plus Tenant's share of Operating Costs
payable at the time of such expiration or termination. Nothing herein,
however, shall prevent Landlord from removing Tenant forthwith and seeking all
remedies available to Landlord in law or equity.
15. SUBORDINATION: The rights of Tenant shall be and are subject
and subordinate at all times to the lien of any mortgage now and hereafter in
force against the Project and Tenant shall execute such further instruments
subordinating this Lease to the lien or any such mortgage as shall be requested
by Landlord.
16. ESTOPPEL CERTIFICATE: Tenant shall at any time and from time
to time, within twenty (20) days after written request by Landlord, execute,
acknowledge and deliver to Landlord and any other parties designated by
Landlord, a certificate in writing certifying (a) that this Lease is in full
force and effect and is unmodified (or, if modified, stating the nature of such
modifications), (b) the date to which the rental and other charges payable
hereunder have been paid in advance, if any, and (c) that there are, to
Tenant's knowledge, no uncured defaults on the part of Landlord hereunder (or
specifying such defaults if any are claimed). Any such certificate may be
furnished to and relied upon by any prospective purchaser, lessee or
encumbrancer of all or any portion of the Project.
8
<PAGE> 9
17. INTEREST: Any amount due under this Lease which is not paid
when due shall bear interest at the lesser of the highest legal rate or 18
percent per annum from the date due until paid; provided, however, the payment
of such interest shall not excuse or cure the default upon which such interest
accrued.
18. BINDING EFFECT: The word "Tenant", wherever used in this
Lease, shall be construed to mean tenants in all cases where there is more than
one tenant, and the necessary grammatical changes required to make the
provisions hereof apply to corporations, partnerships or individuals, men or
women, shall in all cases be assumed as though in each case fully expressed.
Each provision hereof shall extend to and shall, as the case may require, bind
and inure to the benefit of Landlord and Tenant and their respective heirs,
legal representatives, successors and assigns, provided that this Lease shall
not inure to the benefit of any assignee, heir, legal representative,
transferee or successor of the Tenant except upon the express written consent
or election of Landlord.
19. ENVIRONMENTAL PROVISIONS:
A. Tenant shall not cause or permit any Hazardous
Material to be brought upon, kept or used in or about
the Premises by Tenant, its agents, employees,
contractors or invitees.
B. Tenant shall not discharge, leak, or admit, or permit
to be discharged, leaked, or admitted any material
into the atmosphere, ground, sewer system or any
body of water, if that material (as is reasonably
determined by Landlord or any governmental authority)
does or may pollute or contaminate the same, or may
adversely effect (a) the health, welfare or safety of
persons, whether located on the Premises or
elsewhere, or (b) the condition, use or enjoyment of
the Premises or any other real or personal property.
C. As used herein the term "Hazardous Material" means:
i. Any "hazardous waste" as defined by the
Resource Conservation and Recovery Act of
1976, as amended from time to time, and
regulations promulgated thereunder;
ii. Any "hazardous substance" as defined by the
Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as
amended from time to time, and regulations
promulgated thereunder,
iii. Any oil, petroleum products, and their
byproducts; and
iv. Any substance that is or becomes regulated by
any federal, state or local governmental
authority.
9
<PAGE> 10
D. Tenant shall defend, indemnify and hold harmless
Landlord, its successors and assigns, and their
agents from and against any claims, demands,
penalties, fines, liabilities, settlements, damages,
costs or expenses (including without limitation
attorneys' and consultant's fees, court costs and
litigation expenses) of whatever kind or nature,
known or unknown, contingent or otherwise, arising out
of Tenant's acts or omissions after Tenant takes
possession of the Premises, and in any way related
to:
i. The presence, disposal, release or threatened
release of any Hazardous Material that is on,
from or affecting the soil, water,
vegetation, buildings, personal property,
persons, animals, or otherwise;
ii. Any personal injury (including wrongful
death) or property damage (real or personal)
arising out of or related to the Hazardous
Material;
iii. Any lawsuit brought or threatened, settlement
reached or government order relating to the
Hazardous Material; or
iv. Any violations of any laws or regulations
applicable thereto.
The provisions of this paragraph shall be in addition to any other
obligations or liabilities Tenant may have to Landlord.
20. COMMISSIONS: Tenant represents and warrants that Tenant has not
been and is not liable for any brokers' or finders' fees or commissions in
connection with Tenant's leasing of the Premises.
21. TRANSFER OF LANDLORD'S INTEREST: In the event of any transfer
or transfers of Landlord's interest in the Premises or the Building, other than
a transfer for security purposes only, the transferor shall be automatically
relieved of any and all obligations and liabilities on the part of Landlord
accruing from and after the date of such transfer. Except that Tenant shall be
entitled to any rights of termination and/or rights of cancellation and/or
rights of cancellation and/or rights of abatement of rent to which Tenant is
entitled under the terms of this Lease.
22. INCORPORATION OF EXHIBITS: The following exhibits to this
Lease are hereby incorporated by reference for all purposes as fully as if set
forth at length herein:
EXHIBIT A Floor Plan of Premises
EXHIBIT B Leasehold Improvements Plan and
Specifications
10
<PAGE> 11
EXHIBIT C Intentionally Omitted
EXHIBIT D Additional Terms and Conditions
EXHIBIT D-1 Letter to Building Department
23. QUIET ENJOYMENT: Landlord covenants that its estate in the
Premises is fee simple and that Tenant, on paying the Monthly Base Rent and
Operating Costs herein reserved and performing all the agreements by Tenant to
be performed, shall and may peaceably have, hold and enjoy the Premises for the
Term of this Lease free from molestation, eviction or disturbance by Landlord
or any other persons or legal entity whatsoever.
24. DEFAULT BY LANDLORD: If Landlord breaches any of the
obligations required to be performed by Landlord under this Lease, and fails to
cure such breach within ten (10) days after written notice thereof, Tenant may
either cure such breach and deduct the cost thereof from any sum subsequently
due hereunder, or elect to terminate this Lease upon written notice to
Landlord.
25. ATTORNEY FEES: In the event either party hereto is successful
in enforcing against the other any remedy, legal or equitable, for a breach of
any of the provisions of this Lease, there shall be included in the judgment or
decree, the reasonable expenses and attorney's fees of the successful party.
26. APPLICABLE LAW: This Lease shall be construed and performed in
accordance with the laws of the State of Iowa.
27. ATTORNMENT: Tenant agrees that no action taken by the holder
of a mortgage by reason of default hereunder shall terminate this Lease or
invalidate or constitute a breach of any of the terms or conditions hereof and
Tenant shall attorn to the purchaser at any foreclosure sale or the grantee
in any conveyance in lieu of foreclosure as Landlord under this Lease, and
Tenant will execute such instruments as may be necessary or appropriate to
evidence such attornment, provided that the holder of the note and mortgage
agrees that as long as Tenant is not in default under this Lease, Tenant's
right to possession and use of the Premises shall be and remain undisturbed and
unaffected by the holder of the note and mortgage or by any foreclosure
proceedings thereunder.
28. WARRANTY: Landlord shall defend, indemnify and hold harmless
Tenant, its successors and assigns, from any and all claims, demands,
penalties, fines, liabilities, settlements, damages, costs or expenses
(including without limitation attorneys and consultant's fees, court costs and
litigation expenses) of whatever kind or nature, known or unknown, contingent
or otherwise, which arise out of Landlord's acts or omissions which are not
attributable to Tenant's acts or omissions and are not in any way related to the
items described in 19.D.(i-iv) above.
11
<PAGE> 12
IN WITNESS WHEREOF, the respective parties hereto have caused this
Lease to be executed as of the day and year first above written.
LANDLORD: TENANT:
2060 PARTNERSHIP, L.P. TELECOM*USA PUBLISHING COMPANY
By: 2001 Development Corporation
Its: General Partner
By: /s/ THOMAS L. ALLER By: /s/ JAMES A. HADDAD
-------------------------- --------------------------------
Thomas L. Aller James A. Haddad
Its: Executive Vice President Its: Vice President - Finance
Date: 7-18-95 Date: 7/18/95
------------------------ ------------------------------
12
<PAGE> 13
EXHIBIT B
LEASEHOLD IMPROVEMENT PLAN AND SPECIFICATIONS
Landlord and Tenant agree to the Leasehold Improvement Plan and Specifications
as shown in drawings by OPN Architects dated June 5, 1995. The Landlord will
pay $17,100.00 towards the improvements on the Lower Level location. Any
improvements in excess of the above amount shall be paid by Tenant.
13
<PAGE> 14
EXHIBIT D
ADDITIONAL TERMS AND CONDITIONS
1) LEASEHOLD IMPROVEMENTS (Lower Level):
Landlord and Tenant agree all Leasehold Improvements to the Lower
Level Premises location shall be constructed by Ryan Construction
Company (Ryan) in accordance with the Leasehold Improvement Plan and
Specifications agreed to by Landlord and Tenant as per drawings by OPN
Architects dated June 5, 1995. Landlord will pay $17,100.00 towards
improvements for the Lower Level. Any improvements in excess of this
amount shall be paid by Tenant. Landlord will amortize the excess
Leasehold Improvements in the amount of $52,670.00. The terms are 11%
interest over 60 months. The monthly Leasehold Improvement payment
will be $1,145.17.
2) RIGHT OF CANCELLATION. Tenant shall have the right to terminate this
Lease as of September 1, 2002 if:
(a) Tenant gives written notice to Landlord that it is
exercising that right no later than March 1, 2002 and
(b) Tenant is not in default under the Lease at the time
such termination right is exercised and at the time
such termination becomes effective, and
(c) Tenant pays to Landlord in cash on or before the date
of termination, One Hundred Ninety-Five Thousand and
Zero dollars ($195,000.00) in addition to all other
sums due and owing under the terms of the Lease as of
the date of termination.
If the foregoing conditions are met, on or before the date set forth
in Tenant's notice, the Term shall expire with the same force and
effect as if such date were the expiration date of the Term.
The respective rights and obligations of Landlord and Tenant with
respect to the Lease and the Premises shall be preserved and shall
survive the termination of this Lease as to all matters arising or
accruing prior to the date of termination.
14
<PAGE> 15
Within 15 days after receipt from Landlord or Tenant, the other party
shall execute and deliver those instruments reasonably requested to
evidence the termination of this Lease.
3) RENEWAL OPTION:
Landlord grants Tenant the option to extend the Term for 1 period of 60
months each subject to the following conditions:
(a) At the time Tenant exercises the option, Tenant is
not in default under the Lease.
(b) Tenant gives Landlord at least 8 months prior written
notice of Tenant's election to extend the Term no
later than January 1, 2005.
(c) The extended Term will be on the same terms,
covenants and conditions provided during the initial
Term except that there will be no further options to
extend the Term, and the Monthly Base Rent will be as
follows:
<TABLE>
<CAPTION>
Base Rent
Dates Per/RSF
------------------------------------ ---------
<S> <C>
September 1, 2005 to August 31, 2006 $ 9.25
September 1, 2006 to August 31, 2010 $10.75
</TABLE>
(d) At the request of either, Landlord and Tenant will
execute and deliver appropriate documents covering
extension of the Term, the Monthly Base Rent and
other terms of this Lease during the extended Term.
(e) The rights of Tenant under this Section will not be
severed from this Lease or separately sold, assigned
or transferred, and will expire on the expiration or
earlier termination of this Lease.
4) EXPANSION:
(a) Tenant shall have the option to lease the area
designated Right of First Refusal on Exhibit A
(Fourth Floor) attached hereto effective January 1,
1997. Tenant shall notify Landlord in writing no
later than June 30, 1996 of its intention to lease
this area. The Monthly Base Rent during the Lease's
initial Term shall be calculated as follows if the
space is leased in "as-is" condition:
15
<PAGE> 16
<TABLE>
<CAPTION>
Base Rent
Dates Per/RSF
------------------------------------ ---------
<S> <C>
Commencement date - December 31, 2001 $6.88
January 1, 2002 - December 31, 2002 $7.25
January 1, 2003 - December 31, 2004 $7.75
January 1, 2005 - August 31, 2005 $8.25
</TABLE>
The Monthly Base Rental rate for the Option period
shall be:
<TABLE>
<CAPTION>
Rate
Dates Per/RSF
------------------------------------ -------
<S> <C>
September 1, 2005 to August 31, 2006 $8.25
September 1, 2006 to August 31, 2010 $9.75
</TABLE>
All other terms, covenants and conditions provided in
the Lease will apply to the expansion space.
The failure of Tenant to exercise its option as to
any space tendered pursuant to this paragraph shall
terminate the obligation of Landlord to again offer
that space to Tenant pursuant to the terms and
conditions of this paragraph.
(b) Effective January 1, 1997, Tenant shall have the
option to lease the corridor area on Exhibit A
(Fourth Floor) only if Tenant exercises its option as
outlined in this Section 4, Item a. Tenant shall
notify Landlord in writing no later than June 30,
1996 of its intention to lease this area. Landlord
shall pay $22,965 towards Leasehold Improvements for
this area. The Monthly Base Rent shall be calculated
using the same rates as outlined in the Lease
(Section 3; Monthly Base Rent) and in Exhibit D
(Section 3, Item C; Renewal Option). All other terms
convenience and conditions provided in the Lease will
apply to the corridor space Any excess Leasehold
Improvement costs shall be paid by the Tenant.
Landlord will consider amortizing the excess cost at
reasonable rates, but is not committed to doing so.
5) PARKING:
Landlord shall cause to be made available to Tenant, and Tenant agrees
to rent up to 48 parking spaces ("Spaces") in the parking facility
located at 218 Fourth Avenue SE, Cedar Rapids, Iowa and up to 96
spaces in the City of Cedar Rapids Fourth Avenue Parkade. Tenant
shall pay directly to the parking facility operator ("Operator") such
amounts as are from time to time agreed upon by Tenant and Operator.
Landlord does not warrant that these Spaces will be free from
interruption from causes beyond reasonable control of Landlord. Such
16
<PAGE> 17
interruption of Spaces shall never be deemed an eviction or
disturbance of Tenant's use and possession of the Premises or any part
thereof or render Landlord liable to Tenant for damages by abatement
of rent or otherwise relieve Tenant from performance of Tenant's
obligations under this Lease.
6) TERMINATION OF LEASE:
This Lease is in lieu of and to take the place of the certain Lease
Agreement for Third, Fourth, and Fifth floors dated February 12, 1993
and First Lease Amendment dated May 24, 1994, by and between 2060
Partnership, L.P. and Telecom*USA Publishing Company, which lease and
amendment shall terminate as of the commencement date of this Lease.
7) RESTROOMS - FIFTH FLOOR:
If Tenant exercises its option to lease the area outlined in this
Exhibit, Item 4a, Landlord agrees to pay for reasonable relocation
expansion and remodeling of the men's and women's restrooms on Fifth
Floor of the Premises to comply with applicable City Code requirements
and ordinances. Landlord agrees that reasonable relocation encompasses
any place on South side. See attached Exhibit D1 to the City of Cedar
Rapids Building Department.
17
<PAGE> 1
EXHIBIT 10.69
LEASE - BUSINESS PROPERTY
THIS LEASE AGREEMENT, executed in duplicate, made and entered into this
26th day of April 1995, by and between A.M. Henderson
- ---- ---- -- ----------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
_______________________________(hereinafter called the "Landlord") whose
address for the purpose of this lease is P.O. Box 922, Cedar Rapids
---------------------------------------
(Street and Number) (City)
Iowa 52406 and Telecom*USA Publishing Company
- -------------------------- ------------------------------------------------
(State) (Zip Code)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
_____________________________________(hererinafter called the "Tenant") whose
address for the purpose of this lease is 201 3rd Avenue SE, Ste. 550, Cedar
--------------------------------------
(Street and Number) (City)
Rapids, IA 52401 , WITNESSETH THAT:
- -------------------------
(State) (Zip Code)
1. PREMISES AND TERM. The Landlord, in consideration of the rents
herein reserved and of the agreements and conditions herein contained, on the
part of the Tenant to be kept and performed, leases unto the Tenant and Tenant
hereby rents and leases from Landlord, according to the terms and provisions
herein, the following described real estate, situated in Linn County, Iowa, to
wit:
23,773 sq.ft. (see Exhibit B for breakdown)
931 Blairs Ferry Road NE, Cedar Rapids, Iowa
Legal: IRR SUR NE 3-83-7 N OF RR W 438.25' MEAS ON N LN LOT 5 & IRR
SUR NW N OF RR (LESS CITY) E 169' MEAS ON N LN LOT 2
with the improvements thereon and all rights, easements and appurtenances
thereto belonging, which, more particularly, includes the space and premises
as may be shown on "Exhibit A," if and as may be attached hereto, for a term of
5 years, commencing at midnight of the day previous to the first day of the
lease term, which shall be on the first day of August 1995, and ending at
midnight on the last day of the lease term, which shall be on the 31st day of
July 2000, upon the condition that the Tenant pays rent therefor,
and otherwise performs as in this lease provided.
2. RENTAL. Tenant agrees to pay to Landlord as rental for said term,
as follows: $12,824.28 per month, in advance, the first rent payment becoming
due upon
Strike XXXXXXXXXXXXXXXXXXX
one (b) the 1st day of August, 1995,
and the same amount, per month, in advance, on the _______day of each month
thereafter, during the term of this lease.
In addition to the above monthly rental Tenant shall also pay:
All sums shall be paid at the address of Landlord, as above designated,
or at such other place in Iowa, or elsewhere, as the Landlord may, from time
to time, previously designate in writing.
Delinquent payments shall draw interest at 9.0% per annum from five (5)
days after the due date, until paid.
3. POSSESSION. Tenant shall be entitled to possession on the first
day of the term of this lease, and shall yield possession to the Landlord at
the time and date of the close of this lease term, except as herein otherwise
expressly provided. Should Landlord be unable to give possession on said date,
Tenant's only damages shall be a rebating of the pro rata rental.
4. USE OF PREMISES. Tenant convenants and agrees during the term of
this lease to use and to occupy the leased premises only for
office/warehouse/training center.
- -----------------------------------------------------------------------------
For restrictions on such use, see paragraphs 6(c), 6(d) and 11(b) below.
5. QUIET ENJOYMENT. Landlord covenants that its estate in said
premises is fee simple absolute
-----------------------------------------------------------------
and that the Tenant on paying the rent herein reserved and performing all the
agreements by the Tenant to be performed as provided in this lease, shall and
may peaceably have, hold and enjoy the demised premises for the term of this
lease free from molestation, eviction or disturbance by the Landlord or any
other persons or legal entity whatsoever. (But see paragraph 14, below.)
Landlord, shall have the right to mortgage all of its right, title,
interest in said premises at any time without notice, subject to this lease.
6. CARE AND MAINTENANCE OF PREMISES. (a) Tenant takes said premises in
their present condition except for such repairs and alterations as may be
expressly herein provided.
<PAGE> 2
(b) LANDLORD'S DUTY OF CARE AND MAINTENANCE. Landlord will keep the
roof, structural part of the floor, walls and other structural parts of the
building in good repair.
(c) TENANT'S DUTY OF CARE AND MAINTENANCE. Tenant shall, after taking
possession of said premises and until the termination of this lease and the
actual removal from the premises, at its own expense, care for and maintain
said premises in a reasonably safe and serviceable condition, except for
structural parts of the building. Tenant will furnish its own interior
decorating. Tenant will not permit or allow said premises to be damaged or
depreciated in value by any act or negligence of the Tenant, its agents or
employees. Without limiting the generality of the foregoing. Landlord will
make necessary repairs to the sewer, the plumbing, the water pipes and
electrical wiring, except as follows:
None
and Tenant agrees to keep faucets closed so as to prevent waste of water and
flooding of premises: to promptly take care of any leakage or stoppage in any
of the water, gas or waste pipes. The Tenant agrees to maintain adequate heat
to prevent freezing of pipes, if and only if the other terms of this lease fix
responsibilility for heating upon the Tenant. Landlord will be responsible for
the plate glass in the windows of the leased premises and for maintaining the
parking area, driveways and sidewalks on and abutting the leased premises, if
the leased premises include the ground floor, and if the other terms of this
lease include premises so described. Tenant shall make no structural
alterations or improvements without the written approval of the Landlord first
had and obtained, of the plans and specifications therefor.
(d) Tenant will make no unlawful use of said premises and agrees to
comply with all valid regulations of the Board of Health, City Ordinances or
applicable municipality, the laws of the State of Iowa and the Federal
government, but this provision shall not be construed as creating any duty by
Tenant to members of the general public. If Tenant, by the terms of this lease
is leasing premises on the ground floor, it will not allow trash of any kind
to accumulate on said premises in the halls, if any, or the alley or yard in
front, side or rear thereof, and it will remove same from the premises at its
own expense. Tenant also agrees to remove snow and ice and other obstacles
from the sidewalk on or abutting the premises, if premises include the ground
floor, and if this lease may be fairly-construed to impose such liability on
the Tenant.
7. (a) UTILITIES AND SERVICES. Tenant, during the term of this lease,
shall pay, before delinquency, all charges for use of telephone, electricity,
power, air conditioning, garbage disposal, trash disposal and not limited by
the foregoing all other utilities and services of whatever kind and nature
which may be used in or upon the demised premises.
(b) AIR CONDITIONING equipment shall be furnished at the expense of
Landlord and maintenance thereof at the expense of Landlord
- ------------------- -------------------
(Landlord or Tenant) (Landlord or Tenant)
(c) JANITOR SERVICE shall be furnished at the expense of
Tenant
- --------------------
(Landlord or Tenant)
(d) HEATING shall be furnished at the expense of Landlord
-----------------------
(Landlord or Tenant)
8. (a) SURRENDER OF PREMISES AT END OF TERM - REMOVAL OF FIXTURES.
Tenant agrees that upon the termination of this lease, it will surrender,
yield up and deliver the leased premises in good and clean condition, except
the effects of ordinary wear and tear and depreciation arising from lapse of
time, or damage without fault or liabilitiy of Tenant. [See also 11(a) and
11(e) below]
(b) Tenant may, at the expiration of the term of this lease, or renewal
or renewals thereof or at a reasonable time thereafter, if Tenant is not in
default hereunder, remove any fixtures or equipment which said Tenant has
installed in the leased premises, providing said Tenant repairs any and all
damages caused by removal.
(c) HOLDING OVER. Continued possession, beyond the expiratory date of
the term of this lease, by the Tenant, coupled with the receipt of the
specified rental by the Landlord (and absent a written agreement by both
parties for an extension of this lease, or for a new lease) shall constitute a
month to month extension of this lease.
9. ASSIGNMENT AND SUBLETTING. Any assignment of this lease or
subletting of the premises or any part thereof, without the Landlord's written
permission shall, at the option of the Landlord, make the rental for the
balance of the lease term due and payable at once. Such written permission
shall not be unreasonably withheld.
10. (a) ALL REAL ESTATE TAXES, except as may be otherwise expressly
provided in this paragraph 10, levied or assessed by lawful authority (but
reasonably preserving Landlord's rights of appeal) against said real property
shall be timely paid by the parties in the following proportions: by Landlord
100%; by Tenant 0%.
(b) Increase in such taxes, except as in the next paragraph provided,
above the amount paid for the base tax year of 1994/95 (base year if any and as
may be defined in this paragraph) shall be paid by Landlord, 0%; by Tenant
100%.
(c) Increase in such taxes caused by Improvements of Tenant shall be
paid by Landlord 0%; by Tenant 100%.
(d) PERSONAL PROPERTY TAXES. Tenant agrees to timely pay all taxes,
assessments or other public charges levied or assessed by lawful authority (but
reasonably preserving Tenant's rights of appeal) against its personal property
on the premises, during the term of this lease.
(e) SPECIAL ASSESSMENTS. Special assessments shall be timely paid by
the parties in the following proportions: by the Landlord 0%; by the Tenant
100%.
11. INSURANCE. (a) Landlord and Tenant will each keep its respective
property interests in the premises and its liability in regard thereto, and the
personal property on the premises, reasonably insured against hazards and
casualties; that is, fire and those items usually covered by extended coverage;
and Tenant will procure and deliver to the Landlord a certification from the
respective insurance companies to that effect. Such insurance shall be made
payable to the parties hereto as their interests may appear.
(b) Tenant will not do or omit the doing of any act which would vitiate
any insurance, or increase the insurance rates in force upon the real estate
improvements on the premises or upon any personal property of the Tenant upon
which the Landlord by law or by the terms of this lease, has or shall have a
lien.
(c) Subrogation rights are not to be waived unless a special provision
is attached to this lease.
(d) Tenant further agrees to comply with recommendations of Iowa
Insurance Service Bureau and to be liable for and to promptly pay, as if
current rental, any increase in insurance rates on said premises and on the
building of which said premises are a part, due to increased risks of hazards
resulting from Tenant's use of the premises otherwise than as herein
contemplated and agreed.
(e) INSURANCE PROCEEDS. Landlord shall settle and adjust any claim
against any insurance company under its said policies or insurance for the
premises, and said insurance monies shall be paid to and held by the Landlord to
be used in payment for cost of repairs or restoration [REMAINDER OF SENTENCE IS
MISSING]
<PAGE> 3
12. INDEMNITY AND LIABILITY INSURANCE. Except as to any negligence of
the Landlord, or any other tenants, Tenant will protect, indemnify and save
harmless the Landlord from and against any and all loss, costs, damage and
expenses occasioned by, or arising out of, any accident or other occurrence
causing or inflicting injury and/or damage to any person or property, happening
or done, in, upon or about the leased premises, or due directly or indirectly
to the tenancy, use or occupancy thereof, or any part thereof by the Tenant or
any person claiming through or under the Tenant. The Tenant further covenants
and agrees that it will at its own expense procure and maintain casualty and
liability insurance in a responsible company or companies authorized to do
business in the State of Iowa, in amounts not less than $100,000 ___________ for
any one person injured, and $500,000 ___________________ for any one accident,
and with the limits of $25,000 _____________ for property damage, protecting
the Landlord against such claim, damages, costs or expenses on account of injury
to any person or persons, or to any property belonging to any person or
persons, by reason of such casualty, accident or other happening on or about
the demised premises during the term thereof. Certificates or copies of said
policies, naming the Landlord, and providing for 30 days' notice to the
Landlord before cancellation shall be delivered to the Landlord within twenty
(20) __________ days from the date of the beginning of the term of this lease.
As to insurance of the Landlord for roof and structural faults, see paragraph
11(a) above.
13. FIRE AND CASUALTY, PARTIAL DESTRUCTION OR PREMISES. (a) In the
event of a partial destruction or damage of the leased premises, which is a
business interference, that is, which prevents the conducting of a normal
business operation and which damage is reasonably repairable within sixty (60)
days after its occurrence, this lease shall not terminate but the rent for the
leased premises shall abate during the time of such business interference. In
the event of partial destruction, Landlord shall repair such damages within 60
___________________ days of its occurrence unless prevented from so doing by
acts of God, the elements, the public enemy, strikes, riots, insurrection,
government regulations, city ordinances, labor, material or transportation
shortages, or other causes beyond Landlord's reasonable control.
(b) ZONING. Should the zoning ordinance of the city or municipality in
which this property is located make it impossible for Landlord, using diligent
and timely effort to obtain necessary permits and to repair and/or rebuild so
that Tenant is not able to conduct its business on these premises, then such
partial destruction shall be treated as a total destruction as in the next
paragraph provided.
(c) TOTAL DESTRUCTION OF BUSINESS USE. In the event of a destruction or
damage of the leased premises including the parking area (if a parking area is
a part of the subject matter of this lease) so that Tenant is not able to
conduct its business on the premises or the then current legal use for which
the premises are being used and which damages cannot be repaired within sixty
(60) _______________ days this lease may be terminated at the option of either
the Landlord or Tenant. Such termination in such event shall be effected by
written notice of one party to the other, within 30 days after such
destruction. Tenant shall surrender possession within ten (10) ____________
days after such notice issues, and each party shall be released from all future
obligations hereunder, Tenant paying rental pro rata only to the date of such
destruction. In the event of such termination of this lease, Landlord at its
option, may rebuild or not, according to its own wishes and needs.
14. CONDEMNATION. (a) DISPOSITION OF AWARDS. Should the whole or any
part of the demised premises be condemned or taken by a competent authority for
any public or quasi-public use or purpose, each party shall be entitled to
retain, as its own property, any award payable to it. Or in the event that a
single entire award is made on account of the condemnation, each party will
then be entitled to take such proportion of said award as may be fair and
reasonable.
(b) DATE OF LEASE TERMINATION. If the whole of the demised premises
shall be so condemned or taken, the Landlord shall not be liable to the Tenant
except and as its rights are preserved as in paragraph 14(a) above.
15. TERMINATION OF LEASE AND DEFAULTS OF TENANT. (a) TERMINATION UPON
EXPIRATION OR UPON NOTICE OF DEFAULTS. This lease shall terminate upon
expiration of the demised term; or if this lease expressly and in writing
provides for any option or options, and if any such option is exercised by the
Tenant, then this lease will terminate at the expiration of the option term or
terms. Upon default in payment of rental herein or upon any other default by
Tenant in accordance with the terms and provisions of this lease, this lease
may at the option of the Landlord be cancelled and forfeited, PROVIDED,
HOWEVER, before any such cancellation and forfeiture except as provided in
15(b) below, Landlord shall give Tenant a written notice specifying the
default, or defaults, and stating that this lease will be cancelled and
forfeited thirty (30) days after the giving of such notice, unless such
default, or defaults, are remedied within such grace period. (See paragraph 22,
below.) As an additional optional procedure or as an alternative to the
foregoing (and neither exclusive of the other) Landlord may proceed as in
paragraph 21, below, provided.
(b) BANKRUPTCY OR INSOLVENCY OF TENANT. In the event Tenant is
adjudicated a bankrupt or in the event of a judicial sale or other transfer of
Tenant's leasehold interest by reason by any bankruptcy or insolvency
proceedings or by other operation of law, but not by death, and such
bankruptcy, judicial sale or transfer has not been vacated or set aside within
ten (10) days from the giving of notice thereof by Landlord to Tenant, then,
and in any such events, Landlord may, at its option, immediately terminate this
lease, re-enter said premises, upon giving of ten (10) days' written notice
by Landlord to Tenant, all to the extent permitted by applicable law.
(c) In (a) and (b) above, waiver as to any default shall not constitute
a waiver of any subsequent default or defaults.
(d) Acceptance of keys, advertising and re-renting by the Landlord upon
the Tenant's default shall be construed only as an effort to mitigate damages
by the Landlord, and not as an agreement to terminate this lease.
16. RIGHT OF EITHER PARTY TO MAKE GOOD ANY DEFAULT OF THE OTHER. If
default shall be made by either party in the performance of, or compliance
with, any of the terms, covenants or conditions of this lease, and such
default shall have continued for thirty (30) days after written notice thereof
from one party to the other, the person aggrieved, in addition to all other
remedies now or hereafter provided by law, may, but need not, perform such
term, covenant or condition, or make good such default and any amount advanced
shall be repaid forthwith on demand, together with interest at the rate of 12%
per annum, from date of advance.
17. SIGNS (a) Tenant shall have the right and privilege of attaching,
affixing, painting or exhibiting signs on the leased premises, provided only
(1) that any and all signs shall comply with the ordinances of the city or
municipality in which the property is located and the laws of the State of
Iowa; (2) such signs shall not change the structure of the building; (3) such
signs if and when taken down shall not damage the building; and (4) such signs
shall be subject to the written approval of the Landlord, which approval shall
not be unreasonably withheld.
(b) Landlord during the last ninety (90) days of this lease, or
extension, shall have the right to maintain in the windows or on the building
or on the premises either or both a "For Rent" or "For Sale" sign and Tenant
will permit, at such time, prospective tenants or buyers to enter and examine
the premises.
18. MECHANIC'S LIENS. Neither the Tenant nor anyone claiming by,
through, or under the Tenant, shall have the right to file or place any
mechanic's lien or other lien of any kind or character whatsoever, upon said
premises or upon any building or improvement thereon, or upon the leasehold
interest of the Tenant therein, and notice is hereby given that no contractor,
sub-contractor, or anyone else who may furnish any material, service or labor
for any building, improvements, alteration, repairs or any part thereof, shall
at any time be or become entitled to any lien thereon, and for the further
security of the Landlord, the Tenant covenants and agrees to give actual
notice thereof in advance, to any and all contractors and sub-contractors who
may furnish or agree to furnish any such material, service or labor.
<PAGE> 4
21. RIGHTS CUMULATIVE. The various rights, powers, options, elections
and remedies of either party, provided in this lease, shall be construed as
cumulative and no one of them as exclusive of the others, or exclusive of any
rights, remedies or priorities allowed either party by law, and shall in no way
affect or impair the right of either party to pursue any other equitable or
legal remedy to which either party may be entitled as long as any default
remains in any way unremedied, unsatisfied or undischarged.
22. NOTICES AND DEMAND. Notices as provided for in this lease shall be
given to the respective parties hereto at the respective addresses designated
on page one of this lease unless either party notifies the other, in writing, of
a different address. Without prejudice to any other method of notifying a
party in writing or making a demand or other communication, such message shall
be considered given under the terms of this lease when sent, addressed as above
designated, postage prepaid, by registered or certified mail, return receipt
requested, by the United States mail and so deposited in a United States mail
box.
23. PROVISIONS TO BIND AND BENEFIT SUCCESSORS, ASSIGNS, ETC. Each and
every covenant and agreement herein contained shall extend to and be binding
upon the respective successors, heirs, administrators, executors and assigns of
the parties hereto; except that if any part of this lease is held in joint
tenancy, the successor in interest shall be the surviving joint tenant.
24. CHANGES TO BE IN WRITING. None of the covenants, provisions, terms
or conditions of this lease to be kept or performed by Landlord or Tenant shall
be in any manner modified, waived or abandoned, except by a written instrument
duly signed by the parties and delivered to the Landlord and Tenant. This
lease contains the whole agreement of the parties.
25. RELEASE OR DOWER. Spouse of Landlord, appears as a party signatory
to this lease soley for the purpose of releasing dower, or distributive share,
unless said spouse is also a co-owner of an interest in the lease premises.
26. CONSTRUCTION. Words and phrases herein, including acknowledgement
hereof, shall be construed as in the singular or plural number, and as
masculine, feminine or neuter gender according to the context.
27. See Addendum attached hereto and made a part hereof for all
purposes.
IN WITNESS WHEREOF, the parties hereto have duly executed this lease in
duplicate the day and year first above written.
<TABLE>
<S> <C>
/s/ A.M. HENDERSON
- ----------------------------------- -----------------------------------------
LANDLORD'S SPOUSE A.M. Henderson LANDLORD
(See paragraph 25)
Telecom*USA Publishing Company
By: /s/ JAMES A. HADDAD
- ----------------------------------- -----------------------------------------
TENANT'S SPOUSE James A. Haddad, Vice President TENANT
[See paragraph 19(b)]
</TABLE>
[ATTACH APPROPRIATE ACKNOWLEDGEMENTS HERE]
<PAGE> 5
ADDENDUM
Addendum to Lease -- Business Property (the "Lease") between A.M. Henderson
("Landlord") and Telecom*USA Publishing Company, an Iowa corporation
("Tenant").
The provisions of this Addendum shall control over any conflicting provisions
of the Lease.
If the Lease is in full force and effect on June 30, 2000, Tenant shall have
the right, at its option, to extend the term of the Lease for an additional five
(5) years upon the same terms and conditions contained in the Lease, except
the rental for such extended period shall be increased by 80% of the percentage
increase in the Consumer Price Index All Consumers - U.S. Cities average, from
the commencement date through June 30, 2000, with such increased monthly rental
commencing on July 1, 2000. To exercise this option to extend, Tenant
shall notify Landlord in writing no later than December 31, 1999.
The parties acknowledge that Telecom is currently leasing other space for its
Cedar Rapids sales office at 1350 Boyson Road, Building D, Hiawatha, Iowa.
Scott Olson has agreed to attempt to sublet that lease space. The rent due
under this Lease shall be reduced by $1,000.00 per month beginning September 1,
1995 until that space is leased.
Landlord agrees to, prior to the commencement date of this Lease, repair the
parking lot surface on the property, clean up the area around the railroad
tracks, and paint the south wall of the building. In addition, Landlord shall
fence the warehouse area in accordance with the drawing attached hereto as
Exhibit "A and B".
Telecom shall be allowed to place signage on the west wall of the building,
over the loading dock area, and at the front of the property near Blairs Ferry
Road. Such signage shall be subject to the prior approval of Landlord, which
approval shall not be unreasonably withheld.
Tenant shall have the right to use one-half of the east parking lot on the
property until 4:00 p.m. each day. Tenant shall have the right to use at least
seventy parking spaces in the west parking lot at all times.
All notices to Tenant under the Lease shall be sent to the attention of James
A. Haddad.
Any increase in the amounts due from Tenant under this Lease, including, but
not limited to, any increase in real estate taxes, shall be paid by Tenant on a
pro rata basis based on the square footage under this Lease versus the square
footage of the entire building. Total taxes for 1994/95 are $$28,404.00.
<PAGE> 6
ADDENDUM
--------
PAGE 2
Notwithstanding the provision of Section 6(d), Tenant shall not be obligated to
make any alterations or changes required by the Americans With Disabilities Act
or any other rules, regulations, ordinances, or laws, unless such alterations or
changes are required due to the nature of Tenant's use of the premises.
Landlord agrees to complete its work on the premises on or before September 1,
1995. If Landlord has not completed its work by such date, Tenant shall have
the right, at its option, to terminate this Lease upon written notice to
Landlord.
Tenant shall have the non-exclusive use of two loading docks and one ramp.
Landlord acknowledges that the warehouse space and the use of the loading docks
is an important requirement of Tenant in entering into the Lease. Therefore,
Tenant shall have the right, at its option, to terminate the Lease upon 60 days
written notice to Landlord if Tenant's reasonable use of the loading docks is
adversely affected or restricted.
The parties acknowledge that the rent due hereunder is based on the
calculations set out on Exhibit "C" attached hereto. As shown on such Exhibit,
$125,000 of the renovation costs have been amortized over a five year period
(the "5 year component"). Landlord agrees that if Tenant exercises its options
to extend the term of the Lease, the 5 year component shall be removed from the
calculation of the rent for the extended term of the Lease.
Attached hereto as Exhibit "B" are the improvements to be completed to the
premises. The allowance provided Tenant for such construction costs, including
design costs and a contingency fund, totals $325,000. Any amounts incurred by
Tenant above that amount shall be paid directly by Tenant.
Rate is based on gas annual usage of $0.19/sq.ft. If gas usage increases, rate
will be adjusted annually prorated by square footage.
TELECOM*USA PUBLISHING COMPANY
/s/ A.M. HENDERSON By: /s/ JAMES A. HADDAD
- ----------------------------- -----------------------------
A.M. Henderson James A. Haddad, Vice President
<PAGE> 1
EXHIBIT 10.70
AMERITECH LISTING
LICENSE AGREEMENT
This Agreement entered into as of the 19th day of April, 1994, between
AMERITECH INFORMATION INDUSTRY SERVICES, A division of Ameritech Services, Inc.,
whose principal place of business is 2000 W. Ameritech Center Drive, Hoffman
Estates, Illinois 60196-1025, on behalf of and as agent for Ameritech Illinois,
Ameritech Indiana, Ameritech Michigan, Ameritech Ohio and Ameritech Wisconsin
(each said Company shall be referred to individually and collectively
hereinafter as "Ameritech") and Telecom * USA Publishing Company whose principal
place of business is 201 Third Ave. SE. STE. 500, Cedar Rapids, IA ("Licensee").
52406-3162
WITNESSETH:
WHEREAS, Ameritech to the extent permitted by law, is the owner of all
right, title and interest in and to certain name, address and telephone number
information of its residential and business telephone service subscribers
("Listing Information"); and
WHEREAS, Licensee desires to obtain the Listing Information which
appears in one or more Ameritech Directory or Directories, for us in compiling,
producing, publishing, and/or delivering a directory in Licensee's name
("Licensee Directory"); and
WHEREAS, Ameritech is willing to license the right to use Listing
Information to Licensee strictly pursuant to the provisions of this Agreement
and for no other purpose.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties do hereby agree as follows:
ARTICLE ONE-LISTING REQUESTS
1.0 Licensee may, from time-to-time, during the term of this Agreement
obtain from Ameritech Listing Information subject to the conditions
stated herein. Such Listing Information shall be current as of the date
of extraction from Ameritech's listing system.
1.1 All requests for Ameritech Listing Information supplied to Licensee
pursuant to this Agreement shall be provided upon the submission by
Licensee of an appropriate "Request for Listing Information" form, the
current sample of which appears as Appendix A, attached hereto and
incorporated herein ("Request").
<PAGE> 2
1.2 Each Request shall specify the Listing Information requested according
to either the Ameritech Exchange Areas, zip code area or community and
shall include the format in which such Listing Information shall be
furnished. For purposes of this Agreement, "Exchange Area" means the
central office serving area represented by the first three digits of a
telephone exchange within an area code.
1.3 Each Request shall be subject to appropriate license fees and other
charges as set forth in Paragraph 3 herein. Any Request submitted by
Licensee for a Base File only (as defined in Appendix B) shall be
subject to a minimum charge of three hundred dollars ($300).
1.4 Each Request shall be provided to Ameritech no later than thirty (30)
calendar days prior to the date by which Listing Information and related
Additional Services are scheduled to be provided to the Licensee. It
shall contain the name of the Licensee's Directory, the publication
date, Additional Services, if any, the date mutually agreed upon for
provision of same to Licensee ("Provision Date") and identification
specifications for the requested Ameritech Listing Information.
ARTICLE TWO-LICENSE
2.0 Subject to the provisions of this Agreement, Ameritech grants to
Licensee during the term of this Agreement a non-exclusive,
non-transferable License for one (1) time use of Listing Information
provided pursuant to each Request, such use to be limited to the
compilation, production, publication and distribution of the Licensee
Directory identified in the particular Request. This License Agreement
applies to and is effective only to those listings contained in
Ameritech's records with respect to business and residence customers and
excludes all non-published and non-listed subscribers.
2.1 Licensee agrees not to use or publish any lists or Listing Information
which it has been advised by Ameritech or otherwise has reason to know
is incorrect or incomplete.
2.2 Ameritech reserves the right to make changes in the form, content or
scope of its Listing Information; makes no representation that it will
continue to provide the Listing Information in its current form in the
future; and reserves the right to modify its form, to change the manner
in which it is provided. Ameritech shall notify Licensee in writing of
any such change not less than thirty (30) days prior to implementation.
2.3 Any source material containing Listing Information furnished by
Ameritech hereunder, whether or not used by Licensee for the purpose
stated herein, shall remain the property of Ameritech and Licensee
shall, upon request from Ameritech, but in no event later than thirty
(30) days following the termination of this Agreement as stated in
Paragraph 6.5 herein, return or destroy such source material.
2
<PAGE> 3
2.4 If Listing Information provided hereunder includes any listings or other
information that is the property of a telephone company other than
Ameritech whether pursuant to release, by mistake or otherwise, Licensee
must enter into a separate license agreement with such telephone company
if Licensee desires to use or publish any such listing or other
information in a Licensee Directory. Upon Ameritech's request, Licensee
shall furnish a copy of such license agreement to Ameritech.
2.5 The License granted herein shall be non-assignable and Licensee shall
have no right to sub-license or permit any other publisher or person to
use the Listing Information of any information extracted therefrom
except for the purpose of assisting in the compilation, production,
publication or distribution of the Licensee Directory identified in the
particular Request. Licensee shall take reasonable and prudent steps to
prevent disclosure of the source material containing Listing Information
at least equal to the steps taken by it to protect its own similar
proprietary information, including adequate computer security measures
to prevent unauthorized access to the Listing Information when contained
in any data base.
2.6 Any "Updates", "Advanced Listing Orders" or "New Connect Listings" (as
defined in Appendix B) requested by Licensee, whether provided daily,
weekly, or monthly shall not be used to compile, publish or update a
directory or compile or publish a separate list but may be used to
generate leads for sales of yellow pages classified advertising in
Licensee's Directory. In no event shall Licensee use, disclose or
reproduce any Ameritech service order information or other information
furnished hereunder or permit anyone but its duly authorized employees
or agents to inspect or use the same, except for the purposes expressly
provided herein.
ARTICLE THREE - LICENSEE FEE
3.0 Fees as set forth in the Appendix B and any transportation expenses
shall be assessed for the Listing Information and related Additional
Services specified in 3.2 below. Amounts due hereunder shall be
invoiced fifty percent (50%) upon receipt of a Request and fifty percent
(50%) sixty (60) days after delivery of the Listing Information or upon
publication of a Licensee Directory containing such Listing Information,
whichever first occurs. All fees owed to Ameritech under this Agreement
shall be paid by Licensee within thirty (30) days of invoice date.
3.1 Listing Information - Licensee agrees to pay to Ameritech all applicable
license fees and per-listing charges and such state, municipal and
federal taxes as may be applicable to such transaction (hereinafter
"Fees") for each submitted Request as are shown on Appendix B.
3.2 Additional Services.
(i) Photocomposition pages - Upon receipt of a Request ordering
photocomposition pages, Ameritech shall provide Licensee with
3
<PAGE> 4
photocomposed pages of the requested Listing Information for
Licensee's Directory. In addition to the Fees described in
Paragraph 3.1 herein, Licensee shall pay to Ameritech a
processing charge as set forth in Appendix B for each
photocomposed page provided to it.
(ii) Customization services - Customization and other special
programming for non-standard extracts e.g. sorted by street
address, as noted in Appendix B, are also available to
Licensee, upon receipt of a Request by Licensee. For each
Request requiring special programming, Licensee shall pay to
Ameritech a one time fee set forth in Appendix B in addition
to the fees described in Paragraph 3.1.
3.3 The per listing charge as specified in Appendix B herein entitles
Licensee to a one time publication of each listing so provided. In
the event any Licensee Directory contains more than one reference to
any Listing Information (for example, in both an alphabetical and a
classified listing section), and only one per listing charge will be
assessed.
3.4 Increase or Decrease in Fees or Charges, All Fees shall be fixed
during the period of this Agreement. Charges for Additional Services
specified in Paragraph 3.2 herein may be increased by Ameritech at any
time upon thirty (30) days prior written notice to Licensee.
Notwithstanding the foregoing, all Fees and other charges herein may
be decreased by Ameritech at any time without notice.
3.5 Notwithstanding the provisions of paragraph 3.0 above, Ameritech
reserves the right to require receipt of payment in full for any
Listing Information or Additional Services prior to scheduled shipment
to Licensee. The payment in full will include, but is not limited to,
estimated charges made for items requested by Licensee and contained
in the Request. The payment of estimated charges by Licensee to
Ameritech shall be credited against the charges due and payable with
the final invoice. Any or all remaining payment shall be due and
payable upon thirty (30) days of receipt of an invoice.
ARTICLE FOUR - IDENTIFICATION OF LICENSEE
4.0 Licensee shall, to the extent legally permissible, include a proper
copyright notice in its name in each Licensee Directory published by
it and Licensee shall use its best efforts to protect and maintain the
validity of said copyright. Nothing contained in this Agreement shall
restrict, impair or diminish the proprietary interest of Ameritech in
any Ameritech Directory or the Listing Information furnished to the
Licensee, and Ameritech shall continue to copyright directories
published by it or on its behalf without regard to the prior
publication and copyright of any Licensee Directory. Upon request by
Ameritech, Licensee agrees to execute and deliver to Ameritech all
assignments, documents and directories necessary to carry out the
intent of this Paragraph; however, Licensee shall deliver to Ameritech
one copy of each edition of the
4
<PAGE> 5
Licensee's Directory for which Listing Information has been provided
by Ameritech. This copy shall be furnished without charge within ten
(10) working days following the publication of Licensee's Directory.
Ameritech further reserves the right to examine at reasonable times
Licensee's security practices.
4.1 Licensee shall not make any representation to the public, prospective
advertisers or others, express or implied, written or oral, which
would give the impression that Licensee and/or any Licensee Directory
is the same as, a part of, or associated with Ameritech or any
Ameritech Directory; nor shall Licensee canvass for or publish any
type of telephone directory in the name of Ameritech, or use, except
as authorized herein, Listing Information or any Ameritech or any
affiliated Ameritech Company advertising contained in Ameritech
Directories.
4.2 Licensee shall not publish any Licensee Directory in such form as may
tend to cause or create confusion or be identified with any Ameritech
Directory, and further, Licensee agrees that its employees, agents and
representatives shall not use any advertisement, order form, billing
invoice, stationery, promotional material or any other material or
device which would tend to create or imply association with or
sponsorship by Ameritech or any affiliated Ameritech Company.
4.3 Licensee shall not word the title of any Licensee Directory in any
manner which would tend to indicate that it is an Ameritech Directory.
Licensee shall use its own name or trade name (in full or in part) on
the cover of each Licensee Directory and shall use a similar
designation in all of its advertising, canvassing and billing for such
Licensee Directory.
4.4 Licensee shall not reproduce or use in a classified portion (or in any
other part) of any Licensee Directory stock graphic cuts or filler
material or text which is proprietary to Ameritech or used by
Ameritech or its affiliated companies in any Ameritech Directory,
unless such matter was furnished to Licensee by the advertiser and
owned by the advertiser.
4.5 Licensee agrees to print month and year of publication on the front
cover of each of its Directories and to publish the following
statement on the masthead page of each Directory:
Listings of Ameritech, contained herein were transcribed by
Telecom * USA Publishing Company pursuant to a license from
Ameritech and may not be reproduced in whole or in part, or in
any form whatsoever, without the written permission of
Ameritech.
5
<PAGE> 6
ARTICLE FIVE - INDEMNITY/LIMITATION OF LIABILITY
5.0 Licensee shall defend, indemnify, and hold harmless Ameritech and its
officers, employees, affiliates, agents, assigns, representatives and
licensees from and against all loss, liability, damage and expense
(including all costs and reasonable attorneys' fees) arising out of
any demand, claim, suit or judgment by a third party related to
Ameritech supplying or its failure to supply any listing or Listing
Information hereunder, or Licensees use or misuse of the same; or
related to any error, inclusion or omission in any Licensee Directory,
regardless whether any such demand, claim or suit by such third party
is brought jointly against the Licensee and Ameritech or against
Ameritech alone; provided, however, that in the event of any such
demand, claim or suit, Ameritech may, at its option and at its
expense, assume and undertake its own defense or assist in the defense
of Licensee provided, however, that Ameritech shall not enter into any
settlement of any such demand, claim or suit without prior written
consent of Licensee.
5.1 Ameritech's responsibility for delivery of the Listing Information
shall be discharged upon its delivery to Licensee's specified courier.
If the Listing Information provided to Licensee by Ameritech is not
that as stated in the Request, Ameritech shall, upon request, attempt
to provide those listings identified in the particular Request without
additional cost to Licensee. Such request must be made within thirty
(30) calendar days of Licensee's receipt of the Listing Information
and shall include the original Listing Information provided in error.
5.2 The lists and Listing Information are provided "AS IS"; Ameritech does
not warrant or represent that any lists or Listing Information made
available to Licensee pursuant to this Agreement are correct or
complete; and, Licensee hereby releases Ameritech from any liability
due to errors, inclusions or omissions in the lists or Listing
Information provided hereunder; provided however Licensee shall be
entitled to refund of the amount paid for any individual listing to
the extent such listing is found to be inaccurate or incomplete.
5.3 THE REMEDY STATED IN PARAGRAPH 5.1 and 5.2 HEREOF SHALL BE LICENSEE'S
SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO THE PROVISION OF LISTS AND
LISTING INFORMATION HEREUNDER, AMERITECH MAKES AND LICENSEE RECEIVES
NO WARRANTY, EXPRESS OR IMPLIED, AND THERE ARE EXPRESSLY EXCLUDED ALL
WARRANTIES OR MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
AMERITECH SHALL HAVE NO LIABILITY WITH RESPECT TO ITS OBLIGATIONS
UNDER THIS AGREEMENT FOR DIRECT, CONSEQUENTIAL EXEMPLARY OR INCIDENTAL
DAMAGES EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
6
<PAGE> 7
ARTICLE SIX - MISCELLANEOUS
6.0 Non-Exclusivity - Nothing in this Agreement or elsewhere shall give
Licensee any exclusive right to the use of the Listing Information and
Ameritech shall be free at any time to grant similar Licenses to
others under the same or different terms and conditions as Ameritech
in its sole discretion may determine.
6.1 Force Majeure - Performance by Ameritech shall be excused by reason
of natural disaster; labor difficulty; civil disorder; acts of God;
statute, ordinance or regulation hereinafter enacted, promulgated or
entered by a court or government agency of competent jurisdiction; or
by reason of any other cause beyond the reasonable control of
Ameritech.
6.2 Survival of Obligations - The provisions of this Agreement that by
their sense and context are intended to survive the termination of
this Agreement shall so survive and continue in effect in accordance
with their terms.
6.3 Governing Law - The validity, construction and enforceability of this
Agreement shall be governed by the laws and regulations of the State
of Illinois.
6.4 Severability - In the event any one or more of the provisions of this
Agreement shall for any reason be held to be invalid, illegal or
unenforceable, the remaining provisions of this Agreement shall be
unimpaired, and the valid, illegal or unenforceable provisions shall
be replaced by a mutually acceptable provision, which being valid,
legal and enforceable, comes closest to the intention of the parties
underlying the invalid, illegal or unenforceable provision.
6.5 Term and Termination
(i) This Agreement shall commence as of the date noted in the
introductory paragraph of this Agreement, and shall continue
for a period of 36 months (the "Term"); provided however, if
Licensee violates any material provisions of this Agreement,
Ameritech may immediately terminate this Agreement without
notice thereof to Licensee, and seek injunctive relief and all
damages and other remedies available to it by law or equity.
Failure of Ameritech to enforce or insist upon compliance with
any provisions of this Agreement shall not constitute a waiver
thereof nor derogate from Ameritech the right to damages or
any other relief. Subject to this Paragraph, termination of
the Agreement shall not affect Licensee's right to use the
material or information furnished prior to the effective date
of the termination solely for the purpose permitted by this
Agreement.
(ii) In the event this Agreement is terminated by Licensee prior to
the expiration of the Term, Licensee shall be responsible for
paying the difference between the per listing charge
associated with this Agreement Term and the higher per listing
charge specified in Section I of Appendix B hereto for the
actual period this Agreement remains in effect.
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<PAGE> 8
The foregoing liability shall be in addition to any other
damages or remedies available to Ameritech in law or in
equity. Termination of this Agreement by Ameritech shall not
relieve Licensee of the obligation to pay all amounts owing to
Ameritech as of the date of termination or any of its other
obligations contained herein.
6.6 Notices - All notices and deliveries to Ameritech as contemplated by
this Agreement shall be delivered to:
AMERITECH INFORMATION INDUSTRY SERVICES
ATTN.: LINDA J. PARKER - OPERATIONS SPECIALIST
23500 NORTHWESTERN HWY, RM. A-106
SOUTHFIELD, MICHIGAN 48075
All notices and deliveries of any kind to Licensee as contemplated by
this Agreement shall be delivered to:
TELECOM * USA PUBLISHING COMPANY
201 THIRD AVE. S.E., STE. 500
P.O. BOX 3162
CEDAR RAPIDS, IA 52406-3162
ATTN: JAMES HADDAD
6.7 Entire Agreement - The terms contained in this Agreement and the
attachment(s) and specification(s) referred to herein, which are
incorporated herein by this reference, constitute the entire agreement
between the parties with respect to the subject matter hereof,
superseding all prior understandings and communications, oral or
written. This Agreement may not be modified except by a writing
signed by both parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year written below.
AMERITECH INFORMATION INDUSTRY SERVICES Telecom * USA Publishing Company
A division of Ameritech Services, Inc. --------------------------------
LICENSEE
By: /s/ PETER M. POTOSKI By: /s/ JAMES HADDAD
Name: Peter M. Potoski Name: James Haddad
Title: Regional Account Manager Title: Vice President
Date: 8/26/94 Date: 10/18/94
8
<PAGE> 9
APPENDIX B
I. Listing Information may include any or all of the following
information provided at the rates specified herein:
<TABLE>
<CAPTION>
LISTING INFORMATION RATES
<S> <C>
BASE FILE ONE YEAR CONTRACT
Includes a snap shot of a particular date specified $.23 per listing
in a Request of the name, address and telephone
number information ("Subscriber Information") of TWO YEAR CONTRACT
all residential and business telephone service Year One: $.21 per listing
subscribers which appear in one or more Ameritech Year Two: $.19 per listing
directories.
THREE YEAR CONTRACT
Year One: $.19 per listing
Year Two: $.16 per listing
Year Three: $.13 per listing
NEW CONNECTS Daily - $1.75
Includes Subscriber Information on N and T orders, new Weekly - $.75
installs and changes of address orders. Monthly (or 30 days old) provided
at Walter Karl Corp. market price.
UPDATES Daily - $1.75
Includes any changes in Weekly - $1.25
Subscriber Information through any Monthly - $.50
completed service order activity
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C>
ADVANCE LISTING ORDERS Daily - $1.75
Includes any changes in Subscriber Information Weekly - $1.25
as a result of any pending service order activity Monthly - $.50
II. Other Rates & Charges
PHOTOCOMPOSED PAGES Up to sixty pages $4.70 each
Over sixty pages $3.00 each
SPECIAL PROGRAMMING
Requests for non-standard extracts, e,g., $111.00 per hour of work time
sorted by street address
</TABLE>
10
<PAGE> 1
EXHIBIT 10.71
LICENSE AGREEMENT
FOR THE USE OF
DIRECTORY PUBLISHER LISTS
THIS LICENSE AGREEMENT ("Agreement") is made by and between U S WEST
Communications, Inc., a Colorado corporation ("USWC") and Telecom*USA
Publishing Company ("Client"). For the purpose of this Agreement the addresses
of the parties shall be listed in Section 13, Notices.
FOR AND IN CONSIDERATION of the mutual promises and covenants hereinafter set
forth, the parties agree as follows:
1. GRANT AND SCOPE OF LICENSE
A. Subject to the terms of this Agreement, USWC grants to Client
a non-exclusive, non-transferable (except as specifically allowed in
an Exhibit) restricted license, for Client's use of Directory
Publisher List Information as is more fully defined under the
appropriate Exhibit for List(s).
B. Lists covered under this Agreement:
Exhibit A- Expanded Use Subscriber List(s) and Updates
Exhibit B- Subscriber List(s)
Exhibit C- Daily Business Updates
Exhibit D- One-Time Use of Delivery Lists
2. TERM
A. This Agreement shall become effective September 13, 1993, 1993,
and shall continue until terminated by either party by providing
thirty (30) days prior written notice to the other party. Client
agrees to reimburse USWC for any non-recoverable costs associated with
an Order(s) (as determined by USWC's then current accounting method),
incurred by USWC prior to the termination of that Order. In the event
USWC terminates this Agreement while an order is pending, USWC agrees
to reimburse client an amount equal to the amount client would have
paid to USWC for that order out of which any liability arose. The
termination of an Order(s) or this Agreement shall not affect the
obligations of either party to the other which have accrued prior to
the effective date of the termination.
B. Client may obtain Directory Publisher List Information by
using the Order Forms(s) attached to the Exhibit(s) to this Agreement.
Client may submit additional or replacement Order Forms throughout the
term of this Agreement in accordance with
1
<PAGE> 2
the terms contained in the associated Exhibit(s) and Order Form(s).
3. EXCHANGE CARRIER OWNED LISTINGS
In the event Client orders Exchange Carrier Owned Listings which
consist of the Exchange Carrier's (EC) subscribers' names, telephone
numbers and addresses that reside in USWC's database, Client must
provide written proof of a License Agreement between Client and the EC
owning the listings, as well as the authorization for USWC to extract
Listings, thirty (30) days prior to the provision of Listings. USWC
will provide Listings only for those exchanges detailed in the License
Agreement between Client and the EC. Client agrees to notify USWC in
the event the License Agreement between Client and the EC is
terminated. Upon USWC's receipt of such notification, Exchange
Carrier Information will no longer be provided.
4. CLIENT RESPONSIBILITIES:
A. Listing information will not include non-published or
non-listed subscriber listings. In the event such information is
provided or a subscriber elects non-published or non-listed status
after the Listings have been provided to Client, Client then agrees
not to publish any such non-published or non-listed listings, to the
extent Client has been advised by USWC or the subscriber that such
listings are non-published or non-listed. Client further agrees to
remove from its compilation and not to publish in any future
directories any listings which Client has been advised have become
non-published or non-listed in the records of USWC. Client will be
responsible for such changes only when they have been given to Client
in a time frame which would reasonably permit changes to the status.
Client shall not use non-published and non-listed information in
violation of any tariff, state PUC rule or state or federal law.
B. Delivery Lists include name and address of each residence
and/or business subscriber who is to receive a telephone directory.
Client's use of Delivery Lists is restricted to delivery of telephone
directories.
C. Client agrees to abide by subscriber-requested restrictions on
use, such as omit-from-marketing lists, omit-from-reverse directories
or no telephone solicitation as noted under Client Responsibilities in
the attached product exhibits.
D. Client agrees to take all appropriate security measures to
guard against any unauthorized use of Information provided hereunder.
Upon written request, Client agrees to advise USWC
2
<PAGE> 3
of the names of persons known by the Client to have access to
information provided and will permit USWC to inspect Client's premises
to observe the manner in which said information is stored, processed,
and used.
5. CHARGES FOR LIST(S)
Charges for Listing Information provided under this Agreement shall be
pursuant to USWC's Price Schedule in effect at the time an Order is
filled, attached hereto as Exhibit E. Client shall pay all federal,
state or local sales, use, excise, gross receipts or other taxes or
tax like fees imposed on or charged upon the sums payable hereunder.
The Price Schedule in effect at the time this Agreement was made is
attached to the Exhibit(s) to this Agreement. It is understood that
USWC may, at any time and at its sole discretion modify prices or
product descriptions, provided, however, no increase in Price
Schedules will become effective until after USWC has provided Client
with sixty (60) days prior written notice. USWC reserves the right to
require an advance payment for Client's license to use Information
hereunder. If an advance payment is required, USWC will notify Client
upon receipt of Client's Order.
6. PAYMENT AND LATE CHARGES
A. Amounts payable under this Agreement are due and payable as
follows: (1) within thirty (30) days after the date of USWC's invoice;
or (2) one-half upon receipt of USWC's invoice and the remaining
balance upon publication of Client's product plus a late charge as
described below. Any amount not paid within thirty (30) days of the
date of the applicable invoice shall bear a late charge equal to the
lesser of:
1) The highest interest rate (in decimal value) which is
allowed by law compounded daily for the number of calendar
days from the payment due date to and including the date that
Client actually makes the payment to USWC, or
2) 0.000454 per day compounded daily for the number of
calendar days from the payment due date to and including the
date that Client actually makes the payment to USWC, which
would result in an annual percentage rate of 18%.
B. Client shall notify USWC in writing in the event of any
dispute relating to the invoice. Client shall, notwithstanding the
continuing existence of any dispute, pay the invoice amount in
accordance with the terms defined in this Agreement. In any event,
Client shall notify USWC of any dispute relating to the invoice no
later than sixty (60) days after the publication of Client's product.
If any adjustment
3
<PAGE> 4
is due Client, USWC shall reflect such adjustment on an invoice
including interest at same rate as 6.A above, which shall be
calculated from the date of payment to the adjustment date. Both
parties shall retain such detailed information as may reasonably be
required for resolution of the disputed amount during the duration of
the dispute.
7. INDEMNIFICATION
Client agrees to indemnify and save harmless USWC against and with
respect to any and all losses, damages, expenses (including but not
limited to reasonable attorneys' fees) and all other liabilities
arising, in whole or in part, out of the negligence or misconduct or
breach of this Agreement by Client, its employees, agents, or
contractors in the use of the information herein provided.
8. LIMITATION OF LIABILITY
USWC DOES NOT WARRANT OR GUARANTEE THE CORRECTNESS OR THE COMPLETENESS
OF THE LISTING INFORMATION, INCLUDING, BUT NOT LIMITED TO IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
IN NO EVENT WILL USWC BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL,
PUNITIVE OR SPECIAL DAMAGES. IT IS EXPRESSLY AGREED THAT ANY
LIABILITY WILL BE LIMITED, ON A LISTING-BY-LISTING BASIS, TO THE
AMOUNT PAID BY CLIENT TO USWC FOR THAT LISTING OUT OF WHICH ANY
LIABILITY AROSE.
9. TRADEMARKS
Neither party may use, for any purpose, the other party's name or
logo, in any form or abbreviation, its trade name(s), trademarks, or
service marks. Client may disclose that USWC is a source of its
information by using the following statement in its directory:
"Listings of U S WEST Communications' subscribers contained within
this directory, were provided under license from U S WEST
Communications and were subsequently compiled for publication by
Telecom*USA. Questions or concerns about this directory should be
referred to Telecom*USA."
10. FORCE MAJEURE
Neither of the parties shall be held responsible for delays, failure
in performance, loss or damage due to fire, explosion, power blackout,
earthquake, volcanic action, flood, strike, war, civil disturbance,
governmental requirements, or acts of God. For the purpose of this
Agreement, "strike" shall be interpreted to mean a third party labor
dispute affecting USWC's operations but, beyond USWC's control.
List(s) shall be provided as soon as possible after the cessation of
such cause, unless otherwise terminated as provided in this
4
<PAGE> 5
paragraph. If such condition occurs and results in a delay in
performance of a Party's obligations for more than sixty (60) calendar
days, the other Party may by providing written notice, terminate this
Agreement.
11. PROPERTY RIGHTS
Client acquires no ownership interest in any information by virtue of
the license granted in this Agreement.
12. DEFAULT
A. If either party defaults in the performance of any obligation
under this Agreement and such default is not cured within fifteen (15)
days of written notice thereof, the non-defaulting party may
terminate this Agreement upon written notice to the defaulting party.
B. Client will be liable to USWC for damages arising out of
Client's unauthorized use(s) of information, and shall bear all
expenses of collection, including costs and attorneys' fees.
13. NOTICES
Except as otherwise provided under this Agreement, all notices,
demands or requests which may be given by any party to the other party
shall be in writing and shall be deemed to have been duly given on the
date delivered in person or after being deposited, postage prepaid, in
the United States mail and addressed as follows:
Telecom*USA Publishing Co. U S WEST Communications, Inc.
P. O. Box 3162 1314 DOTM, 10th Floor
Cedar Rapids, IA 52406-3162 Omaha, Nebraska 68102
Attn: Rich Twedt Attn: Barb Sandel
319-366-1100 402-422-7845
If personal delivery is selected as the method of giving notice under
this section, a receipt of such delivery shall be obtained. Either
party may change its representative by giving thirty (30) days written
notice to the other party.
14. ASSIGNMENT
Either party may assign its rights and obligations hereunder, or any
portion thereof, to a parent corporation, a subsidiary of a parent
corporation, or successor, upon prior written notification to the
other party.
15. NON-WAIVER
5
<PAGE> 6
A failure, on any occasion, by either party to enforce or insist upon
compliance with any provision of this Agreement, shall not constitute
a general waiver of its right to enforce that or any other provision
of this Agreement on any other occasion.
16. LAWFULNESS
This Agreement and the parties' actions under this Agreement shall
comply with all applicable federal, state, and local laws, rules,
regulations, court orders, and governmental agency orders including
the Modification of Final Judgment ('MFJ'), as issued in United States
v. Western Electric Co., et al., Civil Action No. 82-0192, U. S.
District Court for the District of Columbia, and all subsequent orders
issued in or related to that proceeding. This Agreement shall only be
effective when mandatory regulatory filing requirements are met, if
applicable. If a court or a governmental agency with proper
jurisdiction determines that this Agreement, or a provision of this
Agreement, is unlawful, or if USWC determines this Agreement or a
provision of this Agreement, is inconsistent with, or contradictory to
the "MFJ", this Agreement, or that provision of this Agreement shall
terminate on written notice to the customer to that effect. If a
provision of this Agreement is so terminated but the parties legally,
commercially, and practicably can continue this Agreement without the
terminated provision, the remainder of this Agreement shall continue
in effect.
17. AMENDMENT
This Agreement may be amended only by a written document signed by
both parties.
18. JURISDICTION
This Agreement and the obligations of the parties hereunder shall be
construed and governed in accordance with the laws of the State of
Colorado.
19. COMPLETE AGREEMENT
This Agreement, together with all attachments, constitutes the entire
understanding of the parties with respect to the use and provision of
List(s) provided hereunder. Neither party will be bound by any other
representations.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the last
date written below.
TELECOM*USA PUBLISHING COMPANY U S WEST COMMUNICATIONS, INC.
/s/ ARTHUR L. CHRISTOFFERSEN /s/ JANET L. WATKINS
- ---------------------------------- ----------------------------------
SIGNATURE SIGNATURE
ARTHUR L. CHRISTOFFERSEN
PRESIDENT AND CEO Janet L. Watkins, Director
- ---------------------------------- ----------------------------------
NAME NAME
9/9/93 9/13/93
- ---------------------------------- ----------------------------------
DATE DATE
7
<PAGE> 8
EXHIBIT A
EXPANDED USE SUBSCRIBER LIST(S) AND UPDATES
This Exhibit A describes EXPANDED USE SUBSCRIBER LIST(S) AND UPDATES LIST(S)
which shall be provided to Client under the license granted by USWC.
DESCRIPTION OF LIST(S): USWC shall provide List(s) which can be used by the
Client for any lawful purpose in the Client's daily business operations and
sublicense by the Client, subject to the terms and conditions set forth in this
Exhibit and Agreement. Subscriber name, address, telephone number information
will be provided for Client's unlimited use, except that Client will be
required to honor those subscriber-requested restrictions as noted on marked
accounts.
RIGHT TO SUBLICENSE:
A. Client shall have the right to sublicense any Information
supplied under this Agreement to any person including, but not limited
to, Client's subsidiaries, for any lawful purpose in the sublicensee's
business operation.
B. With respect to Subscriber-Requested Restrictions noted on
marked accounts at the time of delivery of the Subscriber Listing
Information to Client, the Client will include the obligations of the
Agreement which have been identified in this Exhibit in its
sublicenses. Client agrees to include the obligations in paragraphs 7
INDEMNIFICATION, 8 LIMITATION OF LIABILITY, 9 TRADEMARKS, 11 PROPERTY
RIGHTS, and 19 JURISDICTION of this Agreement in its sublicenses, USWC
as licensor (not specified by name) shall be made a third-party
beneficiary with respect to such obligations in Client's sublicenses.
DEFINITION:
A. Expanded Use Subscriber Listing Information consists of USWC
subscriber name, address, telephone number, and related elements.
Information will not include USWC's subscribers with non-published or
non-listed telephone service.
B. Expanded Use Updates are changes to any of the elements that
comprise the Expanded Use Subscriber Lists, including New Connects and
Disconnects. Expanded Use Updates transactions will portray as
disconnects any listings which have changed to non-published or
non-listed service.
A-1
<PAGE> 9
C. Updates are provided in the form of transactions on a daily
basis. A transaction refers to the time and type of a change in a
subscriber's listing information.
D. Subscriber-Requested Restrictions are limitations on use of
the Information as noted on marked accounts. Listings for subscribers
who have requested restrictions will include coding to designate
usage, such as omit from all marketing lists and from reverse
directories, omit from telemarketing lists. Another coding may
indicate the requirement to print the phrase "No Solicitation Calls"
in the directory and/or an indicator by the specific listing.
CLIENT RESPONSIBILITIES:
A. Client agrees to remove from its data base and not to use or
sublicense any Information that has become non-published or non-listed
as notified by subscriber or updates.
B. Client agrees to honor subscriber requested restrictions on
use.
C. Upon written request, Client agrees to advise USWC of the
names of persons known by the Client to have access to information
provided hereunder and will permit USWC to inspect Client's premises
to observe the manner in which said Information is stored, processed,
and used.
D. Client agrees either to print the No Solicitation indicator or
the No Solicitation phrase in their directory, dependent upon the
state's regulatory requirements.
DELIVERY SCHEDULE: USWC will deliver Information within thirty (30) days of
receipt of an Order Form.
CHARGES: Priced per current Price Schedule
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the last
date written below.
TELECOM*USA PUBLISHING COMPANY U S WEST COMMUNICATIONS, INC.
/s/ ARTHUR L. CHRISTOFFERSEN /s/ JANET L. WATKINS
- ---------------------------------- ----------------------------------
SIGNATURE SIGNATURE
ARTHUR L. CHRISTOFFERSEN
PRESIDENT AND CEO Janet L. Watkins, Director
- ---------------------------------- ----------------------------------
NAME NAME
9/9/93 9/13/93
- ---------------------------------- ----------------------------------
DATE DATE
A-2
<PAGE> 10
EXHIBIT B
SUBSCRIBER LIST(S)
This Exhibit B describes SUBSCRIBER LIST(S) which shall be provided to Client
under the license granted by USWC.
DESCRIPTION OF LIST:
A. USWC will provide Client with listing information in white
page directory format. Client shall be restricted to using the listing
information only for the compilation, publication and distribution of
Client's printed, voice or electronic directories named on the Order
Form for the specific areas identified. Client may use listing
information in one or more directories, printed, voice or electronic;
provided however, that Client identifies such uses on the Order Form.
B. Subscriber listing information consists of USWC's subscriber
listed name, address, and telephone number for the geographic areas
selected by client as contained in USWC's Customer Listing Databases.
C. The computer and magnetic tape formats in which subscriber
listing information will be furnished shall be agreed upon by USWC and
Client, dependent, however, upon the format(s) available and in use by
USWC.
DEFINITION:
A. Subscriber List(s) - Business and/or residence subscriber
listings in white page directory format, include caption arrangements
and may include composition, i.e., running heads, page numbers, mast
heads; not for resale.
B. Cutover List: When there is a central office conversion, an
"old number/new number" list can be provided. This cutover list is
only available in conjunction with a Subscriber List Order and is to
be used for Clients internal use. Listings may only be used for the
compilation, publication and distribution of a printed, voice or
electronic directory, not for resale.
C. No Solicitation Calls: Where subscribers have so requested,
Information will include coding to indicate that a symbol and/or
phrase designating "No Solicitation Calls" is to be printed in
Client's directory.
D. Government Listings-Name, address and telephone number of
recognized government agencies, (city, county, state, federal).
Listings are manually extracted from subscriber
B-1
<PAGE> 11
database and placed in separate government sections. Client identifies
which government entities are to be included in Client's directory,
this information is not for resale. The Client specifies the
sequencing arrangement of those listings.
E. Proofs: First and Final Copies - A printout of first and final
versions for proofing and internal use, not for publication, shall be
offered in a format the same as or different from published product.
CLIENT RESPONSIBILITIES:
A. To reduce the potential for outdated publications, Client
shall publish the listing information, subject to this Agreement for
any area(s) for which listing information is requested, within a
reasonable time after such listing information has been provided to
Client by USWC.
B. Client shall resolve all customer complaints regarding listing
errors or omissions in Client's Telephone Directories.
C. Client agrees to honor those Subscriber-Requested Restrictions
as noted on marked accounts, and agrees to print No Solicitation Call
symbols and/or phrase on listings where applicable.
D. Client shall, at it's expense, furnish USWC a copy of each
version of the published directories, containing the listing
information covered herein, within ten (10) days after publication.
The mailing address is:
U S WEST Communications, Inc.
1314 DOTM, 10th Floor
Omaha, Nebraska 68102
Attention: Barb Sandel
DELIVERY SCHEDULE:
USWC will deliver Information within thirty (30) days of receipt of an Order
Form.
CHARGES:
Priced per current Price Schedule.
B-2
<PAGE> 12
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the last
date written below.
TELECOM*USA PUBLISHING COMPANY U S WEST COMMUNICATIONS, INC.
/s/ ARTHUR L. CHRISTOFFERSEN /s/ JANET L. WATKINS
- ---------------------------------- ----------------------------------
SIGNATURE SIGNATURE
ARTHUR L. CHRISTOFFERSEN
PRESIDENT AND CEO Janet L. Watkins, Director
- ---------------------------------- ----------------------------------
NAME NAME
9/9/93 9/13/93
- ---------------------------------- ----------------------------------
DATE DATE
B-3
<PAGE> 13
EXHIBIT C
DAILY BUSINESS UPDATES
This Exhibit C describes DAILY BUSINESS UPDATES LIST which shall be provided to
Client under the license granted by USWC.
DESCRIPTION OF LIST:
A. USWC will grant Client the use of USWC's Daily Business Updates
("Records"), which will consist of all listing-related changes occurring on a
business subscriber's name, address or telephone number ("Listing'). The
Listing changes that will cause issuing of the Record include: changes in name,
address or telephone number, change from business class of service to
residence, or the reverse, new connects, disconnects, and "To and From" (T &
F) move activity. Listings changing to non-listed and non-published will
appear as disconnects.
B. Client shall be restricted to using the listing information only
for the purpose of conducting activities generally associated with the
publishing of telephone directories, updating business files, and soliciting
advertisement(s). The listing information may not be resold or used for
publication of other than yellow pages. Client shall not use the Records for
publication of white pages.
DEFINITION:
Listings for subscribers who have requested restrictions will be designated by
coding such as omit from all marketing lists and from reverse directories, omit
from telemarketing lists and no solicitation calls.
CLIENT RESPONSIBILITIES:
Client will honor subscriber requested restrictions as noted on marked
accounts. On listings with subscriber requested restrictions such as no
marketing or solicitation, Client is allowed to contact subscriber to determine
appropriate yellow pages heading under which subscriber's listing is to be
placed. Such Records shall be used for yellow page clarification only, not for
the purpose of solicitation of advertising.
DELIVERY SCHEDULE:
Records will be extracted for Client once each business day and will be shipped
to Client at the frequency requested by Client on Order Form.
C-1
<PAGE> 14
CHARGES: Priced per current Price Schedule
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the last
date written below.
TELECOM*USA PUBLISHING COMPANY U S WEST COMMUNICATIONS, INC.
/s/ ARTHUR L. CHRISTOFFERSEN /s/ JANET L. WATKINS
- ---------------------------------- ----------------------------------
SIGNATURE SIGNATURE
ARTHUR L. CHRISTOFFERSEN
PRESIDENT AND CEO Janet L. Watkins, Director
- ---------------------------------- ----------------------------------
NAME NAME
9/9/93 9/13/93
- ---------------------------------- ----------------------------------
DATE DATE
C-2
<PAGE> 15
EXHIBIT D
ONE-TIME USE OF DELIVERY LISTS
This Exhibit D describes ONE-TIME USE OF DELIVERY LIST(S) which shall be
provided to Client under this license granted by USWC.
DESCRIPTION OF LIST(S): USWC will grant Client the use of USWC's List(s), which
include USWC's subscriber name, address, and telephone number information, as
detailed on the Delivery List(s) Order Form(s). Lists will exclude
non-published and non-listed telephone numbers, public and semi-public
listings.
CLIENT RESPONSIBILITIES: Client shall be restricted to using Delivery Lists
solely for the purpose of delivering Client's named directory.
AUTHORIZED USAGE:
A. Client may use the List(s) in a computer merge-purge operation
for the sole purpose of eliminating duplicate names, addresses,
telephone numbers on delivery lists, and to compare the List(s) with
other information for the sole purpose of selecting or suppressing
certain parts of the List(s) for delivery.
B. At Client's discretion, Client may include unbound promotional
materials or packets of information with the directories to be
delivered.
C. Client agrees that USWC shall not be held responsible for any
claim or action filed against Client or USWC as a result of any
unbound advertising or packets of information Client includes with
the directories.
UNAUTHORIZED USAGE: Unauthorized uses of the list include, but are not limited
to, the following:
A. Use the list for any purpose other than delivery of a
directory.
B. To use the List(s) to establish a database.
C. Using the List(s) in any merge-purge or matching process to
tag or code other names, addresses, telephone numbers on other
lists or files;
D. Addition of telephone numbers from the List to another List;
D-1
<PAGE> 16
E. Appending information from the List(s) to Client's house list;
F. Collecting, transferring or tagging information from the
List(s) at a geographic level (such as zip code, state, house,
apartment, suite numbers, etc.);
G. Retention by Client or its service bureau of any full or match
code version of names and addresses from the List(s) for
purposes of pre-screening, qualifying or segmenting other
List(s).
DELIVERY SCHEDULE: Normal production time is seven (7) working days from the
date an order is accepted by USWC until it is shipped. Where multiple orders
are involved, USWC will notify Client when a requested delivery date cannot be
met.
CHARGES: Priced per current Price Schedule
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the last
date written below.
TELECOM*USA PUBLISHING COMPANY U S WEST COMMUNICATIONS, INC.
/s/ ARTHUR L. CHRISTOFFERSEN /s/ JANET L. WATKINS
- ---------------------------------- ----------------------------------
SIGNATURE SIGNATURE
ARTHUR L. CHRISTOFFERSEN
PRESIDENT AND CEO Janet L. Watkins, Director
- ---------------------------------- ----------------------------------
NAME NAME
9/9/93 9/13/93
- ---------------------------------- ----------------------------------
DATE DATE
D-2
<PAGE> 1
EXHIBIT 11.1
MCLEOD, INC.
COMPUTATION OF LOSS PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------- ----------------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Computation of weighted average
number of common shares
outstanding and common
equivalent shares:(A)
Common shares, Class A,
outstanding at the beginning
of the period . . . . . . . . . 18,750 11,993,760 14,455,981 14,455,981 16,387,081
Common shares, Class B,
outstanding at the beginning
of the period . . . . . . . . . -- 5,625,000 7,670,457 7,670,457 15,625,929
Weighted average number of
shares issued during the
period (C) . . . . . . . . . . 14,730,198 3,859,959 -- -- 1,456,667
Weighted average number of
shares purchased for the
treasury during the period . . -- (14,918) -- -- --
Weighted average number of
shares reissued from the
treasury during the period . . -- -- 22,191 22,000 --
Common equivalent shares
attributable to stock options
granted(B) . . . . . . . . . . 5,018,605 5,018,605 5,018,605 5,018,605 5,018,605
Common stock issued(c) . . . . . . . 9,887,510 9,887,510 9,887,510 9,887,510 23,438
----------- ------------ ------------ ----------- -----------
Weighted average number of
common and common equivalent
shares . . . . . . . . . . . . 29,655,063 36,369,916 37,054,744 37,054,553 38,511,720
=========== ============ ============ =========== ===========
Net loss . . . . . . . . . . . . . . $(2,439,617) $(11,425,963) $(11,328,939) $(5,721,857) $(8,883,115)
=========== ============ ============ =========== ===========
Loss per common and common
equivalent share . . . . . . . $ (0.08) $ (0.31) $ (0.31) $ (0.15) $ (0.23)
=========== ============ ============ =========== ===========
</TABLE>
- ---------------
(A) All shares have been adjusted to give effect to the 3.75 for 1 stock
split effected in the form of a stock dividend effective March 28,
1996.
(B) All stock options are anti-dilutive, however, pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83 (SAB 83),
stock options granted with exercise prices below the assumed initial
offering price during the twelve-month period preceding the date of
the initial filing of the Registration Statement have been included in
the calculation of common stock equivalent shares as if they were
outstanding for all periods presented.
(C) All stock issued during the year ended December 31, 1995 was within
the twelve-month period discussed in (B) above. As a result, the
shares issued at prices below the assumed initial public offering
price during this period have been included in the calculation as if
they were outstanding for all periods presented. For the six months
ended June 30, 1996, the shares of Class A and B common stock issued
during the year ended December 31, 1995 are shown as shares
outstanding at the beginning of the period.
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
OF McLEOD, INC.
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
---- -------------
<S> <C>
McLeod Telemanagement, Inc. Iowa
(doing business as McLeod
Telemanagement Organization,
McLeod Telemanagement
Organization and TMO)
MWR Telecom, Inc. Iowa
McLeod Network Services, Inc. Iowa
McLeod Telecommunications, Inc. Iowa
Ruffalo, Cody & Associates, Inc. Iowa
Campus-Call, Inc. Iowa
Telecom*USA Publishing Group, Inc. Iowa
Telecom*USA Publishing Company Iowa
OakTel Directory, L.L.C. Iowa
</TABLE>
<PAGE> 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
October 10, 1996
<PAGE> 2
[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 Registration 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
October 10, 1996
<PAGE> 3
[MCGLADREY & PULLEN, LLP LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Ruffalo, Cody & Associates, Inc.
Cedar Rapids, Iowa
We hereby consent to the use in this Registration Statement of our report,
dated February 9, 1996, except for Note 8, as to which the date is July 15,
1996, relating to the consolidated financial statements of Ruffalo, Cody &
Associates, Inc. and subsidiary, and to the reference to our Firm under the
caption "Experts" in the Prospectus.
/s/ MCGLADREY & PULLEN, LLP
--------------------------------
MCGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
October 10, 1996
<PAGE> 4
[MCGLADREY & PULLEN, LLP LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Telecom*USA Publishing Group, Inc.
Cedar Rapids, Iowa
We hereby consent to the use in this Registration Statement of our report,
dated September 27, 1996, relating to the consolidated financial statements of
Telecom*USA Publishing Group, Inc. and subsidiaries, and to the reference to
our Firm under the caption "Experts" in the Prospectus.
/s/ MCGLADREY & PULLEN, LLP
-----------------------------
MCGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
October 10, 1996
<PAGE> 1
EXHIBIT 99.1
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT is made and entered into as of this 15th day
of August, 1996 between IOWA LAND AND BUILDING COMPANY ("Seller"), and RYAN
PROPERTIES, INC. ("Purchaser").
In consideration of the covenants and agreements contained herein, the
parties agree as follows:
1. Land To Be Purchased. Subject to compliance with the terms and
conditions of this Agreement, Seller shall sell to Purchaser and
Purchaser shall purchase from Seller the real property legally
described on Exhibit A attached hereto (the "Land"), together with all
leases, if any, not earlier terminated, easements, tenements,
hereditaments, and appurtenances belonging thereto.
2. Purchase Price. The purchase price for the Land ("Purchase Price")
shall be the sum of Six Hundred Ninety-one Thousand Sixty Hundred
Fifty Dollars and Twenty-five Cents ($691,650.25) payable by wire
transfer, certified or cashier's check at the closing hereunder.
3. Title To Be Delivered. Seller agrees to convey marketable fee simple
title in the Land to Purchaser subject only to the farm lease for the
Land which is terminable on not more than six months notice,
easements, restrictions, conditions and covenants of record.
A. Seller, at its sole cost and expense, shall deliver to
Purchaser an abstract of title to the Land continued through
the date of Purchaser's exercise of its option to purchase the
Land for examination by Purchaser. It shall show merchantable
title in Seller in conformity with this Agreement, Iowa law
and Title Standards of the Iowa Bar Association. The abstract
shall become the property of Purchaser when the Purchase Price
is paid in full. Seller shall pay the costs of any additional
abstracting and title work due to any act or omission of
Seller between the date of Purchaser's exercise and the
closing.
B. Purchaser shall have twenty (20) days after receipt of the
abstract of title to render objections to title, including any
easements or other encumbrances, in writing to Seller and
Seller shall have thirty (30) days from the date it receives
such objections to have the same removed or satisfied. If
Seller shall fail to have such objections removed within that
time, Purchaser may, at its sole discretion, either (a)
terminate this Agreement without any further liability on its
part, except for the forfeiture of the option payments
<PAGE> 2
as and to the extent provided for in the Option Agreement
between the parties, or (b) take title subject to such
objections. Seller agrees to use its best reasonable efforts
to promptly satisfy any such objections.
4. Inspection Rights.
A. Throughout the term of this Agreement Purchaser, its counsel,
accountants, agents and other representatives, shall have full
and continuing access to the Land and all parts thereof, upon
reasonable notice to Seller, subject to prior rights of any
tenants of the Land. Purchaser and its agent and
representatives shall also have the right to enter upon the
Land at any time after the execution and delivery hereof for
any purpose whatsoever, including inspecting, surveying,
engineering, test boring, performance of environmental tests
and such other work as Purchaser shall consider appropriate,
provided that Purchaser shall defend, indemnify hold Seller
harmless against any damage, claim, liability or cause of
action (including, claims of third parties) arising from or
caused by the acts or omissions of Purchaser, its agents, or
representatives upon the Land specifically including, but not
limited to, personal injury and property damage claims. In
the event Purchaser contracts with a third party to perform
inspection, surveying, engineering, test boring performance of
environmental tests or other such work on the Land, Purchaser
shall remain solely responsible for the satisfactory
completion of such work.
B. Environmental Investigation. Purchaser shall pay for all costs
associated with the environmental investigation and shall
provide Seller with copies of all analysis, test results, and
draft and final reports prepared or generated. Seller shall
be given the opportunity to take split samples.
Except to the extent necessary for the performance of the tests, et
al. to be conducted hereunder or as otherwise required by law or order
of court, Purchaser agrees to keep confidential all analytical
results, test results, and other reports, information and documents
obtained or prepared during the environmental investigation either by
Purchaser or its contractor(s)and to not release to any third party
any reports, information or documents relating to same the without the
prior written consent of Seller.
Purchaser shall not unreasonably interfere with Seller's operations
during the environmental investigation and shall provide Seller with
forty-eighth (48) hours notice of such activities. Purchaser shall
remain solely responsible for the activities of its contractors or
subcontractors in the performance of the limited sampling, and shall
incorporate the terms and conditions of this Purchase Agreement into
any
2
<PAGE> 3
contracting agreement. After termination of the sampling activities,
Purchaser agrees to restore the Land to its condition prior to
sampling, and shall leave it free of debris and holes in the ground
and in such condition as is satisfactory to the Seller.
5. Eminent Domain/Insurance. If, prior to closing, the Land shall be
materially damaged, through no fault of the Purchaser, or be the
subject of an action in eminent domain or a proposed taking by a
governmental authority, Purchaser, at its sole discretion, shall have
the right to terminate this Agreement upon notice to Seller without
further liability on its part, except for the forfeiture of the option
payments as and to the extent provided for in the Option Agreement, by
so notifying Seller in writing. Seller agrees to keep the Land
continually insured during the term of this Agreement under its
current policy of fire and extended coverage insurance.
6. Seller's Statements
(a) Seller acknowledges receipt from Purchaser of a copy of the
Phase I Environmental Site Assessment, McLeod Complex, dated
July, 1996, by Howard R. Green Company (the "Phase I Report").
Except for the items raised in the Phase I Report, Seller
states that to the best of its knowledge:
A. Except any which might result from actions being
taken by Purchaser, there are not any action in
condemnation, eminent domain or public taking
proceedings against the Land.
B. Except any which might result from actions being
taken by Purchaser, there is not any ordinance or
hearing now before any local governmental body which
authorizes any public improvements or special tax
levies, the cost of which may be assessed against the
Land.
C. Seller has not received any notices, orders, suits,
judgment or other proceedings relating to fire,
building, zoning, air pollution or health violations
that have not been corrected. Seller shall notify
Purchaser of any past notices, orders, suits,
judgments or other proceedings relating to fire,
building, zoning, air pollution or health violations
as they relate to the Land.
D. Neither any consents from nor notice to any federal,
state, or municipal or local government agency, body,
board or official are required for Seller's
performance of this Agreement.
E. Seller has not received notice of any violations of
any environmental laws, rules or regulations relating
to the Land or its use nor has Seller received notice
of any writs, injunctions, decrees, orders,
judgments,
3
<PAGE> 4
lawsuits, claims, proceedings, or investigations,
whether pending or threatened, relating to the
ownership, use, maintenance or operation of the Land.
7. Closing. The closing of the purchase and sale shall take place as
promptly as possible after the conditions set out in Section 8 are
satisfied and in no event later than ninety (90) days after exercise
of the Option pursuant to the Option Agreement. Closing may be
extended beyond ninety (90) days by mutual agreement of the parties.
Possession of the Land shall be delivered on the date of Closing.
8. Conditions to Closing. The closing of this transaction and all the
obligations of Purchaser under this Agreement are subject to
fulfillment on or before the Closing Date of the following conditions:
A. Purchaser, in its sole and absolute discretion, shall have
completed and approved of any inspections done by Purchaser
hereunder or under the Option Agreement dated June 11, 1996.
B. Purchaser shall have obtained any and all necessary
governmental approvals including without limitation approval
of subdivision or platting which might be necessary in
connection with the sale and transfer of the Land. Any
material conditions imposed as a part of the platting or
subdivision must be satisfactory to Purchaser, in its sole
opinion and any condition imposed on any portion of Seller's
remaining property contiguous with the Land must be
satisfactory to Seller in its sole opinion. Seller shall
cooperate with Purchaser in its attempts to obtain any such
approvals and shall execute any documents necessary for this
purpose provided that Seller shall bear no expense in
connection therewith.
C. Seller's statements set forth in Section 6 shall be true and
correct on the Closing Date.
9. Seller's Obligations At Closing. At or prior to the Closing Date,
Seller shall:
A. Deliver to Purchaser Seller's duly recordable Warranty Deed to
the Land (in a form satisfactory to Purchaser) conveying to
Purchaser marketable fee simple title to the Land and all
rights appurtenant thereto subject only to easements,
restrictions, conditions and covenants of record.
B. Deliver to Purchaser the Abstract of Title to the Land.
4
<PAGE> 5
C. Deliver to Purchaser such other documents as may be required
by this Agreement, all in a form satisfactory to Purchaser and
Seller.
10. Delivery of Purchase Price; Purchaser's Obligations At Closing. At
closing, and subject to the terms, conditions, and provisions hereof
and the performance by Seller of its obligations as set forth herein,
Purchaser shall deliver the Purchase Price to Seller pursuant to
Section 2 hereof and shall deliver such other documents as may be
required by this Agreement, all in a form satisfactory to Purchaser
and Seller.
11. Closing Costs. The following costs and expenses shall be paid as
follows in connection with the closing:
A. Seller shall pay:
(i) The transfer fee imposed on the conveyance.
(ii) A pro-rata portion of all taxes as provided in
Section 10.
(iii) All special assessments whether levied, pending or
assessed.
(iv) Seller's attorneys fees.
(v) The cost of recording the satisfaction of any
existing mortgage and any other document necessary to
make title marketable.
B. Purchaser shall pay the following costs in connection with the
closing:
(i) The documentary fee necessary to record the Deed.
(ii) Purchaser's attorneys fees.
(iii) Broker and real estate commissions and fees, if any.
12. Real Estate Taxes and Special Assessments. Seller shall pay all
levied and pending special assessments against the Land prior to the
Closing Date. Seller shall pay all real estate taxes for all fiscal
years which end prior to the Closing Date. Real estate taxes for the
fiscal year in which the Closing Date occurs shall be prorated to the
Closing Date on the basis of a 365 day calendar year. Purchaser shall
pay all real estate taxes due in subsequent fiscal years.
13. Remedies. If Seller defaults in the performance of this Agreement,
Purchaser may elect either to cancel this Agreement, or to commence an
action for specific performance to enforce performance of the terms of
this Agreement. In the event of cancellation or termination for
breach, Purchaser shall be entitled to reimbursement of all option
payments expended under the Option Agreement.
5
<PAGE> 6
If Purchaser defaults in the performance of this Agreement, Seller may
elect either to cancel this Agreement, and to recover the direct costs
associated with such breach, including the forfeiture of all amounts
paid under the Option Agreement, or to commence an action for specific
performance to enforce performance of the terms of this Agreement.
14. Time for Acceptance. This Agreement, when duly executed by all of the
parties hereto, shall be binding upon the parties hereto, their heirs,
representatives, successors and assigns. By execution hereof, Seller
acknowledges the timely exercise, as of the date hereof, by Purchaser
of its option under the Option Agreement as to all the Land and waives
the necessity of written notice thereunder.
15. Miscellaneous. The following general provisions govern this Agreement.
A. No Waivers. The waiver by either party hereto of any
condition or the breach of any term, covenant or condition
herein contained shall not be deemed to be a waiver of any
other condition or of any subsequent breach of the same or of
any other term, covenant or condition herein contained.
Either party, in its sole discretion may waive any right
conferred upon such party by this Agreement; provided that
such waiver shall only be made by giving the other party
written notice specifically describing the right waived.
B. Time of Essence. Time is of the essence of this Agreement.
C. Governing Law. This Agreement is made and executed under and
in all respects to be governed and construed by the laws of
the State of Iowa
D. Notices. All notices and demands given or required to be
given by any party hereto to any other party shall be deemed
to have been properly given if and when delivered in person or
three (3) business days after having been deposited in any
U.S. Postal Service and sent by registered or certified mail,
Postage prepaid, addressed as follows:
<TABLE>
<CAPTION>
If to Seller: If to Purchaser:
------------- ----------------
<S> <C>
Iowa Land and Building Company Ryan Properties, Inc.
c/o Thomas L. Aller c/o Jeff A. Smith
200 First Street SE 221 Third Avenue SE, Suite 250
Cedar Rapids, IA 52401 Cedar Rapids, IA 52401
</TABLE>
6
<PAGE> 7
E. Assignability. This Agreement and the rights set out herein
may not be assigned by Purchaser to anyone other than McLeod,
Inc., or its affiliate without the prior written consent of
the Seller. If at the time of execution hereof, this Agreement
has not already been assigned to McLeod, Inc. or one of its
affiliates, Purchaser shall so assign this Agreement on or
before the Closing Date and it shall be a condition of
Seller's obligations hereunder that this Agreement be so
assigned. Any assignment shall not release Purchaser from any
liability under this Agreement.
F. Invalidity. If for any reason any term or provision of this
Agreement shall be declared void and unenforceable by any
court of law or equity it shall only affect such particular
term or provision of this Agreement and the balance of this
Agreement shall remain in full force and effect.
G. Complete Agreement. All understandings and agreements
heretofore had between the parties are merged into this
Agreement which alone fully and completely expressed their
agreement. This Agreement may be changed only in writing
signed by both of the parties hereto and shall apply to and
bind the successors and assigns of each of the parties hereto
and shall merge with the deed delivered to Purchaser at
closing except as specifically provided herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
SELLER:
-------
IOWA LAND AND BUILDING COMPANY
BY: /s/ THOMAS L. ALLER
-------------------------------------
THOMAS L. ALLER, Vice President
PURCHASER:
----------
RYAN PROPERTIES, INC.
BY: /s/ JEFF A. SMITH
-------------------------------------
JEFF A. SMITH, Vice President
7
<PAGE> 1
EXHIBIT 99.2
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT is made and entered into as of this 28th day
of June, 1996 between Donald E. Zvacek, Dennis E. Zvacek and Robert J. Zvacek
("Seller"), and Ryan Properties, Inc. ("Purchaser").
In consideration of the covenants and agreements contained herein and
prior payments made by Purchaser to Seller, the parties agree as follows:
1. Land To Be Purchased. Subject to compliance with the terms and
conditions of this Agreement, Seller shall sell to Purchaser and
Purchaser shall purchase from Seller the real property legally
described on Exhibit A attached hereto (the "Land"), together with all
easements, tenements, hereditaments, and appurtenances belonging
thereto.
2. Purchase Price. The purchase price for the Land ("Purchase Price")
shall be the sum of $9,250.00 per acre payable by wire transfer,
certified or cashier's check at the closing hereunder.
3. Title To Be Delivered. Seller agrees to convey marketable fee simple
title in the Land to Purchaser subject only to easements,
restrictions, conditions and covenants of record and to rights of farm
tenants of the Land whose leases can be terminated on not more than
six (6) months notice only ("Six Month Farm Leases").
A. Seller at its sole cost and expense shall deliver to Purchaser
an abstract of title to the Land continued through the date of
Purchaser's exercise of its option to purchase the Land for
examination by Purchaser. It shall show merchantable title in
Seller in conformity with this Agreement, Iowa law and Title
Standards of the Iowa Bar Association. The abstract shall
become the Land of Purchaser when the Purchase Price is paid
in full. Seller shall pay the costs of any additional
abstracting and title work due to any act or omission of
Seller between the continuation date of the abstract and the
closing.
B. Purchaser shall have twenty (20) days after receipt of the
abstract of title and survey to render objections to title,
including any easements, et al. not satisfactory to Purchaser,
in writing to Seller and Seller shall have thirty (30) days
from the date it receives such objections to have the same
removed or satisfied. If Seller shall fail to have such
objections removed within that time, Purchaser may, at its
sole discretion, either (a) terminate this Agreement without
any liability on its part, or (b) take title subject to such
<PAGE> 2
objections. Seller agrees to use its best reasonable efforts
to promptly satisfy any such objections.
4. Rights of Inspection, Testing and Review. Purchaser, its counsel,
accountants, agents and other representatives, shall have full and
continuing access to the Land and all parts thereof, upon reasonable
notice to Seller. Purchaser and its agent and representatives shall
also have the right to enter upon the Land at any time after the
execution and delivery hereof for any purpose whatsoever, including
inspecting, surveying, engineering, test boring, performance of
environmental tests and such other work as Purchaser shall consider
appropriate, provided that Purchaser shall hold Seller harmless and
fully indemnify Seller against any damage, claim, liability or cause
of action arising from or caused by the actions of Purchaser, its
agents, or representatives upon the Land, and shall have the further
right to make such inquiries of governmental agencies and utility
companies, etc., and to make such feasibility studies and analyses as
it considers appropriate.
5. Control of Land. Until the closing and subject to Purchaser's
indemnification under Section 4 above, Seller shall have the full
responsibility and the entire liability for any and all damages or
injury of any kind whatsoever to the Land, and any and all persons,
whether employees or otherwise, and all property from and connected to
the Land. If, prior to the closing, the Land is materially damaged or
the Land shall be the subject of an action in eminent domain or a
proposed taking by a governmental authority, whether temporary or
permanent, Purchaser, at its sole discretion, shall have the right to
terminate this Agreement upon notice to Seller without liability on
its part by so notifying Seller and all sums heretofore paid by
Purchaser (with interest) shall be refunded to Purchaser. If
Purchaser does not exercise its right of termination, any and all
proceeds arising out of such damage or destruction, if the same be
insured, or out of any such eminent domain or taking, shall be
assigned to or paid over to the Purchaser on the Closing Date. Seller
agrees to keep the Land continually insured during the term of this
Agreement under its current policy of fire and extended coverage
insurance.
6. Representations Of Seller. In order to induce Purchaser to enter into
this Agreement and purchase the Land, Seller hereby represents and
warrants to Purchaser that to the best of Seller's knowledge:
A. No action in condemnation, eminent domain or public taking
proceedings are now pending or contemplated against the Land.
B. No ordinance or hearing is now before any local governmental
body which either contemplates or authorizes any public
improvements or special tax levies, the cost of which may be
assessed against the Land.
<PAGE> 3
C. Seller has good and marketable fee simple title interest to
the Land.
D. There are no notices, orders, suits, judgment or other
proceedings relating to fire, building, zoning, air pollution
or health violations that have not been corrected. Seller
shall notify Purchaser of any past notices, orders, suits,
judgments or other proceedings relating to fire, building,
zoning, air pollution or health violations as they relate to
the Land.
E. The Land will as of the date of closing be free and clear of
all liens, security interests, all encumbrances, leases
(except Six Month Farm Leases) or other restrictions, with the
exception, if any, placed thereon as a result of the
governmental approvals itemized in Section 7D herein.
F. All labor or material which have been furnished to the Land
have been fully paid for or will be fully paid for prior to
the closing date so that no lien for labor or materials
rendered can be asserted against the Land.
G. The undersigned is a duly authorized representative of the
Seller and as such is authorized to execute this Agreement and
bind the Seller hereto.
H. The Land does not contain any underground or above ground
storage tanks. If any above ground or underground tanks have
previously been located on the Land, Seller agrees to provide
Purchaser with any and all information available in connection
with the removal of any such tanks.
I. The Land and its existing and all prior uses comply and have
at all times complied with, and Seller is not in violation of,
has not violated, in connection with its ownership, use,
maintenance or operation of the Land and the conduct of the
business related thereto, any applicable federal, state,
county or municipal or local statutes, laws, regulations,
rules, ordinances, codes, standards, orders, licenses and
permits of any governmental authorities relating to
environmental matters (being hereinafter collectively referred
to as the "Environmental Laws") and all other applicable
environmental standards or requirements.
(i) Neither Seller, its agents, employees and independent
contractors nor any tenant has operated the Land for
the purpose of receiving, handling, using, storing,
treatment, transporting and disposing of petroleum
products or any Hazardous Substance or Material
meaning asbestos, urea formaldehyde, polychlorinated
biphenyls, nuclear fuel or materials, chemical waste,
radioactive materials, explosives, known carcinogens,
petroleum products or other dangerous or toxic or
hazardous pollutant, contaminant, chemical
<PAGE> 4
material or other substance defined in said
Environmental Laws, or other toxic dangerous or
hazardous chemicals, materials, substances,
pollutants and wastes, or any chemical, material or
substance exposure which is prohibited, limited or
regulated by any federal, state, county, regional or
local authority (all the foregoing being hereinafter
collectively referred to as "Hazardous Materials");
(ii) there are no existing or pending remedial actions or
other work, with respect to the Land in connection
with the Environmental Laws, nor has Seller received
any notice of any of the same;
(iii) no Hazardous Materials have been or will be released
into the environment, or have been or will be
deposited, spilled, discharged, placed or disposed of
at, on, or, to the actual knowledge of Seller,
adjacent to the Land, nor has the Land been used at
any time by any person as a landfill or a disposal
site for Hazardous Materials or for garbage, waste or
refuse of any kind;
(iv) there are not electrical transformers or other
equipment containing dielectric fluid containing
polychlorinated biphenyls in excess of 50 parts per
million located in, on or under the Land, nor is
there any friable asbestos contained in, on or under
the Land;
(v) there are no locations off the Land where Hazardous
Materials generated by or on the Land have been
treated, stored, deposited or disposed of;
(vi) there is no fact pertaining to the physical condition
of either the Land or the area surrounding the Land
and which materially adversely affects or will
materially adversely affect the Land or the use or
enjoyment or the value thereof or Seller's ability to
perform the transactions contemplated by this
Agreement;
(vii) the sale of the Land by Seller to Purchaser does not
require notice to or the prior approval, consent or
permission of any federal, state or municipal or
local governmental agency, body, board or official;
and
(viii) no notices of any violation of any of the matters
referred to in the foregoing sections relating to the
Land or its use have been received by Seller and
there are no writs, injunctions, decrees, orders or
judgments outstanding, no lawsuits, claims,
proceedings or investigations pending or threatened,
relating to the ownership, use, maintenance or
operation of the Land, nor is there any basis for any
such lawsuit, claim, proceedings or investigation
being instituted or filed.
The representations and warranties set forth in this Section 6 shall
survive closing and shall not be affected by any investigation,
verification or approval by any
<PAGE> 5
party thereto or by anyone on behalf of any party hereto and shall not
merge into Seller's deed being delivered at closing. Seller agrees to
indemnify and hold Purchaser harmless from and against and to
reimburse Purchaser with respect to any and all claims, demands,
causes of action, loss, damage, liabilities, and costs (including
attorney's fees and court costs) asserted against or incurred by
Purchaser by reason of or arising out of the breach of any
representation or warranty as set forth in this Section 6.
7. Conditions to Closing. The closing of the transaction contemplated by
this Agreement and all the obligations of Purchaser under this
Agreement are subject to fulfillment, on or before the Closing Date of
the following conditions:
A. The representations and warranties made by Seller in Section 6
shall be correct as of the Closing Date with the same force
and effect as if such representations were made at such time.
B. Title to the Land shall be in the condition warranted in
Section 6.
C. Purchaser, in its sole and absolute discretion, having
completed and approved of any inspections done by Purchaser
hereunder.
D. Purchaser having obtained any and all necessary governmental
approvals, including without limitation those necessary or
desirable for:
(a) subdivision or platting which might be necessary or
desirable in connection with the sale and transfer of
the Land. (Any conditions imposed as a part of the
platting or subdivision must be satisfactory to
Purchaser, in its sole opinion.);
(b) change to the zoning classification of the Land to
O/S. (Any conditions imposed as a part of the
rezoning must be satisfactory to Purchaser, in its
sole opinion.);
(c) annexation of the Land into the City of Cedar Rapids;
(d) CEBA Grant from the Iowa Department of Economic
Development;
(e) RISE Grant from the State of Iowa; and
(f) formation of an Urban Renewal District and passage of
a Tax Increment Financing Ordinance.
Seller shall cooperate with Purchaser in attempting to obtain
any such approvals and shall execute any documents necessary
for this purpose, provided that Seller shall bear no expense
in connection therewith.
<PAGE> 6
8. Closing. The closing of the purchase and sale shall take place as
promptly as possible after all the conditions to closing set forth in
Section 7 have been satisfied. Possession of the Land shall be
delivered on the date of Closing.
9. Seller's Obligations At Closing. At or prior to the Closing Date,
Seller shall:
A. Deliver to Purchaser Seller's duly recordable Warranty Deed to
the Land (in a form satisfactory to Purchaser) conveying to
Purchaser marketable fee simple title to the Land and all
rights appurtenant thereto subject only to easements,
restrictions, conditions and covenants of record.
B. Deliver to Purchaser the Abstract of Title to the Land.
C. Deliver to Purchaser such other documents as may be required
by this Agreement, all in a form satisfactory to Purchaser.
10. Delivery of Purchase Price; Obligations At Closing. At closing, and
subject to the terms, conditions, and provisions hereof and the
performance by Seller of its obligations as set forth herein,
Purchaser shall deliver the Purchase Price to Seller pursuant to
Section 2 hereof.
11. Closing Costs. The following costs and expenses shall be paid as
follows in connection with the closing:
A. Seller shall pay:
(i) The transfer fee imposed on the conveyance.
(ii) A pro-rata portion of all taxes as provided in
Section.
(iii) All special assessments except as provided in the
Option Agreement dated May 29,1996 between the
parties hereto.
(iv) Seller's attorneys fees.
(v) The cost of recording the satisfaction of any
existing mortgage and any other document necessary to
make title marketable.
B. Purchaser shall pay the following costs in connection with the
closing:
(i) The documentary fee necessary to record the Deed.
(ii) Purchaser's attorneys fees.
12. Failure of Closing Conditions. Seller and Purchaser agree that should
any of the conditions to Purchaser's obligations set forth in Section
7D above not be satisfied, the Option Agreement dated May 29, 1996
between Seller and Purchaser shall be reinstated and Purchaser shall
be provided thirty (30) days in which to make up
<PAGE> 7
any option payments due to Seller under the terms of the Option
Agreement but not made due to the execution of this Agreement.
13. Real Estate Taxes and Special Assessments. Except as otherwise
provided in the Option Agreement dated May 29,1996 between Seller and
Purchaser, Seller shall pay all levied and pending special assessments
against the Land prior to the Closing Date. Seller shall pay all real
estate taxes for all fiscal years which end prior to the Closing Date.
Real estate taxes for the fiscal year in which the Closing Date occurs
shall be prorated to the Closing Date on the basis of a 365 day
calendar year. Purchaser shall pay all real estate taxes due in
subsequent fiscal years.
14. Remedies. If Seller defaults in the performance of this Agreement and
Purchaser does not cancel this Agreement, Seller acknowledges the Land
is unique and that money damages to Purchaser in the event of default
by Seller are inadequate. Accordingly, Purchaser shall have the
right, in addition to any other remedy available, to apply for and to
receive from a court of competent jurisdiction equitable relief by way
of restraining order, injunction or otherwise, prohibitory or
mandatory, to prevent a breach of the terms of this Agreement, or by
way of specific performance to enforce performance of the terms of
this Agreement or rescission. This right to equitable relief shall
not be construed to be in lieu of or to preclude the right to seek a
remedy at law.
15. Time for Acceptance. This Agreement, when duly executed by all of the
parties hereto, shall be binding upon the parties hereto, their heirs,
representatives, successors and assigns. By execution hereof, Seller
waives written notice of the exercise of Purchaser's option under the
Option Agreement.
16. Miscellaneous. The following general provisions govern this Agreement.
A. No Waivers. The waiver by either party hereto of any
condition or the breach of any term, covenant or condition
herein contained shall not be deemed to be a waiver of any
other condition or of any subsequent breach of the same or of
any other term, covenant or condition herein contained.
Either party, in its sole discretion may waive any right
conferred upon such party by this Agreement; provided that
such waiver shall only be made by giving the other party
written notice specifically describing the right waived.
B. Time of Essence. Time is of the essence of this Agreement.
C. Governing Law. This Agreement is made and executed under and
in all respects to be governed and construed by the laws of
the State of Iowa
<PAGE> 8
D. Notices. All notices and demands given or required to be
given by any party hereto to any other party shall be deemed
to have been properly given if and when delivered in person or
three (3) business days after having been deposited in any
U.S. Postal Service and sent by registered or certified mail,
Postage prepaid, addressed as follows:
If to Seller If to Purchaser
c/o Donald Zvacek Ryan Properties, Inc.
2403 31st Street, S.W. ATTN: Jeff A. Smith
Cedar Rapids, IA 52404 221 Town Centre, Suite 250
Cedar Rapids, IA 52401
E. Assignability. This Agreement and the rights set out herein
may be assigned by Purchaser provided, however, any assignment
shall not release Purchaser from any liability under this
Agreement.
F. Invalidity. If for any reason any term or provision of this
Agreement shall be declared void and unenforceable by any
court of law or equity it shall only affect such particular
term or provision of this Agreement and the balance of this
Agreement shall remain in full force and effect and shall be
G. Complete Agreement. All understandings and agreements
heretofore had between the parties are merged into this
Agreement which alone fully and completely expressed their
agreement. This Agreement may be changed only in writing signed
by both of the parties hereto and shall apply to and bind the
successors and assigns of each of the parties hereto and shall
merge with the deed delivered to Purchaser at closing except
as specifically provided herein.
H. Counterparts. This Agreement may be executed in one (1) or more
counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
<PAGE> 9
SELLER:
/s/ DONALD E. ZVACEK
-----------------------------------
DONALD E. ZVACEK
/s/ KAREN M. ZVACEK
-----------------------------------
KAREN M. ZVACEK
STATE OF IOWA )
) ss:
COUNTY OF LINN )
On this 28th day of June, 1996, before me, a Notary Public in and for
the State of Iowa, personally appeared Donald E. Zvacek and Karen M. Zvacek,
husband and wife, to me known to be the persons named in and who executed the
foregoing instrument, and acknowledged that they executed the same as their
voluntary act and deed.
[NOTARIAL SEAL CARMEL R. BROWN /s/ CARMEL R. BROWN
IOWA] MY COMMISSION EXPIRES -----------------------------------
5/7/99 NOTARY PUBLIC - STATE OF IOWA
/s/ DONALD E. ZVACEK
Atty. in fact for Dennis E. Zvacek
-----------------------------------
DENNIS E. ZVACEK
/s/ DONALD E. ZVACEK
Atty. in fact for Donalyn A. Zvacek
-----------------------------------
DONALYN A. ZVACEK
STATE OF IOWA )
) ss:
LINN COUNTY )
On this 28th day of June, 1996, before me, a Notary Public in and for
the State of Iowa, personally appeared Donald E. Zvacek, to me known to be the
person who executed the foregoing instrument on behalf of Dennis E. Zvacek and
Donalyn A. Zvacek, and acknowledged that that person executed the same as the
voluntary act and deed of said Dennis E. Zvacek and Donalyn A. Zvacek.
[NOTARIAL SEAL CARMEL R. BROWN /s/ CARMEL R. BROWN
IOWA] MY COMMISSION EXPIRES -----------------------------------
5/7/99 NOTARY PUBLIC - STATE OF IOWA
<PAGE> 10
/s/ ROBERT J. ZVACEK
-----------------------------------
ROBERT J. ZVACEK
/s/ MARILYN J. ZVACEK
-----------------------------------
MARILYN J. ZVACEK
STATE OF IOWA )
) SS:
COUNTY OF LINN )
On this 28th day of June 1996, before me, a Notary Public in and for
the State of Iowa, personally appeared Robert J. Zvacek and Marilyn J. Zvacek,
husband and wife, to me known to be the persons named in and who executed the
foregoing instrument, and acknowledged that they executed the same as their
voluntary act and deed.
/s/ CARMEL R. BROWN
-----------------------------------
NOTARY PUBLIC-STATE OF IOWA
[NOTARIAL SEAL CARMEL R. BROWN
IOWA] MY COMMISSION EXPIRES
5/7/99
<PAGE> 11
BUYER:
RYAN PROPERTIES, INC.
BY: /s/ JEFF A. SMITH
-----------------------------------
JEFF A. SMITH, Vice President
STATE OF IOWA )
) SS:
COUNTY OF LINN )
On this 27th day of 1996, before me, a Notary Public in and for the
State of Iowa, personally appeared Jeff A. Smith, to me personally known, who
being by me duly sworn did say that he is Vice President of Ryan Properties,
Inc., that no seal has been procured by the said corporation, and that said
instrument was signed on behalf of the said corporation by authority of its
Board of Directors, and the said Jeff A. Smith acknowledged the execution of
said instrument to be the voluntary act and deed of said corporation, by it and
by him voluntarily executed.
[NOTARIAL SEAL [NAME] [SIG]
IOWA] MY COMMISSION EXPIRES -----------------------------------
September 27, 1997 NOTARY PUBLIC-STATE OF IOWA
