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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission File Number: 0-20763
McLEOD, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-421407240
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
221 Third Avenue SE, Suite 500
Cedar Rapids, IA 52401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 364-0000
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
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Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the registrant's common stock as of
March 19, 1997 is $328,114,167. */
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The number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date is:
Class A Common Stock, par value $.01 per share, outstanding as of March 19,
1997: 36,989,242
Class B Common Stock, par value $.01 per share, outstanding as of March 19,
1997: 15,625,929
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part
of the Form 10-K into which the document is incorporated:
(1) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 29, 1997, to be filed within 120 days after
the end of the registrant's fiscal year, are incorporated by reference into
Part III, Items 10 - 13 of this Form 10-K.
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*/ Solely for the purposes of this calculation, all directors and executive
- -
officers of the registrant and all stockholders beneficially owning more than 5%
of the registrant's common stock are considered to be affiliates.
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TABLE OF CONTENTS
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PART I Item 1. Business............................................... 1
Item 2. Properties............................................. 36
Item 3. Legal Proceedings...................................... 36
Item 4. Submission of Matters to a Vote of Security Holders.... 39
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 39
Item 6. Selected Financial Data................................ 41
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 42
Item 8. Financial Statements and Supplementary Data............ 49
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 50
PART III Item 10. Directors and Executive Officers of the Registrant..... 50
Item 11. Executive Compensation................................. 50
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 50
Item 13. Certain Relationships and Related Transactions......... 51
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K............................................... 51
GLOSSARY.................................................................. 61
SIGNATURES................................................................ 64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENT SCHEDULES......... S-1
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This Form 10-K contains certain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the caption
"Business--Risk Factors" and elsewhere in this Form 10-K. Unless the context
suggests otherwise, references in this Form 10-K to the "Company" mean McLeod,
Inc. and its subsidiaries and predecessors. Unless otherwise indicated, the
information in this Form 10-K reflects the recapitalization, effective May 2,
1996, in which shares of the Company's Class A Common Stock, $.01 par value
per share (the "Class A Common Stock"), and Class B Common Stock, $.01 par
value per share (the "Class B Common Stock"), were split on the basis of 3.75
for one. 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. See the "Glossary" appearing elsewhere herein
for definitions of certain terms used in this Form 10-K.
PART I
Item 1. 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, the sale of advertising space in
telephone directories and the sale of business telephone systems. As of
December 31, 1996, the Company served over 17,800 telecommunications customers
in 92 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 offers a variety of special access and private line
services to large businesses, institutional customers and interexchange
carriers, primarily in Des Moines, Iowa. 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. The Iowa Communications Network
is a fiber optic network that links certain of the State of Iowa's schools,
libraries and other public buildings. On August 1, 1993, the Company was
reincorporated in the State of Delaware. McLeodUSA Telecommunications
Services, Inc., a wholly owned subsidiary of the Company ("McLeodUSA
Telecommunications"), 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, September 1996 and
January 1997, respectively, the Company acquired MWR Telecom, Inc. ("MWR")
(now part of McLeodUSA Network Services, Inc. ("McLeodUSA Network Services")),
a competitive access provider in Des Moines, Iowa, Ruffalo, Cody & Associates,
Inc. ("Ruffalo, Cody"), a telemarketing company, Telecom*USA Publishing Group,
Inc. (now known as McLeodUSA Media Group, Inc. ("McLeodUSA Publishing")), a
publisher of telephone directories, and Digital Communications of Iowa, Inc.
("Digital Communications"), a telephone equipment company.
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The Company is organized as a holding company and operates primarily
through 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)
Publishing Services, which publishes and distributes telephone directories.
As of the date hereof, the Company is offering integrated
telecommunications services to business and residential customers located
primarily in Iowa and Illinois. The Company has recently begun sales of
integrated telecommunications services in a number of markets in Minnesota and
Wisconsin. The Company plans to begin offering integrated telecommunications
services in markets in South Dakota, North Dakota, Colorado and Wyoming in
1997. Over the next several years, depending on competitive and other factors,
the Company also intends to offer integrated telecommunications services in
Montana, Idaho, Utah and Nebraska. The Company also offers long distance
service in Alabama, Arizona, Arkansas, California, Colorado, Delaware,
Georgia, Idaho, Indiana, Kansas, Kentucky, Maine, Maryland, Massachusetts,
Mississippi, Michigan, Missouri, Montana, Nebraska, Nevada, New Hampshire, New
Jersey, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Utah, Virginia,
Washington and Wyoming.
On January 15, 1997, the Federal Communications Commission ("FCC")
notified the Company that it was the successful bidder for 26 "D" and "E"
block frequency personal communications services ("PCS") licenses in 24
markets covering areas of Iowa, Illinois, Minnesota, Nebraska and South
Dakota. The Company bid an aggregate of approximately $32.8 million for these
PCS licenses, which the Company will be required to pay to the FCC following
grant of the licenses, anticipated to occur during the second or third quarter
of 1997. The PCS licenses encompass approximately 110,000 square miles and a
population of approximately 6.5 million. The Company is assessing its
technological options and beginning to design and engineer its proposed PCS
system. The Company expects to begin constructing its PCS network by the end
of 1997 and offering PCS services as part of its integrated telecommunications
services in 1998. See "--Risk Factors--PCS System Implementation Risks."
The statements in the foregoing paragraphs about the Company's expansion
plans and proposed PCS services are "forward-looking statements" within the
meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These plans may be revised, and the Company's actual
geographic expansion and wireless services may differ materially from that
indicated by its current plans, in each case as a result of 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.
As of the date hereof, the Company believes it is the first
telecommunications provider in most of its 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 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 subscribing to the Company's integrated telecommunications services
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 generally are most popular with the
Company's business customers, and, in certain cases, rates specifically
identified by a
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business customer and agreed to by the Company. The Company also provides
paging and Internet access services.
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 Transactions
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 to 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 from a material agreement with a
major long distance carrier to provide telemarketing services. The major long
distance carrier terminated this agreement, effective December 31, 1996. A
total of $50,782 and 37,107 shares of Class A Common Stock were distributed
pursuant to the escrow agreement in January 1997 and the Company expects one
additional distribution of 19,070 shares of Class A Common Stock to occur in
April 1997.
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 September 20, 1996, the Company acquired McLeodUSA Publishing by means
of a merger of a newly formed wholly owned subsidiary of the Company with and
into McLeodUSA Publishing. As consideration for the acquisition, the Company
paid approximately $74.1 million in cash and an additional amount estimated as
of the date hereof to be approximately $1.6 million to be paid to certain
employees of McLeodUSA Publishing as part of an incentive plan. At the time of
the acquisition, McLeodUSA Publishing had outstanding debt of approximately
$6.6 million.
McLeodUSA Publishing publishes and distributes "white page" and "yellow
page" telephone directories in nineteen states in the midwestern and Rocky
Mountain regions of the United States, including most of the Company's target
markets. McLeodUSA Publishing derives its revenues primarily from the sale of
advertising space in its telephone directories.
On December 9, 1996, the Company, through McLeodUSA Telecommunications,
acquired the customer base of Total Communication Systems, Inc. ("TCSI") for
an aggregate cash purchase price of approximately $534,000. TCSI is an Iowa
corporation that offered local and long distance service in Iowa by
partitioning central office switches of U S WEST Communications, Inc. ("U S
WEST"). TCSI managed approximately 1,600 local and long distance lines in Iowa
prior to the acquisition.
McLeodUSA Publishing entered into an option agreement with Fronteer
Directory Company, Inc. ("Fronteer") on April 27, 1995 pursuant to which
Fronteer granted to McLeodUSA Publishing the right and option to acquire nine
telephone directories published by Fronteer (the "Fronteer Option"). On
January 27, 1997, McLeodUSA Publishing exercised the Fronteer Option to
acquire six of the telephone directories at a price to be determined based on
the sum of the revenues derived from the last Fronteer editions of the
directories. The purchase price is estimated as of the date hereof to be
approximately $4 million. The transaction was consummated on February 25,
1997.
On January 30, 1997, the Company acquired Digital Communications by means
of a merger of a newly formed wholly owned subsidiary of the Company with and
into Digital Communications. As consideration for the acquisition, the Company
issued an aggregate of 84,430 shares of Class A
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Common Stock to the shareholders of Digital Communications. Digital
Communications sells, installs and services telephone systems primarily to
small businesses in eastern Iowa.
On February 27, 1997, McLeodUSA Publishing entered into an agreement with
Indiana Directories, Inc. to acquire 26 telephone directories published by
Indiana Directories, Inc. at a price to be determined based on the sum of the
revenues derived from the last Indiana Directories, Inc. editions of the
directories. The purchase price is estimated as of the date hereof to be
approximately $10.5 million. Closing of the transaction is expected to occur on
March 31, 1997.
On March 4, 1997, the Company completed a private offering of $500
million aggregate principal amount at maturity of 10 1/2% senior discount
notes due March 1, 2007 (the "Notes"). The Notes were priced at a discount and
the Company received net proceeds of approximately $289.5 million.
Business Strategy
The Company's objective is to become a leading provider of integrated
wireline and wireless telecommunications services in Iowa, Illinois,
Minnesota, Wisconsin, South Dakota, North Dakota, Colorado, Wyoming, Montana,
Utah, Idaho and Nebraska. 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 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 wireline
and wireless 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. The Company intends to add PCS services
to its current array of integrated telecommunications services
beginning in 1998.
. Build Market Share Through Branding and Customer Service. The
Company believes that, by branding its telecommunications services
with the trade name *McLeodUSA in combination with the distinctive
black-and-yellow motif of the McLeodUSA Publishing directories, it
will create and strengthen brand awareness in all of the Company's
markets. The Company also 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, and will permit the Company to include
additional services, such as PCS, when available. 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
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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). As
of March 21, 1997, the Company owned approximately 2,500 route miles
of fiber optic network and, subject to the foregoing factors, expects
to construct approximately 5,000 additional route miles of fiber optic
network during the next three years. Through its strategic
relationships with its electric utility stockholders and its contracts
to build the final links of the Iowa Communications Network and lease
a portion of the capacity on those links 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 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 certain
judicial and regulatory proceedings are resolved, and assuming the
economics are favorable to the Company, the Company intends to begin
offering facilities-based switched services by using its existing high
capacity digital AT&T switch and installing additional switches. In
August 1996, the FCC released a decision implementing the
interconnection portions of the Telecommunications Act (the
"Interconnection Decision"). Certain provisions of the Interconnection
Decision have been stayed by an October 1996 court decision, and will
be subject to further judicial and regulatory proceedings. The Company
believes that these proceedings should be substantially resolved, and
that the Company could begin offering local facilities-based switched
services, during 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 Iowa
markets provide it with access to rights-of-way and other resources on
favorable terms. The Company believes that its acquisitions of
Ruffalo, Cody and McLeodUSA Publishing during 1996 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 wireline and wireless services, directory publishing, network
construction and infrastructure and Internet access.
. 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. Seven of the nine executive officers of the Company served as
officers of Teleconnect Company ("Teleconnect") or its successor,
Telecom*USA, Inc. ("Telecom*USA"). Teleconnect began providing long
distance services
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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 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.
Wireline Services. 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 and the sale of business telephone
equipment. Industry sources have estimated that the 1995 aggregate revenues of
all local exchange carriers approximated $95 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 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. Although there can be no assurance, the Company believes that it
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
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competitors non-discriminatory access to local exchange carrier poles, conduit
space and other rights-of-way. Moreover, states may not erect "barriers to
entry" of local competition, although they may 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 optic 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 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, was 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 "Initial 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 Company believes that the Initial
Interconnection
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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. In August 1996 the FCC
released the Interconnection Decision implementing the interconnection
portions of the Telecommunications Act. The Interconnection Decision
establishes rules for negotiating interconnection agreements and guidelines
for review of such agreements by state public utilities commissions. Certain
provisions of the Interconnection Decision have been stayed by an October 1996
court decision, and will be subject to further judicial and regulatory
proceedings. Although this judicial stay does not prevent the Company from
negotiating interconnection agreements, it does create uncertainty about the
rules governing pricing, terms and conditions of interconnection agreements
and will likely delay the execution of these agreements. If the Company can
negotiate favorable interconnection agreements, and subject to the resolution
of judicial and regulatory proceedings necessary to implement such agreements,
the Company believes that it could begin offering local facilities-based
switched services within three years.
As of December 31, 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, Idaho
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.
Wireless Services. Demand for wireless communications has grown rapidly
over the past decade. According to the Cellular Telecommunications Industry
Association ("CTIA"), the number of wireless telephone subscribers nationwide
has grown from approximately 680,000 in 1986 to an estimated 38.2 million as
of June 30, 1996, with a compound annual growth rate in excess of 45% from
1990 through 1995. Wireless communication revenues for the 12-month period
ended June 30, 1996 are estimated by CTIA to have totaled over $21 billion, a
31% increase over the prior 12-month period. The Company believes that the
demand for wireless communications will continue to grow dramatically, and
that PCS will capture a significant share of the wireless market, due to
anticipated declines in costs of service, increased function versatility, and
increased awareness of the productivity, convenience and safety benefits
associated with such services. The Company also believes the rapid growth of
notebook computers and personal digital assistants, combined with emerging
software applications for wireless delivery of electronic mail, fax and
database searching, will further stimulate demand for wireless service. BIA
Consulting, Inc. estimates that the number of wireless service subscriptions
will reach 90.5 million by the year 2000, with PCS accounting for
approximately 23.1 million of such subscriptions.
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. As a
result of the acquisition by the Company of Ruffalo, Cody, McLeodUSA
Publishing and Digital Communications in July 1996, September 1996 and January
1997, respectively, the Company also derives revenue from ancillary services,
including direct marketing and telemarketing services, the sale of advertising
space in telephone directories and the sale of business telephone systems. For
the year ended December 31, 1996, these services represented 51%, 13%, 7% and
29%, respectively, of the Company's total revenues.
Integrated Telecommunications Services. As of December 31, 1996, the
Company was providing service, on a retail basis, to approximately 65,000
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 revenue approximately 800% from the sale of local
and long distance telecommunications services from $4.6 million for the year
ended December 31, 1994 to $41.4 million for
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the year ended December 31, 1996. 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 and Minnesota
customers and Ameritech Corporation ("Ameritech") for its Illinois and
Wisconsin 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 reports, which
enable the Company to verify its customers' bills for both local and long
distance service.
The Company believes that these services are superior to a standard
business 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." As of the date hereof, the Company is purchasing Centrex
service in Minnesota from U S WEST on a month-to-month basis while negotiating
a term agreement. The Company has seven-year Centrex agreements with Ameritech
that extend through 2001 or 2002 in Illinois and 2003 in Wisconsin. These
agreements 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"), a wholly
owned subsidiary of WorldCom, Inc. ("WorldCom"), and routing its customers'
long distance traffic over this capacity. The Company is subject to certain
minimum monthly purchase 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. The Company has consistently met the minimum purchase
requirements under its agreement with WilTel. 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 expects, as of the date hereof, 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,
and will permit the Company to include additional services, such as PCS, when
available. 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 91 cities
and towns in which the Company offers its integrated telecommunications
services as of the date hereof 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 medium-sized business customers, which may lack the
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<PAGE>
resources to support their own PBX, to benefit from a sophisticated
telecommunications system managed by industry experts.
Business customers subscribing to the Company's integrated
telecommunications services generally receive 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 such business customers generally are 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 generally 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, known as Raterizer(R), 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. As of the date hereof, the Company compares the
monthly calls of business customers subscribing to the Company's integrated
telecommunications services 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 has developed the software that performs its long distance
rating analysis. Like other Company software, it is designed around the
customer rather than around a given product. The Company believes that its
method of computing long distance service rates is an important factor in
attracting and retaining business customers. As of March 21, 1997, the
Company's average integrated telecommunications service contract for business
customers had an approximately 40-month term.
The Company also offers other long distance rates to certain business
customers, based on the customer's particular needs. Furthermore, in certain
states, including states outside of its target markets, the Company offers
business customers long distance service only, in order to enhance the
Company's ability to attract business customers that have offices outside of
the Company's target markets. In the markets in which the Company offers long
distance service only, business customers generally receive flat-rate long
distance pricing at rates ranging from $.115 to $.185 per minute as of the
date hereof.
Residential Services. In June 1996, the Company introduced its
PrimeLine(R) service to residential and certain small business customers in
the Cedar Rapids and Iowa City, Iowa markets. The Company expanded its
PrimeLine(R) service to Cedar Falls and Waterloo, Iowa in January 1997, Des
Moines, Iowa in February 1997, and Ames, Davenport and Bettendorf, Iowa in
March 1997. 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. PrimeLine(R) service includes local and 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. As of the date hereof, PrimeLine(R) customers may choose from five
integrated telecommunications service packages generally ranging in price from
$16.95 to $39.95 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
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calls within the continental United States. The Company's standard
PrimeLine/(R)/ service contract has either a month-to-month or a 12-month
term.
Special Access and Private Line Services. The Company 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 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.
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. As of the date hereof,
a single pair of fibers on the Company's network can transmit 32,256
simultaneous voice conversations, whereas a typical pair of copper wires can
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 the initial fiber optic links of the Iowa Communications
Network (the "Part I and II segments"). The Part I and II segments, 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 the Part I
and II segments of the 2,900 miles of the Iowa Communications Network pursuant
to a fiber optic maintenance contract (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
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<PAGE>
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 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 capacity on the Part I and II
segments to provide telecommunications services to customers.
Ancillary Services. Through McLeodUSA Publishing, the Company publishes
and distributes annual "white page" and "yellow page" telephone directories to
local telephone subscribers in nineteen states in the midwestern and Rocky
Mountain regions of the United States, including most of the Company's target
markets. In its fiscal year 1996, McLeodUSA Publishing published and
distributed an aggregate of over 7 million copies of 80 telephone directories
and had revenues of $52.1 million, primarily from the sale of advertising
space in its telephone directories to approximately 85,000 advertisers.
In addition, the Company provides direct marketing and telemarketing
services through Ruffalo, Cody. Such services include 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 approximately 40% of its revenues in 1996 from an
agreement with a major long distance carrier to provide telemarketing
services. The major long distance carrier terminated this agreement, effective
December 31, 1996. As a result, the Company is redirecting telemarketing
resources towards selling the Company's local, long distance and other
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 McLeodUSA Publishing's sales force of 260 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 December 31, 1996, 52 of the Company's 206 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."
The Company also sells, installs and services telephone systems,
primarily to small businesses in eastern Iowa, through Digital Communications,
which the Company acquired in January 1997. The Company believes that these
services will provide valuable expertise for and complement its
telecommunications services offerings.
Expansion of Certain Facilities-based Services
The Company is constructing a fiber optic 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 testing a state-of-the-art high-capacity
digital AT&T switch and plans to acquire additional switches in the future.
Although, as of the date hereof, the Company is not 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.
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<PAGE>
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 utilities commissions to
provide similar services in other markets served by the Company.
The Company's plans to provide local switched services are dependent upon
obtaining favorable interconnection agreements with local exchange carriers.
In August 1996, the FCC released the Interconnection Decision implementing the
interconnection portions of the Telecommunications Act. Certain provisions of
the Interconnection Decision have been appealed in proceedings before the U.S.
Eighth Circuit Court of Appeals. In October 1996, the U.S. Eighth Circuit
Court of Appeals temporarily stayed the effectiveness of portions of the
Interconnection Decision, including provisions establishing a pricing
methodology and a procedure permitting new entrants to "pick and choose" among
various provisions of existing interconnection agreements, pending a decision
on the merits. Although the judicial stay of the Interconnection Decision does
not prevent the Company from negotiating interconnection agreements with local
exchange carriers, it does create uncertainty about the rules governing
pricing, terms and conditions of interconnection agreements, and could make
negotiating such agreements more difficult and protracted. The FCC applied to
the U.S. Supreme Court to vacate the judicial stay, but the U.S. Supreme
Court, on November 12, 1996, refused to do so. The U.S. Eighth Circuit Court
of Appeals heard oral arguments on the merits of the challenges to the
Interconnection Decision on January 17, 1997, but as of the date hereof had
not ruled in the case. Further appeals are possible. There can be no assurance
that the Company will be able to obtain interconnection agreements on terms
acceptable to 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. The foregoing statements are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and where the Company actually provides such services will depend on
factors such as the outcome of the judicial proceedings regarding the
Interconnection Decision. See "--Regulation."
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 wireline 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 proposed PCS markets: two existing cellular providers, five other
PCS providers and one enhanced specialized mobile radio ("ESMR") provider.
Wireless telecommunications networks use a variety of radio frequencies
to transmit voice and data in place of, or in addition to, standard wireline
telephone networks. Wireless telecommunications technologies include one-way
radio applications, such as paging or beeper services, and two-way radio
applications, such as cellular and PCS telephone networks. In 1993, the FCC
allocated 140 MHz of the radio spectrum (and subsequently allocated an
additional 10 MHz of spectrum) for the provision of a new
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<PAGE>
wireless communications service, commonly known as PCS. PCS differs from
traditional cellular telephone service principally in that PCS systems will
operate at a higher frequency band and employ advanced digital technology.
Relative to existing cellular service, these features are expected to enable
PCS system operators to offer customers lower cost service options, lighter
handsets with longer battery lives, and new and enhanced service offerings.
To accommodate a wide range of services and technologies with different
spectrum requirements and to facilitate the entry of small business and rural
telephone companies, the FCC divided the 150 MHz of PCS spectrum into three 10
MHz blocks, three 30 MHz blocks and 30 MHz of unlicensed spectrum. The FCC
adopted the following frequency plan.
<TABLE>
<S> <C>
Block A: 30 MHz (1850-1865/1930-1945 MHz)
Block B: 30 MHz (1870-1885/1950-1965 MHz)
Block C: 30 MHz (1895-1910/1975-1990 MHz)
Block D: 10 MHz (1865-1870/1945-1950 MHz)
Block E: 10 MHz (1885-1890/1965-1970 MHz)
Block F: 10 MHz (1890-1895/1970-1975 MHz)
</TABLE>
The FCC divided service areas based upon the 51 Major Trading Areas
("MTA") and the 493 Basic Trading Areas ("BTA"), as defined by Rand McNally
Commercial Atlas and Marketing Guide. Two 30 MHz frequency blocks were
designated for MTA operation, and one 30 MHz frequency block was designated
for BTA operation. The FCC determined that providing two frequency blocks on
an MTA basis will provide economies of scale and scope necessary for the
development of low-cost PCS equipment. The remaining three 10 MHz frequency
blocks are designated for BTA operation. The FCC concluded that a combination
of these frequency blocks and BTA service areas will minimize the start-up
costs likely to result from competitive bidding, and therefore provide greater
opportunity for participation by small businesses, rural telephone companies
and others.
On January 15, 1997, the FCC notified the Company that it was the
successful bidder for 26 "D" and "E" block frequency PCS licenses in 24 BTAs
covering all of Iowa, seven cities in Illinois, three cities in southern
Minnesota, Omaha, Nebraska and Sioux Falls, South Dakota. The Company bid an
aggregate of approximately $32.8 million for these PCS licenses, which the
Company will be required to pay to the FCC following grant of the licenses,
anticipated to occur during the second or third quarter of 1997. The Company
is assessing its technological options and beginning to design and engineer
its proposed PCS system. The Company expects to begin constructing its PCS
network by the end of 1997 and offering PCS services as part of its integrated
telecommunications services in 1998.
The infrastructure of a PCS system generally consists of digital
switches, base station transmitters and receivers, and related equipment.
Additional costs are attributable to site acquisition and preparation, and
installation services. The Company expects to begin selecting and acquiring
sites for transmitters by the end of 1997. Sites will be selected on the basis
of their coverage of targeted customers and on frequency propagation
characteristics. In many cases, the Company may be required to obtain zoning
approval or other permits. The use of existing towers and other facilities
occupied by other telecommunications service providers and utility companies
is also expected to facilitate this process. The Company has entered into
long-term agreements with its electric utility stockholders (MidAmerican
Energy Holdings Company (collectively with its predecessors and subsidiaries,
"MidAmerican") and IES Industries Inc. (collectively with its subsidiaries,
"IES")), and may negotiate similar agreements with other companies, that will
enable the Company to install PCS base stations and other equipment on such
companies towers. See "--Network Facilities." For new sites, the Company
estimates that the site acquisition process may take three to twelve months.
Once sites are acquired and the requisite governmental approvals are obtained,
preparation of each site, including grounding, ventilation and air
conditioning, equipment installation, testing and optimization, generally will
require an additional two to four months. In addition to system design and
site acquisitions, the implementation of the proposed PCS system will require
frequency planning, construction and equipment procurement, installation and
testing. The Company will be required to make significant expenditures to
develop, construct and operate a PCS system.
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In order to build and operate a PCS system, the Company will be required
to select from among competing and potentially incompatible technologies.
Digital signal transmission is accomplished through the use of frequency
management technologies, or "protocols." These protocols "manage" the radio
channel either by dividing it into distinct time slots (a method known as Time
Division Multiple Access, or "TDMA") or by assigning specific coding
instructions to each packet of digitized data that comprises a signal (a
method known as Code Division Multiple Access, or "CDMA"). While the FCC has
established compatible analog signaling protocols for licensed cellular
systems in the U.S., there is no required universal digital signaling
protocol. As of the date hereof, two principal competing, incompatible
signaling protocols have been proposed by various vendors for use in PCS
systems: Global System for Mobile Communications ("GSM") (a TDMA-based
protocol) and CDMA. Because these protocols are incompatible, a subscriber of
a system that relies on GSM technology, for example, will be unable to use a
GSM handset when traveling in an area served only by CDMA-based wireless
operators, unless it is a dual-mode handset that permits the subscriber to use
the cellular system in that area. For this reason, the success of each
protocol will depend both on its ability to offer enhanced wireless service
and on the extent to which its users will be able to use their handsets when
roaming outside their service area. Each of the two principal PCS signaling
protocols have been adopted by at least one PCS licensee, and each offers
certain advantages and disadvantages.
The Company has not yet selected one of the digital signaling protocols
for its planned PCS network. The Company anticipates that its decision will be
based primarily on an assessment of the signaling protocols selected by PCS
licensees in the markets in which the Company wishes to offer roaming services
as well as the technical advantages and disadvantages of each protocol.
The Company intends to provide roaming service in its proposed PCS
markets by establishing suitable roaming arrangements with other PCS operators
in other markets constructing systems compatible with the digital protocol
technology to be selected by the Company. The Company cannot predict when, or
whether, it will be able to enter into such roaming agreements with local
providers. Future subscribers to the Company's proposed PCS services will not
be able to roam in markets without at least one PCS licensee using the
protocol selected by the Company unless the subscriber uses a dual-mode
telephone that would permit the subscriber to use the existing cellular
wireless system in such other market. Such dual-mode phones are heavier and
more expensive than single-mode phones.
The Company plans to operate a fully digital PCS system. As of the date
hereof, most cellular services transmit voice and data signals over analog-
based systems, which use one continuous electronic signal that varies in
amplitude or frequency over a single radio channel. Digital systems, on the
other hand, convert voice or data signals into a stream of digits that is
compressed before transmission, enabling a single radio channel to carry
multiple simultaneous signal transmissions. The Company believes that this
enhanced capacity, along with improvements in digital protocols, will allow
the Company's proposed PCS system to offer new and enhanced services,
including:
. Secure Communications. Sophisticated encryption algorithms
provide increased call security, encouraging users to make private
professional and personal calls that they might otherwise have made
only on wireline telephones.
. Sophisticated Call Management. The Company expects that it will
be able to offer call screening, routing and forwarding, caller I.D.,
message waiting, call hold, call transfer, voice activated dialing and
selective call screening, rejection and forwarding through a digital
PCS system.
. Enhanced Battery Performance. While analog handsets transmit
continuous electronic signals, digital handsets transmit messages in
segments, turning the handset off between transmissions. (Because the
handset is turned on and off hundreds of times each second, this
switching is not noticed by the user.) As a result, the handset is
effectively turned off for almost 90 percent of each call, thereby
extending the amount of time a battery can be used
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<PAGE>
without having to be recharged. Digital handsets are also capable of
entering into "sleep" and "hibernation" modes when not in use, which
will significantly extend the handset's battery life.
. Single Number Service. This service provides subscribers with a
convenient way to transfer all incoming calls between primary wireline
and wireless locations automatically. When a subscriber's handset is
activated, the network will route all incoming calls to the
subscriber's wireless number. When the handset is deactivated, all
calls will be directed to the subscriber's primary wireline location.
Such service will enable subscribers to direct their incoming calls to
one of several alternative locations (wireline telephone, paging
system handset, mailbox, etc.) on an ongoing basis.
. Enhanced Wireless Data Transmission. Digital networks will offer
simultaneous voice and data communications. The Company believes that,
as data transmission technologies develop, a number of potential uses
for such services will merge, including short message service, "mobile
office" applications (e.g., facsimile, electronic mail and connecting
notebook computers with computer/data networks), access to stock quote
services, transmission of text such as maps and manuals, transmission
of photographs, connections of wireless point-of-sale terminals to
host computers, monitoring of alarm systems, automation of meter
reading and monitoring of status and inventory levels of vending
machines.
. SIM Card. Credit card-sized Subscriber Identity Module ("SIM")
cards, programmed with the user's billing information and a specified
service package, will allow subscribers to open accounts and obtain
PCS connectivity automatically, simply by inserting their SIM cards
into compatible PCS handsets. With roaming agreements between the
local providers and the Company, SIM cards could also enable
subscribers to roam wherever the digital protocol technology selected
by the Company is deployed by using their SIM cards with handsets
compatible with the local system as they travel.
The Company intends to offer a variety of wireless telecommunications
services, ranging from wireline enhancement services that supplement the
customer's wireline telephone (much like cellular) to wireline replacement
services that will serve as the customer's primary mode of communication. An
example of the latter service is "enhanced cordless" handsets, which operate
as cordless wireline telephones when used in or near the customer's home and
operate as wireless PCS handsets when used elsewhere.
As the wireline and wireless markets converge, the Company believes that
it can also identify other opportunities to generate revenues from the
wireless industry on both a retail and a wholesale basis. 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.
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.
The statements in the foregoing paragraphs about the Company's plans to
own, develop, construct and operate a PCS system are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These plans may be revised, and the Company's actual wireless
services may differ materially from that indicated by its current plans, in
each case as a result of 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. See "--Risk
Factors--PCS System Implementation Risks."
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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, which is now part of McLeodUSA Network
Services, is a competitive access provider which owns and operates a fiber
optic network and offers special access and private line services to 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 the Part I and II segments 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 of Iowa, the Company is 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 wireline and wireless 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 networks. 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.
As of March 21, 1997, the Company owned approximately 2,500 route miles
of fiber optic network and expects to construct approximately 5,000 additional
route miles of fiber optic network during the next three years. The Company
expects that approximately half 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 optic network
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).
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Sales and Marketing
Until June 1996, the Company directed its 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 integrated 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 fully
integrated monthly billing statement for local, long distance, 800,
international, voice mail, paging, Internet access and travel card service, is
very appealing to its prospective customers.
As of March 21, 1997, marketing of the Company's integrated
telecommunications services to business customers was conducted by 210 direct
sales personnel, located at the Company's headquarters in Cedar Rapids, Iowa
and in 43 branch sales offices in Iowa, Illinois, Minnesota, Wisconsin, South
Dakota, North Dakota and Colorado. The sales personnel make direct calls to
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 integrated telecommunications services to
residential customers was conducted as of March 21, 1997 by 168 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 uses Ruffalo,
Cody's information database to identify attractive sales opportunities and
pursues those opportunities through a variety of methods, including calls from
Ruffalo, Cody's telemarketing personnel.
The Company believes that its acquisition of McLeodUSA 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 integrated telecommunications
service but expects to do so in the future (such as South Dakota, North
Dakota, 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 McLeodUSA 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 McLeodUSA
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-yellow motif with the trade name McLeodUSA will create
and strengthen brand awareness in all of the Company's markets.
In 1997, the Company expects to expand its telecommunications sales and
marketing efforts primarily by opening new branch sales offices in Minnesota,
Wisconsin, South Dakota, North Dakota and Colorado, 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 Wyoming. Over the next several years, depending
on competitive and other factors, the Company also
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intends to begin sales and marketing efforts in Montana, Idaho, Utah and
Nebraska. See "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. The foregoing statements are "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 and the results of the Company's actual expansion efforts
may be materially different, depending on a variety of other 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.
Sales and marketing of the Company's competitive access services are
handled as of the date hereof by a small sales staff located in Des Moines,
Iowa. These sales people work closely with the Company's network engineers to
design and market special access and private line services.
Competition
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
and Ameritech) and the General Telephone Operating Companies, which, as of the
date hereof, 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.
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
acquired MFS Communications Company, Inc., a competitive access provider, in
December 1996. Moreover, in November 1996, British Telecommunications plc, an
international telecommunications company, announced its agreement to acquire
the national long distance carrier MCI. 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. Like the
Company, MCI 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. One other small telecommunications company also holds
such a certificate in Iowa. On July 26, 1996, the Iowa Utilities Board
approved AT&T's application to offer local service in Iowa on both a resale
and facilities-based basis, subject to certain additional filing requirements.
During the past twelve months, AT&T has received certification to provide
local service in all of the Company's current and target markets. 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.
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The Company believes that the Telecommunications Act and state
legislative and regulatory 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
negotiate with entities such as the Company to provide interconnection to the
existing local telephone network, to allow the purchase, at cost-based rates,
of access to unbundled network elements, to establish dialing parity, to
obtain access to rights-of-way and to resell services offered by the incumbent
local exchange carriers.
The Company's plans to provide local switched services are dependent upon
obtaining favorable interconnection agreements with local exchange carriers.
In August 1996, the FCC released the Interconnection Decision implementing the
interconnection portions of the Telecommunications Act. Certain provisions of
the Interconnection Decision implementing the interconnection portions of the
Telecommunications Act have been stayed by the U.S. Eighth Circuit Court of
Appeals, which may limit or delay the development of competition in the local
exchange switched services market. There can be no assurance that the Company
will be able to obtain interconnection agreements on terms acceptable to the
Company.
The Telecommunications Act provides the incumbent local exchange carriers
with 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
"--Regulation."
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 business 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. Using the Company's
sophisticated proprietary software, each business customer subscribing to the
Company's integrated telecommunications services receives the lowest long
distance rate available each month from among the pricing plans of AT&T, MCI
and Sprint that generally 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. Residential customers receive flat-rate
long distance pricing. The Company's fiber optic networks will provide both
diverse access routing and redundant electronics, which design features are
not widely deployed by the local exchange carriers' networks.
Wireless Competition. The wireless telecommunications industry is
experiencing significant technological change, as evidenced by the increasing
pace of improvements in the capacity and quality of
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digital technology, shorter cycles for new products and enhancements, and
changes in consumer preferences and expectations. 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
wireline 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. Accordingly, the Company expects
competition in the wireless telecommunications business to be dynamic and
intense as a result of the entrance of new competitors and the development of
new technologies, products and services. The Company anticipates that in the
future there could potentially be eight wireless competitors in each of its
proposed PCS markets: two existing cellular providers, five other PCS
providers and Nextel Communications Inc., an ESMR provider. Principal cellular
providers in the Company's proposed PCS 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 proposed PCS markets include AT&T
Wireless PCS, Inc., PRIMECO Personal Communications, L.P., WirelessCo, d/b/a
Sprint PCS, American Portable Telecommunications, Inc., d/b/a Aerial
Communications, Inc., Western PCS Corp., Cox Communications, Inc., DCR PCS,
Inc., d/b/a Pocket Communication Corp., Wireless PCS, Inc., d/b/a Airadigm
Communications, Inc., SprintCom, Inc., BRK Wireless Co. Inc., Western PCS BTA
I Corp., OPCSE-Galloway Consortium, Northcoast Operating Co. Inc., Minnesota
PCS Limited Partnership, Northeast Nebraska Telephone Company, Triad Cellular
Corp., Iowa L.P. 136, Redwood Wireless Corp., Polycell Communications Inc.,
CM-PCS Partners, and U S WEST.
Competition with these or other providers of wireless telecommunications
services may be intense. Many of the Company's potential wireless competitors
have substantially greater financial, technical, marketing, sales,
manufacturing and distribution resources than those of the Company and have
significantly greater experience than the Company in testing new or improved
wireless telecommunications products and services. Some competitors are
expected to market other services, such as cable television access, with their
wireless telecommunications service offerings. The Company does not offer
cable television access. In addition, several of the Company's potential
wireless competitors are operating or planning to operate, through joint
ventures and affiliation arrangements, wireless telecommunications systems
that encompass most of the United States. There can be no assurance that the
Company will be able to compete successfully in this environment or that new
technologies and products that are more commercially effective than the
Company's technologies and products will not be developed. See "--Wireless
Services."
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. In addition, the licensing, construction, operation, sale and
interconnection arrangements of wireless telecommunications systems are
regulated to varying degrees by the FCC. The construction and operation of
wireless systems also may be subject to state and local regulation.
The Company, through its wholly owned subsidiary McLeodUSA
Telecommunications, 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.
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The Company, through its wholly owned subsidiary McLeodUSA Network
Services, 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
McLeodUSA Network Services' 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 Offering
Memorandum. Should such laws and/or regulatory interpretations change in the
future to reclassify McLeodUSA Network Services' regulatory status, 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, including, in
certain states, bonding requirements, due to its direct marketing,
telemarketing and fund-raising activities.
Federal Regulation. The Telecommunications Act became effective
February 8, 1996. The Telecommunications Act preempts state and local laws to
the extent that they prevent competitive entry into the provision of any
telecommunications service. Subject to this limitation, however, the state and
local governments retain most of their existing regulatory authority. The
Telecommunications Act imposes a variety of new duties on incumbent local
exchange carriers in order to promote competition in local exchange and access
services. Some smaller telephone companies may seek suspension or modification
of these duties, and some companies serving rural areas are exempt from these
duties. Some duties are also imposed on non-incumbent local exchange carriers,
such as the Company. The duties created by the Telecommunications Act include
the following:
Reciprocal Compensation Requires all local exchange carriers to complete
calls originated by competing carriers under
reciprocal arrangements at prices based on a
reasonable approximation of incremental cost or
through mutual exchange of traffic without
explicit payment.
Resale Requires all local exchange carriers to permit
resale of their telecommunications services
without unreasonable restrictions or conditions.
In addition, incumbent local exchange carriers are
required to offer wholesale versions of all retail
services to other telecommunications carriers for
resale at discounted rates, based on the costs
avoided by the incumbent local carrier in the
wholesale offering.
Interconnection Requires incumbent local exchange carriers to
permit their competitors to interconnect with
their facilities at any technically 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).
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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. Certain FCC
rules regarding negotiation and pricing of interconnection agreements have
been stayed by the U.S. Eighth Circuit Court of Appeals. However, carriers
still may negotiate agreements, and if the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission.
The Telecommunications Act also eliminates previous prohibitions on the
provision of interLATA long distance services by the Regional Bell Operating
Companies and the General Telephone Operating Companies. The Regional Bell
Operating Companies are now permitted to provide interLATA long distance
service outside those states in which they provide local exchange service
("out-of-region long distance service") upon receipt of any necessary state
and/or federal regulatory approvals that are otherwise applicable to the
provision of intrastate and/or interstate long distance service. Under the
Telecommunications Act, the Regional Bell Operating Companies will be allowed
to provide long distance service within the regions in which they also provide
local exchange service ("in-region service") upon specific approval of the FCC
and satisfaction of other conditions, including a checklist of interconnection
requirements. The General Telephone Operating Companies are permitted to enter
the long distance market without regard to limitations by region, although
regulatory approvals otherwise applicable to the provision of long distance
service will need to be obtained. The General Telephone Operating Companies
are also subject to the provisions of the Telecommunications Act that impose
interconnection and other requirements on local exchange carriers.
The Telecommunications Act imposes certain restrictions on the Regional
Bell Operating Companies in connection with the Regional Bell Operating
Companies' entry into long distance services. Among other things, the Regional
Bell Operating Companies must pursue such activities only through separate
subsidiaries with separate books and records, financing, management and
employees, and all affiliate transactions must be conducted on an arm's length
and 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, incumbent
local exchange carriers, including the Regional Bell Operating Companies, are,
as of the date hereof, considered dominant carriers for the provision of
interstate access and interexchange
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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. McLeodUSA
Telecommunications has obtained FCC authority to provide international
services. Services of non-dominant carriers are subject to relatively limited
regulation by the FCC. As of the date hereof, non-dominant carriers are
required to file tariffs listing the rates, terms and conditions of interstate
access 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, McLeodUSA
Telecommunications, 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.
On October 29, 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers such as the Company maintain
tariffs on file with the FCC for domestic interstate interexchange services.
The FCC's order was issued 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. Following a nine-month transition period, relationships between
carriers and their customers will be set by contract. Long distance companies
are no longer required to file with the FCC tariffs for interstate
interexchange services and may immediately cease filing such tariffs. However,
several parties formally requested the FCC to reconsider its order, and MCI,
Sprint and The American Carriers Telephone Association have separately
appealed the FCC's order to the United States Court of Appeals for the
District of Columbia Circuit. On February 13, 1997, the United States Court of
Appeals for the District of Columbia Circuit stayed the FCC's order pending
judicial review of the appeals. If the appeals are unsuccessful and the FCC's
order becomes effective, the Company believes that the elimination of the
FCC's tariff requirement will permit the Company more rapidly to respond to
changes in the marketplace. In the absence of tariffs, however, the Company
will be required to obtain agreements with its customers regarding many of the
terms of its existing tariffs, and uncertainties regarding such new
contractual terms could increase the risks of claims against the Company from
its customers.
The FCC is as of the date hereof conducting a proceeding to implement the
provisions of the Telecommunications Act relating to the preservation and
advancement of universal telephone service. The Telecommunications Act sets
forth certain policy principles for universal telephone service, including
quality service, affordable rates, access to advanced services, access to
service in rural and high-cost areas, specific and predictable support
mechanisms, equitable and non-discriminatory contributions to support
mechanisms, and access to advanced telecommunications for schools, health care
providers and libraries. The Company expects the FCC's decision on universal
telephone service to reflect these principles. There can be no assurance that
the FCC's decision will not have a material adverse effect on the Company.
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 FCC, through the Initial Interconnection Decisions, has ordered the
Regional Bell Operating Companies and all but one of the other local exchange
carriers having in excess of $100 million in gross annual revenue for
regulated services to provide expanded interconnection to local exchange
carrier central offices to any competitive access provider, interexchange
carrier or end user seeking such interconnection for the provision of
interstate access services. As a result, the Company is able to reach most
business customers in its metropolitan service areas and can expand its
potential customer base. The FCC has imposed mandatory virtual collocation
obligations on the local exchange carriers. Virtual collocation is a service
in which the local exchange carrier leases or purchases equipment designated
by the interconnector and exerts complete physical control over this
equipment, including central office installation, maintenance and repair. 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.
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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 the Interconnection Decision 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. These appeals were consolidated into proceedings before the U.S.
Eighth Circuit Court of Appeals. 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 of certain provisions of the Interconnection
Decision, including the pricing rules and rules that would have permitted new
entrants to "pick and choose" among various provisions of existing
interconnection agreements, pending a decision on the merits. The FCC applied
to the U.S. Supreme Court to vacate the judicial stay, but the U.S. Supreme
Court, on November 12, 1996, refused to do so. All other provisions of the
Interconnection Decision remain in effect pending resolution of the appeal on
the merits.
In connection with the Initial Interconnection Decisions, 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. Although no assurances are possible, the Company anticipates that
the FCC will grant local exchange carriers increasing pricing flexibility as
the number of interconnection agreements 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.
In January 1997, U S WEST proposed to implement certain interconnection
surcharges in each of the states in its service region. On February 20, 1997,
the Company and several other parties filed a petition with the FCC objecting
to U S WEST's proposal. The petition was based on Section 252(d) of the
Telecommunications Act, which governs the pricing of interconnection and
network elements. The Company believes that U S WEST's proposal is an unlawful
attempt to recover costs associated with the upgrading of US WEST's network, in
violation of Section 252 of the Telecommunications Act. U S WEST filed an
opposition to the Company's petition with the FCC on March 3, 1997.
As of the date hereof, the Company does not offer PCS or cellular
services. On January 15, 1997, the FCC notified the Company that it was the
successful bidder for 26 "D" and "E" block frequency PCS licenses covering
areas of Iowa, Illinois, Minnesota, Nebraska and South Dakota. The Company
filed an application for such PCS licenses on January 30, 1997. Before the
Company can acquire the PCS licenses, the application is subject to review by
the FCC and challenge by third parties. In general, applications for FCC
radio licenses may be conditioned or denied, and 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, and
has complied with the FCC's ownership, bidding and build-out rules.
All PCS licenses will be granted for a ten-year period, at the end of
which, absent prior revocation or a violation of the FCC's rules by the
licensee, they will be renewed. All PCS licensees must construct facilities
that offer coverage to one-third of the population of their service area
within five years of their initial license grants and to two-thirds of the
population within ten years. Licensees that fail to meet the coverage
requirements may be subject to forfeiture of the license.
The Communications Act of 1934, as amended (the "Communications Act"),
requires the FCC's prior approval of the assignment or transfer of control of
a PCS license. In addition, the FCC has established transfer disclosure
requirements that require licensees who transfer control of or assign a PCS
license within the first three years to file associated contracts for sale,
option agreements, management agreements or other documents disclosing the
total consideration that the applicant would receive in return for the
transfer or assignment of its license. Non-controlling interests in an entity
that holds a PCS license or PCS system generally may be bought or sold by U.S.
companies or individuals without prior FCC approval.
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 company holding a common carrier radio license; or more
than 25% of the parent of a common carrier radio licensee if the FCC
determines that the public interest
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would be served by prohibiting such ownership. If the Company succeeds in
acquiring PCS licenses, 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, McLeodUSA Telecommunications, holds FCC authority to provide
international services, and therefore is also subject to the FCC's rules on
foreign affiliations.
Failure to comply with statutory requirements on foreign ownership of
companies holding 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 Communications Act and the FCC's rules. In addition, fines, a denial
of renewal or revocation of radio licenses are possible. The Company's Amended
and Restated Certificate of Incorporation (the "Restated Certificate") permits
the Board of Directors of the Company (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. As of the date hereof, the Company
has no knowledge of any alien ownership or affiliation with foreign
telecommunications carriers in violation of the Communications Act or the
FCC's rules.
Following the grant of a PCS license, existing licensees that operate
certain fixed microwave systems within the PCS license area retain the right
to continue to operate their systems until 2005. To secure a sufficient amount
of unencumbered spectrum to operate a PCS system efficiently, the Company may
need to relocate many of these incumbent licensees. In an effort to balance
the competing interests of existing microwave users and newly authorized PCS
licensees, the FCC has adopted a transition plan to relocate such microwave
operators to other spectrum blocks. This transition plan allows most microwave
users to operate in the PCS spectrum for a one-year voluntary negotiation
period and an additional one-year mandatory negotiation period. For public
safety entities dedicating a majority of their system communications for
police, fire or emergency medical services operations, the voluntary
negotiation period is three years. Parties unable to reach agreement within
these time periods may refer the matter to the FCC for resolution, but the
incumbent microwave user is permitted to continue its operations until final
FCC resolution of the matter. In connection with its proposed PCS system, the
Company estimates that it may be required to relocate approximately 50
microwave links operated by approximately 19 different microwave licensees.
Wireless systems are also subject to certain Federal Aviation
Administration regulations respecting the location, lighting and construction
of transmitter towers and antennas and may be subject to regulation under the
National Environmental Policy Act and the environmental regulations of the
FCC. Wireless providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage between adjacent systems. In
addition, the height and power of base station transmitting facilities and the
type of signals they emit must fall within specified parameters.
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.
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State Regulation. McLeodUSA Telecommunications, the Company's
subsidiary that provides intrastate common carrier services, is also subject
to various state laws and regulations. Most public utilities commissions
subject providers such as the Company to some form of certification
requirement, which requires providers to obtain authority from the state
public utilities commission prior to the initiation of service. In most
states, including Iowa and Illinois, the Company also is required to file
tariffs setting forth the terms, conditions and prices for services that are
classified as intrastate. The Company also is required to update or amend its
tariffs when it adjusts its rates or adds new products, and is subject to
various reporting and record-keeping requirements.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply
with state law and/or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state utilities commissions or third parties
will not raise issues with regard to the Company's compliance with applicable
laws or regulations.
The Company, through McLeodUSA Telecommunications, 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 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 is authorized to provide
local exchange and long distance services through resale in Illinois, Iowa,
Minnesota, Wisconsin, Montana, South Dakota and North Dakota. As of the date
hereof, applications for authority to provide local services are pending in
Colorado, Wyoming and Idaho. The Company also is authorized to offer long
distance service in Alabama, Arizona, Arkansas, California, Colorado,
Delaware, Georgia, Idaho, Indiana, Kansas, Kentucky, Maine, Maryland,
Massachusetts, Mississippi, Michigan, Missouri, Montana, Nebraska, Nevada, New
Hampshire, New Jersey, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Utah,
Virginia, Washington and Wyoming. As of the date hereof, applications for
authority to provide long distance service are pending in several states,
including Connecticut, Florida, Louisiana, New Mexico, New York, North
Carolina, Oklahoma, Tennessee, Vermont and West Virginia. 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 some states where the legality of such
competition was previously uncertain have not yet completed 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, Wyoming 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
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Company in violation of Iowa law. U S WEST appealed two of these decisions by
the Iowa Utilities Board. On January 28, 1997, the Iowa District Court hearing
the appeals affirmed the decision of the Iowa Utilities Board in one of the
proceedings. U S WEST subsequently withdrew its appeal in the other matter.
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 Communications Act preempts state or local regulation of the entry
of, or the rates charged by, any commercial or private radio service provider.
Notwithstanding such preemption, a state may petition the FCC for authority to
begin regulating or to continue regulating commercial radio services rates.
Petitioners must demonstrate that existing market conditions cannot protect
consumers from unreasonable and unjust rates or that the service is a
replacement for traditional wireline telephone service for a substantial
portion of the wireline service within the state. As of the date hereof, the
states in which the Company plans to provide PCS service have not sought to
regulate such matters.
States are not, however, prohibited from regulating other terms and
conditions of commercial mobile radio service, such as quality, billing
procedures and consumer protection standards. In addition, the siting and
construction of radio transmitter towers, antennas and equipment shelters are
often subject to state or local zoning, land use and other regulations. Under
the Telecommunications Act, states may not restrict cell siting or
modification based on the environmental effects of radio frequency emissions
if the emissions meet FCC standards.
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 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.
Risk 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 to 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 1994,
1995 and 1996 were approximately $11.4 million, $11.3 million and $22.3
million, respectively. At December 31, 1996, the Company had an accumulated
deficit of $47.8 million. Although its revenue has increased
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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 activities during the next several years, while it
develops its businesses, constructs, installs and expands its fiber optic
network and develops and constructs a PCS system. 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
"--Risk Factors--Significant Capital Requirements," "Selected 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 December 31, 1996, the Company estimates that its
aggregate capital requirements for 1997, 1998 and 1999 will be approximately
$456 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) acquiring 26 PCS licenses for which
the Company was the successful bidder in the FCCs recent "D" and "E" block
frequency PCS license auction, (iv) developing, constructing and operating a
PCS system, and (v) constructing its new corporate headquarters and associated
buildings. These capital requirements are expected to be funded, in large
part, out of the net proceeds from the Company's March 1997 private offering
of the Notes (approximately $289.5 million), the net proceeds remaining from
the Company's public offerings of Class A Common Stock in June and November
1996 (approximately $224 million as of December 31, 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 $456
million.
The Company's estimate of its future capital requirements is a "forward-
looking statement" within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual capital
requirements may differ materially as a result of regulatory, technological
and competitive developments (including new opportunities) in the Company's
industry.
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 plans to obtain one or more lines of credit,
although, as of the date hereof, no such lines of credit have yet been
negotiated. 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."
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 these services. The
Company has in the past experienced certain omissions in the call detail
records it receives from U S WEST on a monthly basis. For example, during the
period from January 1995 through January 1996, U S WEST failed to furnish, on
average, monthly call detail records for 2.5% of the long distance calls
placed by the Company's customers in Iowa. Thus, the Company was unable to
verify with certainty that a given long distance call placed by a customer and
known by the Company to have been terminated by the Company's wholesale long
distance supplier was, in fact, placed by the customer. Absent such
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verification, the Company does not bill its customer for the call. These call
detail omissions typically occur in connection with new customers of the
Company.
The Company does not believe this impediment to billing certain customers
for a small percentage of calls in a given month materially adversely affects
its relationships with or contractual obligations to its customers. The
failure to bill the customer does have a negative effect on the Company's
gross margins, because the Company incurs expenses for calls it does not bill.
During the years ended December 31, 1995 and December 31, 1996, the Company
estimates that it was unable to bill approximately $126,000 and $92,000,
respectively, in long distance calls due to this situation.
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 99.4% of the
requisite call detail records for February through December 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.
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 and substantial expenditures. There can be no
assurance that the Company will succeed in developing a PCS system or that,
after expending substantial amounts to develop such a system, the Company will
achieve or sustain profitability or positive cash flows from PCS operations.
The ownership, development, construction and operation of a PCS system could
have a material adverse effect on the Company.
In the absence of FCC mandated technology protocols, the Company will be
required to choose from among several competing and potentially incompatible
digital protocol technologies in order to build and operate a PCS system. The
selection of a particular digital protocol technology could adversely affect
the ability of the Company to successfully offer PCS service. See "--Wireless
Services."
The Company does not own or operate any facilities for providing wireless
telecommunication services to the public. The successful implementation of a
PCS system will require the Company to, among other things, lease or acquire
sites for 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 encounters delays or other
problems, the Company's plans for providing PCS services could be adversely
affected.
The Company's success in the implementation and operation of a PCS system
also is subject to other factors beyond the Company's control. These factors
include, without limitation, (i) changes in general and local economic
conditions, (ii) availability of equipment necessary to operate the PCS
system, (iii) changes in communications service rates charged by others, (iv)
changes in the supply and demand for PCS and the commercial viability of PCS
systems as a result of competing with wireline and wireless operators in the
same geographic area, (v) demographic changes that might negatively affect the
potential market for PCS, (vi) changes in the federal and state regulatory
scheme affecting the operation of PCS systems (including the enactment of new
statutes and the promulgation of changes in the interpretation or enforcement
of existing or new rules and regulations) and (vii) changes in PCS or
competing wireless technologies that have the potential of rendering obsolete
the technology and equipment that the Company intends to use to construct its
PCS system. In addition, the extent of the potential demand for PCS cannot be
estimated with any degree of certainty and may be less than the Company
anticipates. See "--Wireless Services" and "--Risk Factors--Rapid
Technological Changes." There can be no assurance that one or more of these
factors will not have a material adverse effect on the Company's ownership,
development, construction or operation of a PCS system.
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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 directly owned or voted by non-U.S. citizens, by a
foreign government or by a foreign corporation to 20%, and limiting indirect
foreign ownership to 25%, absent waiver by the FCC. See "--Regulation."
Furthermore, certain of the FCC rules require all PCS licensees to meet
certain buildout and population coverage requirements. Failure to comply with
such requirements could result in the imposition of fines on the Company by
the FCC or cause revocation or forfeiture of any PCS licenses the Company
acquires, even after the Company has expended substantial amounts to develop a
PCS system.
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 deploying adequate systems,
procedures and controls in a timely manner) could have a material adverse
effect on the Company.
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. As of the date hereof, the
Company does not 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
million, and on Mr. Gray, in the amount of $1 million.
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.
Contract with the State of Iowa. The Company's telecommunications
network maintenance services revenue is derived almost exclusively from the
State of Iowa under the Iowa Communications Network Maintenance Contract,
which expires 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 $3.4 million, $4.9 million and $5.9 million in 1994,
1995 and 1996, respectively, or 42%, 17% and 7%, of the Company's total
revenues in 1994, 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. As of the date hereof, the Company does not
believe that there are grounds for terminating the Iowa Communications Network
Maintenance Contract or that the State of Iowa 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.
Uncertainties 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, relocate
microwave licensees and obtain rights-of-way, building access, antenna sites
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
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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 assurance 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 employees. 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 (as
defined below) 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 "Legal Proceedings."
Risks Associated With Acquisitions. As part of its business strategy,
the Company acquired Ruffalo, Cody and McLeodUSA Publishing during 1996 and
will continue to evaluate additional strategic acquisitions and alliances
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. 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 McLeodUSA Publishing or 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. See "--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 and 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 IES, MidAmerican or the Company will
be able to maintain existing franchises, permits and rights-of-way or that the
Company will be able 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, such
cancellation or non-renewal of certain of such arrangements could have a
material adverse effect on the Company. See "--Network Facilities" and "--
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
adversely affect the continued use of its fiber optic telecommunications
network nor materially hinder the Company's ability to acquire necessary
technologies, the effect of technological changes on the business of the
Company cannot be predicted. There can be no assurance that technological
developments in telecommunications will not have a material adverse effect on
the Company.
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 acquisition of PCS licenses and
the development, construction and operation of a PCS system, the Company
anticipates that its operating results could vary significantly from period to
period. Such variability could
32
<PAGE>
have a material adverse effect on the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Control of the Company. As of March 19, 1997, IES, MidAmerican, Allsop
Venture Partners III, L.P. and Clark and Mary McLeod owned, directly or
indirectly, in the aggregate approximately 41% of the outstanding Class A
Common Stock and all of the Class B Common Stock, which represented
approximately 50% 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, IES, MidAmerican, Allsop and
Mr. and Mrs. McLeod would hold approximately 59% of the Class A Common Stock
and voting power of the Company. Accordingly, such stockholders collectively
are 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. IES, MidAmerican and Mr. and Mrs.
McLeod also have entered into a voting agreement with respect to the election
of directors. 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.
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 "Market for
Registrant's Common Equity and Related Stockholder Matters--Price Range of
Class A Common Stock." 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 and judicial 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.
Dependence on Regional Bell Operating Companies; U S WEST Centrex Action.
See "Legal Proceedings--Dependence on Regional Bell Operating Companies; U S
WEST Centrex Action."
Refusal of U S WEST to Improve its Processing of Service Orders. See
"Legal Proceedings--Refusal of U S WEST to Improve its Processing of Service
Orders."
Competition. See "--Competition."
Regulation. See "--Regulation."
Employees
As of December 31, 1996, the Company employed a total of 1,713 full-time
employees and 364 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.
33
<PAGE>
Executive Officers of the Company
The following is a list of the executive officers of the Company,
together with biographical summaries of their experience. The ages of the
persons set forth below are as of December 31, 1996.
<TABLE>
<CAPTION>
Name Age Position(s) with Company
---- --- ------------------------
<S> <C> <C>
Clark E. McLeod.............. 50 Chairman, Chief Executive Officer and Director
Stephen C. Gray.............. 38 President, Chief Operating Officer and Director
Blake O. Fisher, Jr.......... 52 Chief Financial Officer, Executive Vice President,
Corporate Administration, Treasurer and Director
Kirk E. Kaalberg............. 37 Executive Vice President, Network Services
Stephen K. Brandenburg....... 44 Executive Vice President and Chief Information Officer
David M. Boatner............. 48 Executive Vice President, Business Services
Albert P. Ruffalo............ 50 Executive Vice President, Consumer Services
Arthur L. Christoffersen..... 50 Executive Vice President, Publishing Services
Casey D. Mahon............... 45 Senior Vice President, General Counsel and Secretary
</TABLE>
Clark E. McLeod. Mr. McLeod founded the Company and has served as
Chairman, Chief Executive Officer and a director of the Company since its
inception in June 1991. His previous business venture, Teleconnect, an Iowa-
based long distance telecommunications company, was founded in January 1980.
Mr. McLeod served as Chairman and Chief Executive Officer of Teleconnect from
January 1980 to December 1988, and from December 1988 to August 1990, he
served as President of Telecom*USA, the successor to Teleconnect following its
merger with SouthernNet, Inc. in December 1988. By 1990, Telecom*USA had
become America's fourth largest long distance telecommunications company with
nearly 6,000 employees. MCI purchased Telecom*USA in August 1990 for $1.25
billion.
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.
Blake O. Fisher, Jr. Mr. Fisher has served as a director of the Company
since October 1996, as Executive Vice President, Corporate Administration
since September 1996 and as Chief Financial Officer and Treasurer since
February 1996. Mr. Fisher also served as one of IES' nominees 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. 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
34
<PAGE>
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 Executive Vice President and 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 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, Publishing Services since September 20,
1996, the date the Company acquired McLeodUSA Publishing. Mr. Christoffersen
has served as Chairman, President and Chief Executive Officer of McLeodUSA
Publishing since November 1990, the date Mr. Christoffersen and other
investors acquired McLeodUSA 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.
35
<PAGE>
Item 2. Properties.
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
on which the Company is constructing a one-story, 160,000 square foot building
to serve as the Company's new headquarters and plans to construct an
additional office building as well as other buildings that will house the
Company's telephone switching, computer and maintenance equipment. The total
cost of the construction of the Company's new corporate headquarters and
associated buildings is estimated to be approximately $27.5 million. 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.
Item 3. 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.
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. As of the
date hereof, U S WEST and Ameritech are 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, as of the date hereof,
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 served by the Company.
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 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, Nebraska, South
Dakota, North Dakota, Idaho 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;
36
<PAGE>
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 entered into 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 and affirmed by the Iowa District Court for Polk County
on February 21, 1997.
In Minnesota, U S WEST's initial filing was rejected on procedural
grounds by the Public Utilities Commission. 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 31, 1996, the Minnesota Public Utilities
Commission issued an order suspending the new U S WEST filing and scheduling a
contested-case proceeding to consider it. On December 23, 1996, an
administrative law judge ruled that U S WEST must continue to offer Centrex
service in Minnesota. U S WEST filed exceptions to this ruling. The Minnesota
Public Utilities Commission denied U S WEST's exceptions on February 20, 1997.
U S WEST has filed a petition for rehearing with the Minnesota Public
Utilities Commission. As of the date hereof, the Minnesota Public Utilities
Commission had not yet ruled on the petition for a rehearing.
In South Dakota, the Public Utilities Commission rejected the U S WEST
Centrex Action on August 22, 1996. U S WEST appealed the unfavorable decision
of the Public Utilities Commission in South Dakota state court. On December 2,
1996, the South Dakota state court hearing the appeal affirmed the decision of
the Public Utilities Commission.
In North Dakota, on November 6, 1996, the Public Service Commission
concluded that the U S WEST Centrex Action is unlawful and ordered U S WEST to
reinstate Centrex service in North Dakota. U S WEST appealed the unfavorable
decision by the Public Service Commission in North Dakota state court. On
January 24, 1997, the North Dakota state court hearing the appeal affirmed the
decision of the Public Service Commission.
In Nebraska, on November 25, 1996, the Public Service Commission rejected
complaints objecting to the U S WEST Centrex Action. In Idaho, on November 14,
1996, the Public Utilities Commission rejected complaints by AT&T and MCI
objecting to the U S WEST Centrex Action. The Company subsequently filed its
own complaint with the Idaho Public Utilities Commission, which as of the date
hereof had not yet been ruled on by the Idaho Public Utilities Commission.
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
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 Colorado, on
September 3, 1996, an administrative law judge issued a recommendation that
the U S WEST Centrex Action be rejected. On December 20, 1996, the Colorado
Public Utilities Commission rejected U S WEST's exceptions to the
recommendation. In Wyoming, U S WEST's filing was rejected by the Public
Service Commission on September 6, 1996. On March 21, 1997, the Wyoming Public
Service Commission rejected U S WEST's petition for a rehearing of the matter.
On October 29, 1996, the Arizona Corporation Commission rejected the U S WEST
Centrex Action. In New Mexico, the Public Service Commission has not allowed
U S WEST's filing to become effective. In Utah, on September 25, 1996, the
Public Service Commission
37
<PAGE>
rejected the U S WEST Centrex Action and ordered U S WEST to continue the
availability of Centrex service for resale. In Montana, on March 6, 1997, the
Public Service Commission approved the U S WEST Centrex Action.
The Company anticipates that U S WEST will continue to appeal unfavorable
decisions by public utilities commissions with respect to the U S WEST Centrex
Action.
In addition to the U S WEST Centrex Action, U S WEST has taken other
measures that may impede the Company's ability to use Centrex service to
provide its competitive local exchange services. In Colorado, U S WEST filed
new tariffs in July 1996 that, as interpreted by U S WEST, would prohibit the
Company from consolidating telephone lines of separate customers into leased
common blocks in U S WEST's central office switches, thereby significantly
increasing the cost of serving customers in Colorado through resale of Centrex
services. The Company filed a complaint with the Colorado Public Utilities
Commission on February 12, 1997 alleging that U S WEST's tariffs, as
interpreted by U S WEST, unlawfully create a barrier to the Company's ability
to compete in Colorado. The Company's complaint is scheduled to be heard by
the Colorado Public Utilities Commission on April 7, 1997.
There can be no assurance that the Company will ultimately succeed in its
legal challenges to the U S WEST Centrex Action or other actions by U S WEST
that have the effect of preventing or deterring the Company from using Centrex
service, or that these actions by U S WEST, or similar actions by other
Regional Bell Operating Companies, will not have a material adverse effect on
the Company. In any jurisdiction where U S WEST prevails, the Company's
ability to offer integrated telecommunications services would be impaired,
which could have a material adverse effect on the Company. See "Business--
Competition."
If the U S WEST Centrex Action or other actions by U S WEST have the
effect of preventing or deterring the Company from using Centrex service in
any jurisdiction and the Company is consequently not able to obtain Centrex
access on acceptable economic terms or at all in a state where the Company is
doing business or plans to do business, the Company intends to evaluate other
U S WEST services that could potentially be purchased and resold in such
jurisdiction to allow the Company to provide some form of integrated local and
long distance services until the Company can obtain access to unbundled
elements pursuant to interconnection agreements. There can be no assurance
that the Company would be able to identify, purchase and resell any such U S
WEST service or ultimately obtain access to such unbundled elements.
The Company also anticipates that U S WEST will seek various legislative
initiatives in states within the Company's target market area in an effort to
reduce state regulatory oversight over its rates and operations. There can be
no assurance that U S WEST will not succeed in such efforts or that any such
state legislative initiatives, if adopted, will not have a material adverse
effect on the Company.
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, which U S WEST refused to
do.
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. In an order issued on October 10, 1996, the Iowa Utilities
Board determined that U S WEST's limitation on the processing of the Company's
service orders constituted an unlawful discriminatory practice under Iowa law.
On October 21, 1996, in accordance with the Iowa Utilities Board's order, the
Company and
38
<PAGE>
U S WEST jointly filed supplemental evidence regarding a potential
modification of order processing practices that would increase U S WEST's rate
of processing service orders. However, since implementing the new process, U S
WEST has not significantly increased its overall order processing rate. On
December 23, 1996, the Company filed a report with the Iowa Utilities Board
requesting further direction. On February 14, 1997, the Iowa Utilities Board
clarified that U S WEST must eliminate numerical limitations on the Company's
residential and business orders. There can be no assurance, however, that the
decision of or any further action by 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Price Range of Class A Common Stock
The Company completed its initial public offering of Class A Common Stock
in June 1996, at a price per share of Class A Common Stock of $20.00. The
Class A Common Stock has been quoted on The Nasdaq National Market under the
symbol "MCLD" since June 11, 1996. Prior to June 11, 1996, no established
public trading market for the Class A Common Stock existed. 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 11, 1996).... $26.75 $22.25
Third Quarter.......................... $39.50 $23.50
Fourth Quarter......................... $34.50 $25.00
</TABLE>
On March 19, 1997, the last reported sale price of the Class A Common
Stock on The Nasdaq National Market was $18.875 per share. On March 19, 1997,
there were 508 holders of record of the Class A Common Stock and two holders
of record of the Class B Common Stock.
Dividend Policy
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying dividends in the foreseeable future. The
Company will effectively be prohibited from paying cash dividends for the
foreseeable future pursuant to restrictions contained in the indenture
relating to the Notes (the "Indenture"). 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 (including the
Indenture) and such other factors as the Board may deem relevant. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Recent Sales of Unregistered Securities
During 1996, the Company offered and sold the following equity securities
that were not registered under the Securities Act of 1933, as amended (the
"Securities Act"):
(1) In February 1996, the Company issued 23,438 shares of Class A Common
Stock to Blake O. Fisher, Jr. upon the exercise of stock options granted to
Mr. Fisher pursuant to the Company's Directors Stock Option Plan. The price
per share was $.99, for an aggregate consideration of $23,125.
39
<PAGE>
(2) 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 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 to 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 from a material agreement with a major long
distance carrier to provide telemarketing services. The major long distance
carrier terminated this agreement, effective December 31, 1996. A total of
$50,782 and 37,107 shares of Class A Common Stock were distributed pursuant to
the escrow agreement in January 1997 and the Company expects one additional
distribution of 19,070 shares of Class A Common Stock to occur in April 1997.
See "Executive Compensation" for information regarding the grant of
options to purchase shares of Class A Common Stock to certain employees
pursuant to the Company's 1996 Employee Stock Option Plan as partial
consideration for the execution of employment, confidentiality and non-
competition agreements.
Each issuance of securities described above was made in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act or
Regulation D promulgated thereunder for transactions 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 distribution in connection with
such transactions. All recipients had adequate access to information about the
Company through their relationship with the Company or through information
about the Company made available to them.
40
<PAGE>
Item 6. Selected Financial 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 Form 10-K.
(In thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1996(1)(2) 1995(1)(3) 1994 1993 1992
------------- ------------- ---------- --------- --------
Operations Statement Data:
<S> <C> <C> <C> <C> <C>
Revenue........................................... $ 81,323 $ 28,998 $ 8,014 $ 1,550 $ 250
-------- -------- -------- ------- -------
Operating expenses:
Cost of service............................... 52,624 19,667 6,212 1,528 262
Selling, general and administrative........... 46,044 18,054 12,373 2,390 219
Depreciation and amortization................. 8,485 1,835 772 235 6
Other......................................... 2,380 -- -- -- --
-------- -------- -------- ------- -------
Total operating expenses...................... 109,533 39,556 19,357 4,153 487
-------- -------- -------- ------- -------
Operating loss.................................... (28,210) (10,558) (11,343) (2,603) (237)
Interest income (expense), net.................... 5,369 (771) (73) 163 --
Other non-operating expenses...................... 495 -- -- -- --
Income taxes...................................... -- -- -- -- --
-------- -------- -------- ------- -------
Net loss.......................................... $(22,346) $(11,329) $(11,416) $(2,440) $ (237)
======== ======== ======== ======= =======
Loss per common and common equivalent share....... $ (.52) $ (.31) $ (.31) $ (.08) $ (.02)
======== ======== ======== ======= =======
Weighted average common and common equivalent
shares outstanding............................ 43,019 37,055 36,370 29,655 14,925
======== ======== ======== ======= =======
<CAPTION>
December 31,
-----------------------------------------------------------------------------
As Adjusted
1996(4) 1996(1)(5) 1995(1)(6) 1994 1993 1992
-------- ---------- ---------- ---- ---- ----
(unaudited)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Current assets...................... $513,851 $224,401 $ 8,507 $ 4,862 $ 7,077 $ 544
Working capital (deficit)........... $475,418 $185,968 $ (1,208) $ 1,659 $ 5,962 $ (440)
Property and equipment, net......... $ 92,123 $ 92,123 $ 16,119 $ 4,716 $ 1,958 $ 135
Total assets........................ $752,994 $452,994 $ 28,986 $ 10,687 $ 9,051 $ 694
Long-term debt...................... $302,573 $ 2,573 $ 3,600 $ 3,500 -- --
Stockholders' equity (deficit)...... $403,429 $403,429 $ 14,958 $ 3,291 $ 7,936 $ (290)
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996(1)(2) 1995(1)(3) 1994 1993 1992
---------- ---------- ---- ---- ----
Other Financial Data:
<S> <C> <C> <C> <C> <C>
Capital expenditures, including
business acquisitions........................ $173,782 $ 14,697 $ 3,393 $ 2,052 $ 138
EBITDA(7)........................................ $(17,345) $ (8,723) $(10,571) $(2,368) $ (231)
- -----------------------------------
</TABLE>
(1) The acquisitions of MWR, Ruffalo, Cody and McLeodUSA Publishing in April
1995, July 1996 and September 1996, respectively, affect the comparability
of the historical data presented to the historical data for prior periods
shown.
(2) Includes operations of Ruffalo, Cody from July 16, 1996 to December 31, 1996
and operations of McLeodUSA Publishing from September 21, 1996 to December
31, 1996.
(3) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(4) Adjusted to reflect the application of proceeds of $289.5 million (net of
discount and commissions and other offering expenses in an aggregate amount
of $10.5 million) from the Company's March 1997 private offering of the
Notes.
(5) Includes Ruffalo, Cody and McLeodUSA Publishing, which were acquired by the
Company on July 15, 1996 and September 20, 1996, respectively.
(6) Includes MWR, which was acquired by the Company on April 28, 1995.
(7) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. 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.
41
<PAGE>
Item 7. 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 Form 10-K.
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 Company also derives revenue
from ancillary services as a result of its acquisitions of Ruffalo, Cody,
McLeodUSA Publishing and Digital Communications in July 1996, September 1996
and January 1997, 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 began deriving revenue from the sale of
advertising space in telephone directories published by McLeodUSA Publishing
on September 20, 1996, the date the Company acquired McLeodUSA Publishing. The
Company began deriving revenue from the sale, installation and service of
business telephone systems on January 30, 1997, the date the Company acquired
Digital Communications. See "Business--Recent Transactions" and "--Liquidity
and Capital Resources." The table set forth below summarizes the Company's
percentage of revenues from these sources:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Local and long distance
telecommunications services ............ 51% 74% 58%
Telecommunications network maintenance
services ............................... 7 17 42
Special access and private line services. 13 9 --
Ancillary services ...................... 29 -- --
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
The Company began offering "bundled" local and long distance services to
business customers in January 1994. At the end of 1995, the Company began
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 expanded its PrimeLine(R) service to
Cedar Falls, Iowa and Waterloo, Iowa in January 1997 and Des Moines, Iowa in
February 1997. 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 McLeodUSA 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. Excluding the ancillary
revenues the Company began deriving following the acquisitions of Ruffalo,
Cody and
42
<PAGE>
McLeodUSA Publishing, the percentage of total revenues from the Company's
three historical sources would have been 72%, 10% and 18%, respectively, for
the year ended December 31, 1996.
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
McLeodUSA 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, including its
acquisitions of MWR, Ruffalo, Cody and McLeodUSA 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 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, to certain directors, officers and
other employees. 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. 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, installs and
expands its fiber optic network and develops and constructs its proposed PCS
system. 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
"Business--Competition" and "Business--Regulation." There can be no assurance
that growth in the Company's revenue or customer base will continue or that
the Company will be able to achieve or sustain profitability or positive cash
flows.
The Company has generated net operating losses since its inception and,
accordingly, has incurred no income tax expense. The Company has reduced the
net deferred tax assets generated by these losses by a valuation allowance
which offsets the net deferred tax asset due to the uncertainty of realizing
the benefit of the tax loss carryforwards. The Company will reduce the
valuation allowance when, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
be realized.
43
<PAGE>
Year Ended 1996 Compared with Year Ended 1995
Revenue increased from $29 million for the year ended December 31, 1995
to $81.3 million for the year ended December 31, 1996, representing an
increase of $52.3 million or 180%. Revenue from the sale of local and long
distance telecommunications services accounted for $19.9 million of this
increase. Total local and long-distance customers increased 103% from 8,776 at
December 31, 1995 to 17,872 at December 31, 1996. Local lines under the
Company's management increased 83% from 35,795 at December 31, 1995 to 65,367
at December 31, 1996. Average lines per customer decreased from 4.31 at
December 31, 1995 to 3.95 at December 31, 1996, due to the increase in
residential customers. Average monthly revenue per line decreased from $62.68
for the month ended December 31, 1995 to $59.90 for the month ended December
31, 1996, also due to the increase in residential customers.
Included in the year ended December 31, 1996 revenue was $8.6 million of
revenue from Ruffalo Cody, which was acquired on July 15, 1996, and $15.1
million in revenue from McLeodUSA Publishing, which was acquired on September
20, 1996. Excluding these acquisitions, 1996 revenue would have been $57.6
million.
Cost of service increased from $19.7 million for the year ended December
31, 1995 to $52.6 million for the year ended December 31, 1996, an increase of
$32.9 million or 168%. This increase in cost of service was due primarily to
the growth in the Company's local and long distance telecommunications
services and to the acquisitions of Ruffalo, Cody and McLeodUSA Publishing,
which contributed $4.5 million and $6.7 million, respectively, to the
increase. Cost of service as a percentage of revenue decreased from 68% to
65%, primarily as a result of the effect of these acquisitions. The cost of
providing local and long-distance services as a percentage of local and long
distance telecommunications revenue increased from 68% for the year ended
December 31, 1995 to 70% for the year ended December 31, 1996, primarily as a
result of an increased number of higher volume, price-sensitive customers and
increased local line costs associated with expansion into new markets.
SG&A increased from $18.1 million for the year ended December 31, 1995 to
$46 million for the year ended December 31, 1996, an increase of $27.9 million
or 155%. The acquisitions of Ruffalo Cody and McLeodUSA Publishing contributed
$3.3 million and $7.3 million, respectively, to the increase. Increased costs
of $17.3 million related to expansion of selling, customer support and
administration activities to support the Company's growth also contributed to
this increase.
Depreciation and amortization expenses increased from $1.8 million for
the year ended December 31, 1995 to $8.5 million for the year ended December
31, 1996, an increase of $6.7 million or 362%. This increase consisted of $2.1
million related to the acquisitions of Ruffalo, Cody and McLeodUSA Publishing;
amortization expense of $2 million 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; and $2.6 million due primarily to the growth of the Company's
network in 1996.
Other operating expense in 1996 represented the realization of a purchase
accounting adjustment related to the capitalization of costs associated with
directories in progress at the time the Company acquired McLeodUSA Publishing.
The Company had net interest income of $5.4 million for the year ended
December 31, 1996 compared to net interest expense of $771,000 for the year
ended December 31, 1995 as a result of earnings on investments made with a
portion of the proceeds of the Company's public offerings of Class A Common
Stock during 1996 and decreased interest expense on reduced borrowings as a
result of the Company's payment of all amounts outstanding under a bank credit
facility maintained by the Company from May 1994 until June 1996 (the "Credit
Facility") with a portion of the net proceeds from the Company's initial
public offering of Class A Common Stock. The Company also had other non-
operating income of $495,000 for the year ended December 31, 1996.
44
<PAGE>
Net loss increased from $11.3 million for the year ended December 31,
1995 to $22.3 million for the year ended December 31, 1996, an increase of $11
million. This increase resulted primarily from the expansion of the local and
long distance businesses, amortization and other operating expenses related to
the acquisitions of Ruffalo, Cody and McLeodUSA Publishing 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, amortization and other nonrecurring
operating expenses ("EBITDA") decreased from a negative $8.7 million for the
year ended December 31, 1995 to a negative $17.3 million for the year ended
December 31, 1996, a decrease of $8.6 million. The change reflected the
increase in the operating 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
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 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 expense of $1.6 million and
associated costs of $1.3 million required to handle the growth experienced
primarily in local and long distance revenues.
Depreciation and amortization expenses increased from $772,000 in 1994 to
$1.8 million in 1995, an increase of $1 million or 138%. This increase
consisted of depreciation of $362,000 related to the additional fiber optic
network purchased and built during 1995; $304,000 of depreciation related to
capital costs associated with the growth of the Company; $266,000 resulting
from the amortization of one-time installation costs primarily associated with
transferring customers' local line service from the Regional Bell Operating
Companies to the Company's telemanagement service; and amortization of
goodwill of $117,000 related to the Company's acquisition of MWR in 1995.
Net interest expense increased from $73,000 in 1994 to $771,000 in 1995.
This net increase resulted from an increase in interest expense of $692,000
due to the need for additional secured debt in 1995 to fund the Company's
growth and operating losses and a decrease in interest income of $6,000
resulting from reduced investment of funds due to the use of funds needed to
satisfy working capital needs.
45
<PAGE>
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.
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.
Liquidity and Capital Resources
Since the inception of the Company in June 1991, the Company's total
assets have grown to $453 million (approximately $753 million as adjusted to
reflect the application of the net proceeds from the Company's March 1997
private offering of the Notes) at December 31, 1996. At December 31, 1996,
$92.1 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, net proceeds of approximately $396.2 million from public
offerings of Class A Common Stock, and net proceeds of approximately $289.5
million from the Company's March
46
<PAGE>
1997 private offering of the Notes. At December 31, 1996, the Company's
current assets of $224.4 million exceeded its current liabilities of $38.4
million, providing working capital of $186 million, which represents an
improvement of $187.2 million compared to December 31, 1995 primarily
attributable to the Company's completion of its public offerings of Class A
Common Stock in 1996. At December 31, 1995, the Company's current liabilities
of $9.7 million exceeded current assets of $8.5 million, resulting in a
working capital deficit of $1.2 million. 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 $11.8 million for the
year ended December 31, 1996 and $9.5 million for the year ended December 31,
1995. During the year ended December 31, 1996, cash for operating activities
was used primarily to fund the Company's net loss of $22.3 million for such
period. The Company also required cash to fund the growth in trade receivables
of $9.3 million offset by a decrease in other current assets of $675,000. The
increase in accounts receivable was a result of the growth in local and long
distance telecommunications services and special access and private line
services. This use of cash was partially offset by an increase in accounts
payable and accrued expenses of $3.2 million due to the costs associated with
the increase in telecommunications revenue, an increase in deferred revenue of
$9.5 million resulting primarily from amounts received in advance in
connection with the completion of construction of network 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 $283.1 million during the
year ended December 31, 1996 and $5.5 million during the year ended December
31, 1995. The significant use of cash for investing activities for the year
ended December 31, 1996 consisted of the purchase of available-for-sale
securities with certain of the net proceeds from the Company's public
offerings of Class A Common Stock, the purchase of Ruffalo, Cody and McLeodUSA
Publishing, and the Company's 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, the
Company's development and construction of its fiber optic telecommunications
network and other capital expenditures resulted in purchases of equipment,
fiber optic cable and other property and equipment totaling $70.3 million and
$5.3 million during the years ended December 31, 1996 and 1995, respectively.
Cash received from net financing activities was $391.4 million during the
year ended December 31, 1996, primarily as a result of the Company's public
offerings of Class A Common Stock in June and November 1996. The Company paid
off and canceled the Credit Facility in June 1996 with a portion of the net
proceeds from its initial public offering of Class A Common Stock. Cash
received from financing activities during 1995 was $15 million and was
primarily obtained through the issuance of Class A 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 March 4, 1997, the Company received net proceeds of approximately
$289.5 million from a private offering of the Notes. The Notes will accrete to
an aggregate principal amount of $500 million by March 1, 2002. Interest will
not accrue on the Notes prior to March 1, 2002. Thereafter, interest will
accrue at a rate of 10 1/2% per annum and will be payable semi-annually on
March 1 and September 1 of
47
<PAGE>
each year, commencing September 1, 2002. The Notes will be redeemable, at the
option of the Company, in whole or in part, at any time on or after March 1,
2002, at 105.25% of their principal amount at maturity, plus accrued and
unpaid interest, declining to 100% of their principal amount at maturity, plus
accrued and unpaid interest, on or after March 1, 2005. In the event of
certain equity investments in the Company by certain strategic investors on or
before March 1, 2000, the Company may, at its option, use all or a portion of
the net proceeds therefrom to redeem up to a maximum of 331/3% of the original
principal amount of the Notes at a redemption price of 110.5% of the accreted
value thereof. In addition, in the event of a change of control of the
Company, each holder of Notes will have the right to require the Company to
repurchase all or any part of such holder's Notes at a repurchase price equal
to 101% of the accreted value thereof prior to March 1, 2002, or 101% of the
principal amount thereof plus accrued and unpaid interest, if any, on or after
March 1, 2002.
The Notes are senior unsecured obligations of the Company ranking pari
passu in right of payment with all other existing and future senior unsecured
obligations of the Company and rank senior to all other existing and future
subordinated debt of the Company. The Notes are effectively subordinated to
all existing and future secured indebtedness of the Company and its
subsidiaries to the extent of the value of the assets securing such
indebtedness. The Notes also are effectively subordinated to all existing and
future third-party indebtedness and other liabilities of the Company's
subsidiaries.
The Indenture imposes operating and financial restrictions on the Company
and its subsidiaries. These restrictions affect, and in certain cases
significantly limit or prohibit, among other things, the ability of the
Company and its subsidiaries to incur additional indebtedness, pay dividends
or make distributions in respect of the Company's or such subsidiaries'
capital stock, make other restricted payments, enter into sale and leaseback
transactions, create liens upon assets, enter into transactions with
affiliates or related persons, sell assets, or consolidate, merge or sell all
or substantially all of their assets. There can be no assurance that such
covenants will not adversely affect the Company's ability to finance its
future operations or capital needs or to engage in other business activities
that may be in the interest 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 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 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 to 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 from a material agreement with a major long
distance carrier to provide telemarketing services. The major long distance
carrier terminated this agreement, effective December 31, 1996. A total of
$50,782 and 37,107 shares of Class A Common Stock were distributed pursuant to
the escrow agreement in January 1997 and the Company expects one additional
distribution of 19,070 shares of Class A Common Stock to occur in April 1997.
See "Business--Recent Transactions." The Company recorded the Ruffalo, Cody
acquisition as a purchase for accounting purposes.
On September 20, 1996, the Company acquired McLeodUSA Publishing for
approximately $74.1 million in cash and an additional amount estimated as of
the date hereof to be approximately $1.6 million to be paid to certain
employees of McLeodUSA Publishing as part of an incentive plan. At the time of
the acquisition, McLeodUSA Publishing had outstanding debt of approximately
$6.6 million. The Company recorded the McLeodUSA Publishing acquisition as a
purchase for accounting purposes.
On January 30, 1997, the Company acquired Digital Communications in a
stock transaction valued at approximately $2.3 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 January 30, 1997, the Company issued 84,430
shares of Class A Common Stock to the shareholders of Digital Communications.
The Company recorded the Digital Communications acquisition as a purchase for
accounting purposes.
48
<PAGE>
The Company used a portion of the net proceeds from the Company's initial
public offering of Class A Common Stock to fund the McLeodUSA Publishing
acquisition and the cash portion of the Ruffalo, Cody acquisition.
At December 31, 1996, the Company had no actual contractual capital
commitments for costs associated with the construction of fiber optic
networks.
On January 15, 1997, the FCC notified the Company that it was the
successful bidder for 26 "D" and "E" block frequency PCS licenses in 24
markets covering areas of Iowa, Illinois, Minnesota, Nebraska and South
Dakota. The Company bid an aggregate of approximately $32.8 million for these
PCS licenses, which the Company will be required to pay to the FCC following
grant of the licenses, anticipated to occur during the second or third quarter
of 1997. The Company will be required to make significant additional
expenditures to develop, construct and operate a PCS system.
As of December 31, 1996, the Company estimates that its aggregate capital
requirements for 1997, 1998 and 1999 will be approximately $456 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) acquiring 26 PCS licenses for which the Company was the
successful bidder in the FCC's recent "D" and "E" block frequency PCS license
auction, (iv) developing, constructing and operating a PCS system, and (v)
constructing its new corporate headquarters and associated buildings. These
capital requirements are expected to be funded, in large part, out of the net
proceeds from the Company's March 1997 private offering of the Notes
(approximately $289.5 million), the net proceeds remaining from the Company's
public offerings of Class A Common Stock in June and November 1996
(approximately $224 million as of December 31, 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 $456
million.
The Company's estimate of its future capital requirements is a "forward-
looking statement" within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual capital
requirements may differ materially as a result of regulatory, technological
and competitive developments (including new opportunities) in the Company's
industry.
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 plans to obtain one or more lines of credit,
although, as of the date hereof, no such lines of credit have yet been
negotiated. 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. See "Business--Risk Factors--Significant Capital
Requirements."
Inflation
The Company does not believe that inflation has had a significant impact
on the Company's consolidated operations.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements of the Company, including the
Company's Consolidated Balance Sheets as of December 31, 1996 and 1995,
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994, Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994, Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994, and Notes to
Consolidated Financial Statements,
49
<PAGE>
together with a report thereon of McGladrey & Pullen, LLP, dated January 31,
1997 (except for the first paragraph of Note 13, as to which the date is March
4, 1997), are attached hereto as pages F-1 through F-20.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On March 27, 1997, the Company engaged the accounting firm of Arthur
Andersen LLP as the Company's principal independent accountants, to replace
McGladrey & Pullen, LLP, the Company's former independent accountants,
effective with such engagement. The decision to change independent accountants
was made following a review of competitive proposals submitted by Arthur
Andersen LLP and two other major public accounting firms, and was recommended
by the Audit Committee of the Board of Directors and approved by the Board.
McGladrey & Pullen, LLP did not resign and did not decline to stand for re-
election.
During the two most recent fiscal years ended December 31, 1996 and 1995,
and the interim period subsequent to December 31, 1996, there have been no
disagreements with McGladrey & Pullen, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which would have caused McGladrey & Pullen, LLP to make reference in
their report to such disagreements if not resolved to their satisfaction.
McGladrey & Pullen, LLP's reports on the financial statements of the
Company for the fiscal years ended December 31, 1996 and 1995 have contained
no adverse opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles.
The Company has provided McGladrey & Pullen, LLP with a copy of this
disclosure and requested that McGladrey & Pullen, LLP furnish it with a letter
addressed to the Securities and Exchange Commission (the "Commission") stating
whether it agrees with the above statements. (A copy of the McGladrey &
Pullen, LLP letter addressed to the Commission is filed as Exhibit 16.1 to
this Form 10-K).
PART III
Item 10. Directors and Executive Officers of the Registrant.
Reference is made to the information set forth under the captions
"Election of Directors--Information as to Nominees and Other Directors" and
"Executive Compensation and Other Information--Section 16(a) Beneficial
Ownership Reporting Compliance" appearing in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 29, 1997
(the "Proxy Statement"), to be filed within 120 days after the end of the
Company's fiscal year, which information is incorporated herein by reference.
Information required by this item with respect to executive officers is
provided in Item 1 of this Form 10-K. See "Business--Executive Officers of the
Company."
Item 11. Executive Compensation.
Reference is made to the information set forth under the captions
"Election of Directors--Directors' Compensation" and "Executive Compensation
and Other Information" appearing in the Proxy Statement to be filed within 120
days after the end of the Company's fiscal year, which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Reference is made to the information set forth under the caption "Stock
Owned by Management" and "Principal Holders of Voting Securities" appearing in
the Proxy Statement to be filed within 120 days after the end of the Company's
fiscal year, which information is incorporated herein by reference.
50
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Reference is made to the information set forth under the caption
"Executive Compensation and Other Information--Certain Transactions" appearing
in the Proxy Statement to be filed within 120 days after the end of the
Company's fiscal year, which information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The following Consolidated Financial Statements of the Company and
independent auditor's report are included in Item 8 of this Form 10-K.
Independent Auditor's Report.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended December
31, 1996, 1995, and 1994.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
(a)(2) The following financial statement schedule is filed as part of
this report and is attached hereto as pages S-1 and S-2.
Independent Auditor's Report on the Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the Commission either have been included in the
Consolidated Financial Statements of the Company or the notes thereto, are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
(a)(3) The following exhibits are either provided with this Form 10-K or
are incorporated herein by reference:
Exhibit
Number Exhibit Description
------ -------------------
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 as of July 12,
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, filed with the Commission on
July 29, 1996 and incorporated herein by reference).
51
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
2.3 Agreement and Plan of Reorganization dated as of August
15, 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, filed with the Commission on
August 26, 1996 and incorporated herein by reference).
2.4 Agreement and Plan of Reorganization dated as of January
27, 1997 among McLeod, Inc., Digital Communications of
Iowa, Inc., Clark E. McLeod and Mary E. McLeod. (Filed as
Exhibit 2 to Current Report on Form 8-K, File No. 0-
20763, filed with the Commission on February 24, 1997 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 Registration Statement on Form S-1, File
No. 333-13885 ("November 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 Indenture dated March 4, 1997 between McLeod, Inc. and
United States Trust Company of New York, as Trustee,
relating to the 10 1/2% Senior Discount Notes Due 2007 of
McLeod, Inc.
4.3 Initial Global 10 1/2% Senior Discount Note Due March 1,
2007 of McLeod, Inc., dated March 4, 1997.
4.4 Form of Certificated 10 1/2% Senior Discount Note Due
March 1, 2007 of McLeod, Inc.
4.5 Registration Agreement dated March 4, 1997 among McLeod,
Inc., Salomon Brothers Inc and Morgan Stanley & Co.
Incorporated.
4.6 Investor Agreement dated as of April 1, 1996 among
McLeod, Inc., 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).
4.7 Amendment No. 1 to Investor Agreement dated as of October
23, 1996 by and among McLeod, Inc., IES Investments Inc.,
Midwest Capital Group Inc., MWR Investments Inc., Clark
E. McLeod and Mary E. McLeod. (Filed as Exhibit 4.3 to
November Form S-1 and incorporated herein by reference).
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).
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
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).
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).
</TABLE>
53
<PAGE>
Exhibit
Number Exhibit Description
- ------ -------------------
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).
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).
54
<PAGE>
Exhibit
Number Exhibit Description
- ------ -------------------
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).
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).
55
<PAGE>
Exhibit
Number Exhibit Description
------ -------------------
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
WiITeI, 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).
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. (Filed as
Exhibit 10.55 to November Form S-1 and incorporated herein by
reference).
10.56 McLeod, Inc. Employee Stock Purchase Plan, as amended.
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 between Ryan
Properties, Inc. and McLeod, Inc. (Filed as Exhibit 10.59 to November
Form S-1 and incorporated herein by reference).
56
<PAGE>
Exhibit
Number Exhibit Description
- ------ -------------------
10.60 Assignment of Purchase Agreement dated August 14, 1996 between Ryan
Properties, Inc. and McLeod, Inc. (Filed as Exhibit 10.60 to November
Form S-1 and incorporated herein by reference).
10.61 Asset Purchase Agreement dated September 4, 1996 between Total
Communication Services, Inc. and McLeod Telemanagement, Inc. (Filed as
Exhibit 10.61 to November Form S-1 and incorporated herein by
reference).
10.62 First Amendment to Asset Purchase Agreement dated September 30, 1996
between Total Communication Services, Inc. and McLeod Telemanagement,
Inc. (Filed as Exhibit 10.62 to November Form S-1 and incorporated
herein by reference).
10.63 McLeod, Inc. Incentive Plan. (Filed as Exhibit 10.63 to November Form
S-1 and incorporated herein by reference).
10.64 Amended and Restated Credit Agreement dated as of May 5, 1996 among
Telecom*USA Publishing Group, Inc., Telecom*USA Publishing Company and
Telecom*USA Neighborhood Directories, Inc. and Norwest Bank Iowa,
National Association. (Filed as Exhibit 10.64 to November Form S-1 and
incorporated herein by reference).
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. (Filed
as Exhibit 10.65 to November Form S-1 and incorporated herein by
reference).
10.66 Lease Agreement dated as of September 26, 1994 between Ryan
Properties, Inc. and Ruffalo, Cody & Associates, Inc. (Filed as
Exhibit 10.66 to November Form S-1 and incorporated herein by
reference).
10.67 First Lease Amendment dated as of April 12, 1995 between Ryan
Properties, Inc. and Ruffalo, Cody & Associates, Inc. (Filed as
Exhibit 10.67 to November Form S-1 and incorporated herein by
reference).
10.68 Lease Agreement dated as of July 18, 1995 between 2060 Partnership,
L.P. and Telecom*USA Publishing Company. (Filed as Exhibit 10.68 to
November Form S-1 and incorporated herein by reference).
10.69 Lease Agreement dated April 26, 1995 by and between A.M. Henderson and
Telecom*USA Publishing Company. (Filed as Exhibit 10.69 to November
Form S-1 and incorporated herein by reference).
10.70 License Agreement dated as of April 19, 1994, between Ameritech
Information Industry Services and Telecom*USA Publishing Company.
(Filed as Exhibit 10.70 to November Form S-1 and incorporated herein
by reference).
10.71 License Agreement dated September 13, 1993 between U S WEST
Communications, Inc. and Telecom*USA Publishing Company. (Filed as
Exhibit 10.71 to November Form S-1 and incorporated herein by
reference).
10.72 Form of McLeod, Inc. Directors Stock Option Plan Option Agreement.
(Filed as Exhibit 10.72 to November Form S-1 and incorporated herein
by reference).
10.73 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Incentive Stock
Option Agreement. (Filed as Exhibit 10.73 to November Form S-1 and
incorporated herein by reference).
57
<PAGE>
Exhibit
Number Exhibit Description
- ------ -------------------
10.74 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Non-Incentive
Stock Option Agreement. (Filed as Exhibit 10.74 to November Form S-1
and incorporated herein by reference).
10.75 Option Agreement dated April 27, 1995 between Fronteer Directory
Company, Inc. and Telecom*USA Publishing Company. (Filed as Exhibit
10.75 to November Form S-1 and incorporated herein by reference).
10.76 Promissory Note dated May 5, 1995 between Telecom*USA Publishing
Company and Fronteer Directory Company, Inc. (Filed as Exhibit 10.76
to November Form S-1 and incorporated herein by reference).
10.77 Security Agreement dated May 5, 1995 between Telecom*USA Publishing
Company and Fronteer Directory Company, Inc. (Filed as Exhibit 10.77
to November Form S-1 and incorporated herein by reference).
10.78 Design/Build Construction Contract dated September 17, 1996 between
Ryan Construction Company of Minnesota, Inc. and McLeod, Inc. (Filed
as Exhibit 10.78 to November Form S-1 and incorporated herein by
reference).
10.79 Guaranty Agreement dated as of October 17, 1996 by McLeod, Inc. in
favor of Kirkwood Community College. (Filed as Exhibit 10.79 to
November Form S-1 and incorporated herein by reference).
10.80 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Telemanagement, Inc.
(Filed as Exhibit 10.80 to November Form S-1 and incorporated herein
by reference).
10.81 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Telecommunications, Inc.
(Filed as Exhibit 10.81 to November Form S-1 and incorporated herein
by reference).
10.82 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Network Services, Inc.
(Filed as Exhibit 10.82 to November Form S-1 and incorporated herein
by reference).
10.83 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod, Inc. (Filed as Exhibit
10.83 to November Form S-1 and incorporated herein by reference).
10.84 Change Order No. 1 to the Construction Services Agreement dated
November 22, 1995 by and between MWR TeIecom, Inc. and MFS Network
Technologies, Inc. (Filed as Exhibit 10.84 to November Form S-1 and
incorporated herein by reference).
10.85 Change Order No. 2 to the Construction Services Agreement dated August
14, 1996 between MWR Telecom, Inc. and MFS Network Technologies, Inc.
(Filed as Exhibit 10.85 to November Form S-1 and incorporated herein
by reference).
10.86 Change Order No. 3 to the Construction Services Agreement dated
October 31, 1996 between MWR Telecom, Inc. and MFS Network
Technologies, Inc. (Filed as Exhibit 10.86 to November Form S-1 and
incorporated herein by reference).
10.87 Independent Contractor Sales Agreement dated May, 1995 between Sprint
Communications Company L.P. and Ruffalo, Cody & Associates, Inc.
(Filed as Exhibit 10.87 to November Form S-1 and incorporated herein
by reference).
10.88 Second Amendment to Asset Purchase Agreement dated October 31, 1996
between Total Communication Services, Inc. and McLeod Telemanagement,
Inc. (Filed as Exhibit 10.88 to November Form S-1 and incorporated
herein by reference)
58
<PAGE>
Exhibit
Number Exhibit Description
------ -------------------
10.89 Escrow Agreement dated July 15, 1996 among McLeod, Inc., certain
shareholders of Ruffalo, Cody & Associates, Inc., Albert P. Ruffalo
and Norwest Bank N.A. (Filed as Exhibit 10.89 to November Form S-1
and incorporated herein by reference).
10.90 Sale and Purchase Agreement dated January 27, 1997 among McLeodUSA
Publishing Company, Fronteer Financial Holdings, Ltd., Classified
Directories, Inc., Larry A. Scott, James Greff, Randall L. Gowin and
Edwin Dressler and certain directors, officers and shareholders of
Fronteer Financial Holdings, Ltd.
10.91 Sale and Purchase Agreement dated February 27, 1997 among McLeodUSA
Publishing Company, Indiana Directories, Inc., John Morgan, Hank
Meijer, Jack Hendricks, Brad Nelson and Talking Directories, Inc.
10.92 Amendment to Sale and Purchase Agreement dated February 28, 1997
between McLeodUSA Publishing Company and Indiana Directories, Inc.
10.93 Ameritech Centrex Service Confirmation of Service Orders dated
August 21, 1996 between McLeod Telemanagement, Inc. and Ameritech
Information Industry Services.
*10.94 Amended and Restated Program Enrollment Terms dated November 1, 1996
between WorldCom Network Services, Inc. d/b/a WilTel and McLeod
Telemanagement, Inc.
11.1 Statement regarding Computation of Per Share Earnings.
16.1 Letter regarding Change in Certifying Accountant.
21.1 Subsidiaries of McLeod, Inc.
23.1 Consent of McGladrey & Pullen, LLP.
27.1 Financial Data Schedule.
99.1 Purchase Agreement dated as of August 15, 1996 between Iowa Land and
Building Company and Ryan Properties, Inc. (Filed as Exhibit 99.1 to
November Form S-1 and incorporated herein by reference).
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. (Filed as Exhibit 99.2 to November Form S-1 and incorporated
herein by reference).
- ---------------
+ Confidential treatment has been granted. The copy filed as an exhibit
omits the information subject to the confidential treatment request.
* To be filed by amendment.
(b) Reports on Form 8-K.
On October 7, 1996, the Company filed a Current Report on Form 8-K to
report the acquisition on September 20, 1996 of McLeodUSA Publishing for
approximately $74.1 million in cash and an additional amount estimated as of the
date hereof to be approximately $1.6 million to be paid to certain employees of
McLeodUSA Publishing as part of an incentive plan. The Form 8-K was amended on
October 11, 1996 to include the relevant financial statements of McLeodUSA
Publishing and pro forma financial information for the Company.
59
<PAGE>
(c) Exhibits.
The Company hereby files as part of this Form 10-K the Exhibits listed in
the Index to Exhibits.
(d) 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 Consolidated Financial Statements of the Company or notes thereto.
60
<PAGE>
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.
Initial 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.
Interconnection Decision--The August 1996 order issued by the FCC
implementing the interconnection provisions of the Telecommunications Act.
Portions of this order have been temporarily stayed by the U.S. Eighth Circuit
Court of Appeals.
InterLATA--Telecommunications services originating in a LATA and
terminating outside of that LATA.
IntraLATA--Telecommunications services originating and terminating in the
same LATA.
61
<PAGE>
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.
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.
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.
Public utilities commission--A state regulatory body, established in most
states, which regulates utilities, including telephone companies providing
intrastate services.
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.
62
<PAGE>
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.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
McLEOD, INC.
By /s/ Clark E. McLeod
-----------------------
Clark E. McLeod
Chairman and Chief Executive Officer
March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Clark E. McLeod Chairman, Chief Executive Officer March 27, 1997
- --------------------------- and Director (Principal Executive
Clark E. McLeod Officer)
/s/ Stephen C. Gray President, Chief Operating March 27, 1997
- --------------------------- Officer and Director
Stephen C. Gray
/s/ Blake O. Fisher, Jr. Chief Financial Officer, March 27, 1997
- --------------------------- Executive Vice President,
Blake O. Fisher, Jr. Corporate Administration,
Treasurer and Director (Principal
Financial Officer)
/s/ Joseph H. Ceryanec Vice President, Finance, March 27, 1997
- --------------------------- Corporate Controller and
Joseph H. Ceryanec Principal Accounting Officer
(Principal Accounting Officer)
/s/ Russell E. Christiansen Director March 27, 1997
- ---------------------------
Russell E. Christiansen
/s/ Thomas M. Collins Director March 27, 1997
- ---------------------------
Thomas M. Collins
/s/ Paul D. Rhines Director March 27, 1997
- ---------------------------
Paul D. Rhines
/s/ Lee Liu Director March 27, 1997
- ---------------------------
Lee Liu
64
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
McLEOD, INC. AND SUBSIDIARIES
Independent Auditor's Report........................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995........... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994..................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994..................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994..................................... F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
<PAGE>
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, 1996 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, 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 McLeod,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
Cedar Rapids, Iowa
January 31, 1997,
except for the first paragraph
of Note 13 as to which the
date is March 4, 1997
F-2
<PAGE>
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In thousands, except shares)
<TABLE>
<CAPTION>
ASSETS (Note 4) 1996 1995
---- ----
<S> <C> <C>
Current Assets
Cash and cash equivalents (Note 3)............................................................. $ 96,480 $ --
Investment in available-for-sale securities (Note 3)........................................... 80,518 --
Trade receivables, net (Note 2)................................................................ 27,560 6,689
Inventory...................................................................................... 1,600 1,598
Deferred expenses.............................................................................. 12,156 --
Prepaid expenses and other..................................................................... 6,087 220
--------- ---------
Total current assets...................................................................... 224,401 8,507
--------- ---------
Property and Equipment
Land........................................................................................... 2,246 311
Telecommunication networks..................................................................... 32,041 8,056
Furniture, fixtures and equipment.............................................................. 22,302 5,742
Networks in progress (Note 5).................................................................. 35,481 4,155
Building in progress (Note 5).................................................................. 6,103 --
--------- ---------
98,173 18,264
Less accumulated depreciation.................................................................. 6,050 2,145
--------- ---------
92,123 16,119
--------- ---------
Investments, Intangibles and Other Assets
Investment in available-for-sale securities (Note 3)........................................... 47,474 --
Goodwill, net.................................................................................. 57,012 2,525
Customer lists, net............................................................................ 17,095 --
Noncompete agreements, net..................................................................... 6,737 --
Deferred line installation costs, net.......................................................... 2,083 1,424
Other (Note 13)................................................................................ 6,069 411
--------- ---------
136,470 4,360
--------- ---------
$ 452,994 $ 28,986
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt (Note 4).................................................. $ 793 $ --
Accounts payable............................................................................... 15,807 5,832
Checks issued not yet presented for payment.................................................... -- 919
Accrued payroll and payroll related expenses................................................... 7,259 1,955
Other accrued liabilities...................................................................... 3,095 857
Deferred revenue, current portion.............................................................. 1,793 134
Customer deposits.............................................................................. 9,686 18
--------- ---------
Total current liabilities................................................................. 38,433 9,715
--------- ---------
Long-Term Debt, less current maturities (Note 4)................................................... 2,573 3,600
--------- ---------
Deferred Revenue, less current portion............................................................. 8,559 713
--------- ---------
Commitments (Notes 5 and 13)
Stockholders' Equity (Notes 4, 7, 8, 9 and 13)
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 and
outstanding 1996 36,172,817 shares; 1995 16,387,081 shares............................. 362 164
Common, Class B, convertible, $.01 par value; authorized 22,000,000 shares;
issued and outstanding 1996 and 1995 15,625,929 shares................................. 156 156
Additional paid-in capital..................................................................... 450,736 40,117
Accumulated deficit............................................................................ (47,825) (25,479)
--------- ---------
403,429 14,958
--------- ---------
$ 452,994 $ 28,986
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenue (Note 2).............................................. $ 81,323 $ 28,998 $ 8,014
-------- -------- --------
Operating expenses:
Cost of service............................................ 52,624 19,667 6,212
Selling, general and administrative........................ 46,044 18,054 12,373
Depreciation and amortization.............................. 8,485 1,835 772
Other...................................................... 2,380 -- --
-------- -------- --------
Total operating expenses............................... 109,533 39,556 19,357
-------- -------- --------
Operating loss......................................... (28,210) (10,558) (11,343)
-------- -------- --------
Nonoperating income (expense):
Interest income............................................ 6,034 139 145
Interest (expense)......................................... (665) (910) (218)
Other income............................................... 495 -- --
-------- -------- --------
Total nonoperating income (expense).................... 5,864 (771) (73)
-------- -------- --------
Loss before income taxes............................... (22,346) (11,329) (11,416)
Income taxes (Note 6)......................................... -- -- --
-------- -------- --------
Net loss............................................... $(22,346) $(11,329) $(11,416)
======== ======== ========
Loss per common and common equivalent share (Note 8).......... $(0.52) $(0.31) $(0.31)
======== ======== ========
Weighted average common and common equivalent shares
outstanding (Note 8)......................................... 43,019 37,055 36,370
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 8, 9 AND 13)
Years Ended December 31, 1996, 1995 and 1994
(In thousands, except shares)
<TABLE>
<CAPTION>
Capital Stock
---------------------------
Common Additional Treasury
---------------- Paid-In Accumulated ---------
Preferred Class A Class B Capital Deficit Stock Total
--------- ------- ------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.................... $ -- $120 $ 56 $ 10,494 $ (2,734) $ -- $ 7,936
Net loss.................................... -- -- -- -- (11,416) -- (11,416)
Issuance of 2,484,720 shares of Class
A common stock............................. -- 25 -- 3,604 -- -- 3,629
Issuance of 2,045,457 shares of Class
B common stock............................. -- -- 20 2,980 -- -- 3,000
Purchase of 22,500 shares of common
stock for the treasury .................... -- -- -- -- -- (33) (33)
Amortization of fair value of stock
options issued to nonemployees -- -- -- 175 -- -- 175
(Note 4)................................. --------- ---- ---- -------- -------- -------- --------
Balance, December 31, 1994.................... -- 145 76 17,253 (14,150) (33) 3,291
Net loss.................................... -- -- -- -- (11,329) -- (11,329)
Issuance of 1,908,600 shares of Class
A common stock............................. -- 19 -- 4,278 -- -- 4,297
Issuance of 4,279,414 shares of Class
B common stock............................. -- -- 43 9,652 -- -- 9,695
Issuance of 3,676,058 shares of Class
B common stock in connection with the
acquisition of MWR Telecom Inc.
(Note 11)................................ -- -- 37 8,296 -- -- 8,333
Reissuance of 22,500 shares of
treasury stock............................. -- -- -- 6 -- 33 39
Amortization of fair value of stock
options issued to nonemployees
(Note 4)................................... -- -- -- 632 -- -- 632
--------- ---- ---- -------- -------- -------- --------
Balance, December 31, 1995.................... -- 164 156 40,117 (25,479) -- 14,958
Net loss.................................... -- -- -- -- (22,346) -- (22,346)
Issuance of 19,424,316 shares of
Class A common stock....................... -- 194 -- 396,020 -- -- 396,214
Issuance of 361,420 shares of Class A
common stock in connection with the
acquisition of Ruffalo, Cody &
Associates, Inc. (Note 11).............. -- 4 -- 8,941 -- -- 8,945
Options to purchase 158,009 shares of
Class A common stock granted in
connection with the acquisition of
Ruffalo, Cody & Associates, Inc.,
less cash to be received upon
exercise of options (Note 11)........... -- -- -- 3,301 -- -- 3,301
Amortization of fair value of stock
options issued to nonemployees
(Note 4)................................... -- -- -- 341 -- -- 341
Amortization of compensation expense
related to stock options (Note 7)........ -- -- -- 2,016 -- -- 2,016
--------- ---- ---- -------- -------- -------- --------
Balance, December 31, 1996.................... $ -- $362 $156 $450,736 $(47,825) $ -- $403,429
========= ==== ==== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
MCLEOD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss............................................................................. $ (22,346) $ (11,329) $ (11,416)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation.................................................................... 3,944 1,299 633
Amortization.................................................................... 4,882 1,168 314
Changes in assets and liabilities, net of effects of purchase business
acquisitions (Note 11):
(Increase) in trade receivables............................................. (9,317) (3,575) (2,272)
(Increase) in inventory..................................................... (2) (269) (185)
Decrease in deferred expenses............................................... 1,966 -- --
(Increase) in deferred line installation costs.............................. (1,289) (806) (1,136)
Increase in accounts payable and accrued expenses........................... 3,192 4,084 1,994
Increase in deferred revenue................................................ 9,505 9 716
Increase in customer deposits............................................... 1,366 11 6
Other, net.................................................................. (3,703) (70) (16)
--------- --------- ---------
Net cash (used in) operating activities................................... (11,802) (9,478) (11,362)
--------- --------- ---------
Cash Flows from Investing Activities
Purchase of property and equipment................................................... (70,290) (5,272) (3,363)
Available-for-sale securities:
Purchases.......................................................................... (207,681) -- --
Sales.............................................................................. 17,577 -- --
Maturities......................................................................... 62,389 -- --
Business acquisitions (Note 11)...................................................... (80,081) -- --
Deposits on PCS licenses (Note 13)................................................... (4,800) -- --
Other................................................................................ (222) (266) (79)
--------- --------- ---------
Net cash (used in) investing activities................................... (283,108) (5,538) (3,442)
--------- --------- ---------
Cash Flows from Financing Activities
Increase (decrease) in checks issued not yet presented for payment................... (919) 885 34
Proceeds from line of credit agreements.............................................. 55,925 42,200 8,400
Payments on line of credit agreements................................................ (59,825) (42,100) (4,900)
Proceeds from long-term debt......................................................... 2,060 -- --
Payments on long-term debt........................................................... (2,065) -- --
Net proceeds from issuance of common stock........................................... 396,214 13,992 6,629
Reissuance (purchase) of treasury stock.............................................. -- 39 (33)
--------- --------- ---------
Net cash provided by financing activities................................. 391,390 15,016 10,130
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...................... 96,480 -- (4,674)
Cash and cash equivalents:
Beginning............................................................................ -- -- 4,674
--------- --------- ---------
Ending............................................................................... $ 96,480 $ -- $ --
========= ========= =========
Supplemental Disclosure of Cash Flow Information
Cash payment for interest, net of interest capitalized 1996 $204; 1995 $62;
and 1994 none...................................................................... $ 300 $ 261 $ 35
========= ========= =========
Supplemental Schedule of Noncash Investing and Financing Activities
Accounts payable incurred for property and equipment................................. $ 5,989 $ 1,234 $ 141
========= ========= =========
Purchase business acquisitions (Note 11)
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
MCLEOD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Midwest, primarily in
Iowa and Illinois. The Company's services primarily include local and long-
distance telecommunications services, competitive access services, including
special access and private line services, and maintenance and installation
services on fiber optic telecommunications networks. The Company also provides
telemarketing services to businesses and nonprofit entities throughout the
United States and publishes telephone directories in a fifteen-state area
primarily in the midwestern United States. 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.
Investments: Management determines the appropriate classification of the
securities at the time they are acquired and evaluates the appropriateness of
such classifications at each balance sheet date. The Company has classified
its securities as available-for-sale. Available-for-sale securities are stated
at fair value, and unrealized holding gains and losses, net of the related
deferred tax effect, are reported as a component of stockholders' equity.
Realized gains and losses are determined on the basis of the specific
securities sold.
Trade receivables: In accordance with the industry practice for the
publication of telephone directories, trade receivables include certain
unbilled revenue from installment contracts. It is anticipated that a
substantial portion of all such amounts at December 31, 1996 will be collected
within one year (see Note 2).
Inventory: Inventory is carried principally at the lower of average cost
or market and consists primarily of new and reusable parts to maintain 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).
F-7
<PAGE>
Note 1. Nature of Business and Significant Accounting Policies--(Continued)
Property and equipment: Property and equipment is stated at cost.
Construction costs, including interest, are capitalized during the
installation of fiber optic telecommunications networks. Depreciation is
computed by the straight-line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Telecommunications networks........ 5-15
Furniture, fixtures and equipment.. 2-10
</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.
Goodwill and customer lists: Goodwill and customer lists resulting from
the Company's acquisitions are being amortized over a range of 5 to 25 years
using the straight-line method and are periodically reviewed for impairment
based upon an assessment of future operations to ensure that they are
appropriately valued. Accumulated amortization on goodwill totaled $1,049,000
and $117,000, and accumulated amortization on customer lists totaled $432,000
and none at December 31, 1996 and 1995, respectively.
Noncompete agreements: Noncompete agreements primarily relate to
directories previously acquired by Telecom*USA Publishing Group, Inc. (now
known as McLeodUSA Publishing Company (McLeodUSA Publishing)) and are being
amortized by the straight-line method over various periods. Accumulated
amortization on noncompete agreements totaled $250,000 and none at December
31, 1996 and 1995, respectively.
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. The contracts' terms do not exceed 60 months. Accumulated
amortization on deferred line installation costs totaled $1,148,000 and
$518,000 at December 31, 1996 and 1995, respectively.
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 telecommunications 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 telecommunications services. The revenue from
long-term leases of fiber optic telecommunications networks is recognized over
the term of the lease. Base annual revenue for telecommunications 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.
F-8
<PAGE>
Note 1. Nature of Business and Significant Accounting Policies--(Continued)
Fees from telemarketing contracts are recognized as revenue in the period
the services are performed.
Revenues from directories are recorded upon publication.
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 or when the related service is performed.
Cost of service and deferred expenses: 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 telecommunications networks. The agreement with the
interexchange carrier requires minimum monthly purchase and minutes-of-usage
commitments. Cost of service also includes direct costs associated with
telemarketing services and the production costs associated with the
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.
Stock options issued to employees: In fiscal year 1996, the Company
adopted the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value based method for the financial
reporting of its stock-based employee compensation plans. However, as allowed
by the new standard, the Company has elected to continue to measure
compensation using the intrinsic value based method as prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Under this method, compensation is measured as the difference
between the market value of the stock on the grant date, 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 8).
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 nonemployees: The Company uses the Black-Scholes
model to determine the fair value of the stock options issued to nonemployees
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: Loss per common and common
equivalent share has been computed using the number of shares of common stock
and common stock equivalents outstanding after giving effect to the
recapitalization (see Note 8). Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, stock issued and stock options granted with
exercise prices below the initial public offering price during the twelve-
month period preceding the date of the initial filing of the Registration
Statement filed in connection with the Company's initial public offering have
been included in the calculation as if they were outstanding for all periods
through June 30, 1996, the end of the quarter in which the initial public
offering was declared effective.
Fair value of financial instruments: The fair value of the Company's
investment in available-for-sale securities is disclosed in Note 3. The
carrying amount of long-term debt approximates fair value because these
obligations bear interest at current rates.
F-9
<PAGE>
Note 1. Nature of Business and Significant Accounting Policies--(Continued)
Reclassifications: Certain items in the 1995 consolidated financial
statements have been reclassified, with no effect on net loss or accumulated
deficit, to be consistent with the classification in the 1996 consolidated
financial statements.
Note 2. Trade Receivables and Major Customer
The composition of trade receivables, net is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
--------- --------
(In thousands)
<S> <C> <C>
Trade receivables:
Billed............................................. $22,846 $6,908
Unbilled........................................... 8,613 --
------- ------
31,459 6,908
Less allowance for doubtful accounts............... (3,899) (219)
and discounts..................................... ------- ------
$27,560 $6,689
======= ======
</TABLE>
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 $5,936,000, $4,937,000 and $3,407,000 for
1996, 1995 and 1994, respectively. The Company also had additional revenues
from the State of Iowa for various fiber optic network construction projects,
which totaled $3,788,000 and $403,000 in 1996 and 1995, respectively. Trade
receivables include approximately $4,860,000 and $2,143,000 from this customer
at December 31, 1996 and 1995, respectively.
Note 3. Investments
At December 31, 1996, the Company held $147,439,000, $54,759,000 and
$7,850,000 in corporate debt securities, United States Government and
governmental agency securities and mortgage-backed securities, respectively.
The Company has classified these securities as available-for-sale, and at
December 31, 1996, their amortized cost approximates fair value. The
available-for-sale securities have been classified as cash and cash
equivalents, investment in available-for-sale securities--current and
investment in available-for-sale securities--long-term, with $82,056,000,
$80,518,000 and $47,474,000, respectively, being recorded in each
classification at December 31, 1996.
The contractual maturities of the available-for-sale securities at December
31, 1996 are as follows (In thousands):
<TABLE>
<S> <C>
Due within one year..................................... $161,205
Due after one year through three........................ 40,731
years
Due after three years................................... 262
Mortgage-backed securities.............................. 7,850
--------
$210,048
========
</TABLE>
Expected maturities will differ from contractual maturities because the
issuers of certain debt securities do have the right to call or prepay their
obligations without any penalties. The amount classified as current assets on
the accompanying balance sheets represent the expected maturities of the debt
securities during the next year.
F-10
<PAGE>
Note 4. Pledged Assets and Long-term Debt
Long-term debt consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Borrowings on line of credit agreements (A) and (B) .............................. $ -- $3,600
Note payable, due January 1, 1997, including interest at 6.625%
Collateralized by a second lien on publishing rights to purchased
directories.................................................................... 500 --
Note payable, due in various annual installments, including interest at
8.25%, through 2006. Collateralized by publishing rights to
purchased directories........................................................... 1,008 --
Contracts payable, to finance company, due in various monthly
payments, including interest at 8.50% to 8.625%, through
November 1998, collateralized by equipment with a depreciated
cost of approximately $298,000.................................................. 248 --
Incentive compensation agreements, due in various estimated
amounts plus interest at 6% through January 2001 (See Note 11).................. 1,610 --
------ ------
3,366 3,600
Less current maturities............................................................ 793 --
------ ------
$2,573 $3,600
====== ======
</TABLE>
(A) At December 31, 1995, the Company had a line of credit agreement with The
First National Bank of Chicago under which it could borrow up to
$20,000,000 from any of three facilities as specified in the agreement. In
March 1996, the agreement was amended to increase the allowable maximum
borrowings to $32,000,000. The agreement required interest payments and
facility fees to be paid at various rates. Class B common stock options
were granted to a stockholder which guaranteed any borrowings under two of
the facilities. The Company used the Black-Scholes model to determine the
value of the options, which was approximately $3,400,000, at the date of
issuance. This value was being amortized over the vesting period of the
options. A portion of the proceeds from the Company's initial public
offering on June 10, 1996 (see Note 8) was used to pay off all existing
indebtedness under these credit facilities, which were subsequently
cancelled. Upon cancellation, the vesting on Class B common stock options
was terminated which also terminated the amortization of the fair value of
the options. At December 31, 1996, a total of 1,300,688 Class B common
stock options are vested.
Due to the inclusion of the amortization of the fair value of these
options in interest expense, the effective average interest rate on the
borrowings under these credit facilities was approximately 15%, 27% and
47% for the years ended December 31, 1996, 1995 and 1994, respectively.
(B) At December 31, 1996, a subsidiary of the Company has a line of credit
agreement with a bank, which expires May 2, 1997. The subsidiary may
borrow up to 80% of its eligible trade receivables up to a maximum of
$2,500,000. Borrowings under this agreement are collateralized by
substantially all of the subsidiary's assets and bear interest at the
bank's prime rate (the current effective rate is 8.25%).
F-11
<PAGE>
Note 4. Pledged Assets and Long-term Debt--(Continued)
Principal payments required on the long-term debt at December 31, 1996 are
as follows (in thousands):
<TABLE>
<S> <C>
1997............................................... $ 793
1998............................................... 1,090
1999............................................... 515
2000............................................... 378
2001............................................... 114
Later years........................................ 476
------
$3,366
======
</TABLE>
Note 5. Leases and Commitments
Leases: The Company leases its facilities under noncancelable 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, 1996 under the leases
mentioned above is as follows (In thousands):
<TABLE>
<S> <C>
1997................................................ $ 4,935
1998................................................ 4,133
1999................................................ 3,386
2000................................................ 2,702
2001................................................ 1,619
Thereafter.......................................... 6,510
-------
$23,285
=======
</TABLE>
The total rental expense included in the consolidated statements of
operations for 1996, 1995 and 1994 is approximately $3,640,000, $1,558,000 and
$622,000, respectively, which also includes short-term rentals for office
facilities.
Network construction: During 1995, the Company was awarded contracts from
the State of Iowa to build 265 fiber optic telecommunications 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. For the years
ended December 31, 1996 and 1995, revenue of $445,000 and none, respectively,
had been recognized under these contracts.
F-12
<PAGE>
Note 5. Leases and Commitments--(Continued)
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 $24,986,000. The Company, however, expects that its actual
construction costs will be higher with respect to such network segments,
because the Company is adding more fiber and route miles than is contractually
required with respect to such construction, in order to optimize the design of
its network. The Company anticipates that the costs to complete this project
will be incurred as follows (In thousands):
<TABLE>
<S> <C>
1997........................................... $13,413
1998........................................... 9,701
1999........................................... 1,872
-------
$24,986
=======
</TABLE>
Buildings: In August 1996, the Company purchased approximately 194 acres
of land on which the Company is constructing its headquarters and associated
buildings. Of the land purchased, approximately 75 acres was purchased from a
subsidiary of a stockholder for approximately $692,000. At December 31, 1996,
the total remaining commitments on the building in progress, including
fixtures, is approximately $14.7 million.
Note 6. Income Tax Matters
Net deferred taxes consist of the following components as of December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards.................... $19,419 $ 9,681
Accruals and reserves not currently deductible...... 4,033 529
Deferred revenues................................... 285 301
Other............................................... 571 17
------- -------
24,308 10,528
Less valuation allowance............................ 16,211 8,418
------- -------
8,097 2,110
------- -------
Deferred tax liabilities:
Deferred line installation cost..................... 833 570
Property and equipment.............................. 2,202 1,540
Customer list....................................... 3,698 --
Deferred expenses................................... 1,035 --
Other............................................... 329 --
------- -------
8,097 2,110
------- -------
$ -- $ --
======== =======
</TABLE>
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 $48.5 million which expire in various amounts in the
years 2008 to 2011.
F-13
<PAGE>
Note 6. Income Tax Matters--(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 1996, 1995
and 1994 due to the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Computed "expected" tax (benefit) $(7,821) $(3,965) $(3,996)
Increase (decrease) in income taxes
resulting from:
Change in valuation allowance 7,793 3,007 4,622
Deferred tax rate differential
on temporary differences 1,661 919 (594)
Tax deductions due to
exercises of incentive stock options (2,028) -- --
Other 395 39 (32)
------- ------- -------
$ -- $ -- $ --
======== ======== ========
</TABLE>
Note 7. Stock-based Compensation Plans
At December 31, 1996, the Company has various stock-based compensation
plans which are described below. Grants under the Company's stock option plans
are accounted for in accordance with Accounting Principles Board (APB) Opinion
No. 25 and related Interpretations. The Company issued 965,166 and 688,502
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 is amortizing approximately $9,190,000 over the vesting period of
these options. Compensation cost of $2,016,000 has been charged to income for
the year ended December 31, 1996 using the intrinsic value based method as
prescribed by APB No. 25. Had compensation cost for all of the stock-based
compensation plans been determined based on the grant date fair values of
awards granted during 1996 and 1995, as prescribed by SFAS No. 123, reported
net loss and loss per common and common equivalent share would have been as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Pro forma net loss $(24,776) $(11,646)
Pro forma loss per common and common (0.58) (0.31)
equivalent share
</TABLE>
1992, 1993 and 1995 Incentive Stock Option Plans: The Company has reserved
5,410,588 shares of Class A common stock for issuance to employees under the
1992, 1993 and 1995 Incentive Stock Option Plans. Options outstanding under
these plans were granted at prices equal to the estimated fair market value on
the dates of grant as determined by the Company's Board of Directors. Under
the 1992 and 1993 plans, all options granted become exercisable at a rate of
25% per year, on a cumulative basis, and expire seven years after the date of
grant. Under the 1995 plan, all options, except for options granted 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 granted to the Company's chairman and chief executive
officer vest at a rate of 20% per year on a cumulative basis. All options
granted under the 1995 plan expire ten years after the date of grant. These
plans have been superseded by the 1996 Employee Stock Option Plan, and no
future grants of options will be made under these plans.
F-14
<PAGE>
Note 7. Stock-based Compensation Plans--(Continued)
1996 Employee Stock Option Plan: The Company has reserved 4,458,236 shares
of Class A common stock for issuance to employees under the 1996 Employee
Stock Option Plan, which supersedes the 1992, 1993 and 1995 Incentive Stock
Option Plans. The exercise price for options granted under this plan is the
fair market value of the Company's Class A common stock on the day before the
grant date (or 110% of the fair market value if the grantee beneficially owns
more than 10% of the outstanding Class A common stock). The options granted
expire ten years after the grant date (or five years after the grant date if
the grantee beneficially owns more than 10% of the outstanding Class A common
stock), and 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 by an individual employee. The 1996
Plan will terminate in March 2006, unless terminated earlier by the Board of
Directors.
Directors' Stock Option Plan: The Company has reserved 550,000 shares of
Class A common stock for issuance under the Directors' Plan to directors who
are not officers or employees of the Company. The Director's Plan was adopted
and approved by the stockholders in 1993 and amended and restated on March 28,
1996 to be a ''formula'' plan providing for an automatic grant of options to
eligible directors. Each eligible director who commences service on the Board
of Directors after the amendment and restatement of the plan 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 after each of the next two annual meetings to each eligible director
who remains for the two-year period. Options granted under the Directors' Plan
vest at a rate of 25% per year, on a cumulative basis and expire seven years
after the date of grant (ten years after the date of grant for options granted
under the amended and restated plan). However, upon a change in control of the
Company as defined in the Directors' Plan, all options will become fully
exercisable. The Company has the right to repurchase any Class A common stock
issued pursuant to the exercise of an option granted under this plan that is
offered for sale to an individual who is not an employee or director of the
Company. The Directors' Plan will terminate in March 2006, unless terminated
earlier by the Board of Directors.
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 90% of the closing price
of the 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 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. The
Company has implemented this plan effective February 1, 1997.
The fair value of each grant under the Company's stock option plans is
estimated at the grant date using the Black-Scholes option-pricing model with
the following weighted-average assumptions for grants in 1996 and 1995,
respectively: risk-free interest rates of 6.08% and 6.30%; price volatility of
40% and expected lives of 4 years for both years and no expected dividends.
F-15
<PAGE>
Note 7. Stock-based Compensation Plans--(Continued)
A summary of the status of the Company's stock option plans as of and for
the years ended December 31, 1996, 1995 and 1994 is as follows (In thousands,
except price data):
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price
------- ---------
<S> <C> <C>
Outstanding at January 1, 1994..................... 2,569 $0.60
Granted.......................................... 786 1.55
Forfeited........................................ (233) 0.95
-----
Outstanding at December 31, 1994................... 3,122 0.82
Granted.......................................... 2,006 2.18
Exercised........................................ (11) 0.29
Forfeited........................................ (248) 1.75
-----
Outstanding at December 31, 1995................... 4,869 1.33
Granted.......................................... 3,502 13.14
Exercised........................................ (491) 1.30
Forfeited........................................ (336) 7.64
-----
Outstanding at December 31, 1996................... 7,544 6.54
=====
</TABLE>
<TABLE>
<CAPTION>
Number Of Options
---------------------
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Exercisable, end of year.................. 2,324 1,581 1,035
===== ===== =====
Weighted-average fair value per
option of options granted 5.74 0.86
during the year ===== =====
</TABLE>
Other pertinent information related to the options outstanding at December
31, 1996 is as follows (In thousands except life and price data):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range Of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
------------------ ----------- ----------- --------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
$0.27 to $1.47........................ 2,517 3.42 $ .71 1,969 $0.61
$1.73 to $2.93........................ 3,351 6.05 2.39 333 2.10
$4.29 to $9.30........................ 56 7.19 6.49 22 4.37
$20.00 to $28.50...................... 1,620 9.57 24.21 -- --
----- -----
7,544 5.94 6.54 2,324 0.85
===== =====
</TABLE>
In addition, the Company has reserved 1,300,688 shares of Class B common
stock for issuance to a stockholder which had guaranteed certain debt
agreements which were repaid with proceeds from the Company's initial public
offering and cancelled. All of these options have vested at December 31, 1996.
F-16
<PAGE>
Note 8. Capital Stock Information and Investor Agreement
Public offerings: On June 10, 1996, the Company undertook an initial
public offering of Class A common stock which yielded net proceeds of
approximately $258 million. On November 20, 1996, the Company completed an
additional public offering of Class A common stock which yielded net proceeds
of approximately $138 million in additional capital.
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. 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
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.
Additionally, 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.
Investor Agreement: On April 1, 1996, certain 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, and which was amended on October 23, 1996. 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.
Note 9. Employment Agreements
Employment, Confidentiality and Noncompetition Agreements: During the year
ended December 31, 1996, the Company entered into employment, confidentiality
and noncompetition agreements with 54 members of senior management, which
provide that during their term of employment and for a two-year period
following termination of employment, the executive employee will not compete
with the Company. The two-year period is reduced to a one-year period for
senior management employees who are not executive employees. As partial
consideration for signing these agreements, the senior management employees
have been granted options to purchase an aggregate of 919,500 shares of Class
A common stock, at exercise prices ranging from $20.00 to $28.50 per share.
These options vest with respect to one-third of the shares underlying the
options in the last month of the fourth year following the date of grant, and
one-third in each of the two subsequent seven-month periods. The agreements
also provide that the senior management employees may not disclose any
confidential information during or after employment.
F-17
<PAGE>
Note 9. Employment Agreements--(Continued)
Change-of-Control Agreements: On May 29, 1996, the Company also entered
into change-of-control agreements with the 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 10. Retirement Plans
The Company has various 401(k) profit-sharing plans available to eligible
employees. The Company's contributions to the plans are discretionary. The
Company contributed approximately $242,000, $44,000 and $12,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Note 11. Acquisitions
MWR Telecom, Inc. (MWR): 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. MWR provides fiber
optics telecommunication services between interexchange carriers and their
customers in the Des Moines, Iowa area. 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.
Ruffalo, Cody & Associates, Inc. (Ruffalo, Cody): On July 15, 1996, the
Company acquired Ruffalo, Cody for a total purchase price of approximately
$17.3 million, which consisted of approximately $5.1 million in cash
(including approximately $243,000 in direct acquisition costs), 361,420 shares
of Class A common stock and 158,009 options to purchase shares of Class A
common stock granted to the holders of Ruffalo, Cody options. An additional
$50,782 in cash and 113,387 shares of Class A common stock were placed into
escrow for delivery to certain stockholders of Ruffalo, Cody contingent upon
certain conditions relating to ongoing revenues from an agreement with a major
long distance carrier to provide telemarketing services . The long distance
carrier terminated this contract effective December 31, 1996. In January 1997,
a total of $50,782 in cash and 37,107 shares were distributed pursuant to the
escrow agreement.
McLeodUSA Publishing: On September 20, 1996, the Company acquired
McLeodUSA Publishing for a total purchase price of approximately $76.1
million, which consisted of approximately $74.5 million in cash (including
approximately $436,000 in direct acquisition costs) and $1.6 million resulting
from the Company entering into an incentive compensation program with all
holders of nonvested McLeodUSA Publishing options, which provides for payments
to be made to these individuals on January 1 of the year following the year in
which the corresponding options would have vested.
Total Communications Systems, Inc. (TCSI): On December 9, 1996, the
Company purchased the customer base and certain other assets of TCSI for a
cash purchase price of approximately $534,000.
F-18
<PAGE>
Note 11. Acquisitions--(Continued)
The following table summarizes the purchase price allocations for the
Company's business acquisitions:
<TABLE>
<CAPTION>
Ruffalo, McLeod USA
MWR Cody Publishing TCSI
--------- ------------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Cash purchase price............. $ -- $ 4,808 $74,060 $534
Acquisition costs............... -- 243 436 --
Incentive agreements............ -- -- 1,610 --
Stock issued.................... 8,333 8,945 -- --
Options to purchase Class A..... -- 3,911 -- --
common stock
Less cash to be received upon... -- (610) -- --
exercise of options............ ------ ------- ------- ----
$8,333 $17,297 $76,106 $534
====== ======= ======= ====
Working capital acquired, net... $ 393 $ 758 $ 8,367 $ 13
Fair value of other assets
acquired, primarily............ 5,298 1,379 4,408 30
telecommunications networks
and equipment
Intangibles, primarily.......... 2,642 15,160 64,315 491
goodwill and customer lists
Liabilities assumed............. -- -- (984) --
------ ------- ------- ----
$8,333 $17,297 $76,106 $534
====== ======= ======= ====
</TABLE>
These acquisitions have been accounted for as purchases and the results of
operations are included in the consolidated financial statements since the
dates of acquisition.
The unaudited consolidated results of operations for the year ended
December 31, 1996 and 1995 on a pro forma basis as though MWR, Ruffalo, Cody,
McLeodUSA Publishing and TCSI had been acquired as of the beginning of the
respective periods are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
(In thousands)
<S> <C> <C>
Revenue..................................$128,624 $ 86,476
Net loss................................. (22,889) (17,249)
Loss per common and common equivalent
share................................... (0.53) (0.46)
</TABLE>
- -------------------
* Includes MWR's results of operations for the period from January 1, 1995 to
April 28, 1995.
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 acquisitions been consummated as of the above dates, nor
are such operating results necessarily indicative of future operating results.
F-19
<PAGE>
Note 12. 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. Revenues provided totaled $254,000, $103,000 and none and services
purchased, primarily rent and legal services, totaled $934,000, $675,000 and
$173,000, for the years ended December 31, 1996, 1995 and 1994, respectively.
In addition, at December 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 13. Subsequent Events
Debt offering: On March 4, 1997, the Company completed a private offering
of 10 1/2% Senior Discount Notes due March 1, 2007 at an original issue
discount in which the Company received approximately $289.5 million in net
proceeds. The notes will accrete at a rate of 10 1/2% per year, compounded
semi-annually, to an aggregate principal amount of $500 million by March 1,
2002. Interest will not accrue on the notes for five years, after which time
the notes will accrue interest at 10 1/2%, payable semi-annually. The notes
will contain certain covenants which, among other things, will restrict the
ability of the Company to incur additional indebtedness, pay dividends or make
distributions of the Company's or its subsidiaries' stock, enter into sale and
leaseback transactions, create liens, enter into transactions with affiliates
or related persons, or consolidate, merge or sell all of their assets. The
Notes will not be registered under the Securities Act of 1933, and therefore
will not be tradeable securities, however, the Company has agreed to file a
registration statement with the Securities and Exchange Commission with
respect to a registered offer to exchange the notes for new notes that will be
tradeable.
Personal Communications Services (PCS) licenses: In January 1997, the
Company was notified by the Federal Communications Commission (FCC) that it
was the successful bidder for 26 PCS licenses in 24 market areas covering all
of Iowa and certain cities in Illinois, Minnesota, Nebraska and South Dakota.
The PCS licenses will allow the Company to provide wireless telecommunications
services to its customers in the markets covered by the licenses. The Company
bid approximately $32.8 million for the licenses, which it will be required to
pay following grant of the licenses, which is expected to occur in the second
or third quarter of 1997. The Company made a $4,800,000 deposit with the FCC
at the beginning of the bidding process in 1996, which will be applied to the
Company's payment in 1997. This deposit is included in other long-term assets
at December 31, 1996.
Acquisitions: In January 1997, the Company issued 84,430 shares of Class A
common stock in exchange for all the outstanding shares of Digital
Communications of Iowa, Inc. (DCI), in a transaction accounted for as a
purchase. The total purchase price was approximately $2.3 million based on the
average closing market price of the Company's Class A common stock at the time
of the acquisition.
Also in January 1997, McLeodUSA Publishing exercised its option to acquire
six directories from Fronteer Financial Holdings, Ltd. for a total purchase
price of approximately $4 million.
F-20
<PAGE>
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
January 31, 1997
S-1
<PAGE>
MCLEOD, INC.
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, 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
========== =========== ======== ========== ===========
Year Ended December 31, 1996:
Allowance for doubtful accounts
and discounts................... $ 219,000 $ 3,680,000* $ -- $ -- $ 3,899,000
Valuation reserve on deferred tax
assets............................. 8,418,000 7,793,000 -- -- 16,211,000
---------- ----------- -------- ---------- -----------
$8,637,000 $11,473,000 $ -- $ -- $20,110,000
========== =========== ======== ========== ===========
</TABLE>
- ----------------------------
* Includes $2,768,000 of allowance for doubtful accounts and discounts related
to acquisitions during the year.
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<S> <C>
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 as of July 12, 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, filed with the
Commission on July 29, 1996 and incorporated herein by reference).
2.3 Agreement and Plan of Reorganization dated as of August 15, 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, filed with the
Commission on August 26, 1996 and incorporated herein by reference).
2.4 Agreement and Plan of Reorganization dated as of January 27, 1997
among McLeod, Inc., Digital Communications of Iowa, Inc., Clark E.
McLeod and Mary E. McLeod. (Filed as Exhibit 2 to Current Report on
Form 8-K, File No. 0-20763, filed with the Commission on February 24,
1997 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
Registration Statement on Form S-1, File No. 333-13885 ("November 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 Indenture dated March 4, 1997 between McLeod, Inc. and United States
Trust Company of New York, as Trustee, relating to the 10 1/2% Senior
Discount Notes Due 2007 of McLeod, Inc.
4.3 Initial Global 10 1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc., dated March 4, 1997.
4.4 Form of Certificated 10 1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc.
4.5 Registration Agreement dated March 4, 1997 among McLeod, Inc., Salomon
Brothers Inc and Morgan Stanley & Co. Incorporated.
4.6 Investor Agreement dated as of April 1, 1996 among McLeod, Inc., 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).
4.7 Amendment No. 1 to Investor Agreement dated as of October 23, 1996 by
and among McLeod, Inc., IES Investments Inc., Midwest Capital Group
Inc., MWR Investments Inc., Clark E. McLeod and Mary E. McLeod. (Filed
as Exhibit 4.3 to November Form S-1 and incorporated herein by
reference).
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).
</TABLE>
<PAGE>
Exhibit
Number Exhibit Description
------- -------------------
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).
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).
2
<PAGE>
Exhibit
Number Exhibit Description
------- -------------------
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).
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).
3
<PAGE>
Exhibit
Number Exhibit Description
------- -------------------
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).
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).
4
<PAGE>
Exhibit
Number Exhibit Description
------- -------------------
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).
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. (Filed as
Exhibit 10.55 to November Form S-1 and incorporated herein by
reference).
10.56 McLeod, Inc. Employee Stock Purchase Plan, as amended.
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).
5
<PAGE>
Exhibit
Number Exhibit Description
------- -------------------
10.59 Assignment of Purchase Agreement dated August 15, 1996 between Ryan
Properties, Inc. and McLeod, Inc. (Filed as Exhibit 10.59 to November
Form S-1 and incorporated herein by reference).
10.60 Assignment of Purchase Agreement dated August 14, 1996 between Ryan
Properties, Inc. and McLeod, Inc. (Filed as Exhibit 10.60 to November
Form S-1 and incorporated herein by reference).
10.61 Asset Purchase Agreement dated September 4, 1996 between Total
Communication Services, Inc. and McLeod Telemanagement, Inc. (Filed as
Exhibit 10.61 to November Form S-1 and incorporated herein by
reference).
10.62 First Amendment to Asset Purchase Agreement dated September 30, 1996
between Total Communication Services, Inc. and McLeod Telemanagement,
Inc. (Filed as Exhibit 10.62 to November Form S-1 and incorporated
herein by reference).
10.63 McLeod, Inc. Incentive Plan. (Filed as Exhibit 10.63 to November Form
S-1 and incorporated herein by reference).
10.64 Amended and Restated Credit Agreement dated as of May 5, 1996 among
Teleco*USA Publishing Group, Inc., Telecom*USA Publishing Company and
Telecom*USA Neighborhood Directories, Inc. and Norwest Bank Iowa,
National Association. (Filed as Exhibit 10.64 to November Form S-1 and
incorporated herein by reference).
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. (Filed
as Exhibit 10.65 to November Form S-1 and incorporated herein by
reference).
10.66 Lease Agreement dated as of September 26, 1994 between Ryan
Properties, Inc. and Ruffalo, Cody & Associates, Inc. (Filed as
Exhibit 10.66 to November Form S-1 and incorporated herein by
reference).
10.67 First Lease Amendment dated as of April 12, 1995 between Ryan
Properties, Inc. and Ruffalo, Cody & Associates, Inc. (Filed as
Exhibit 10.67 to November Form S-1 and incorporated herein by
reference).
10.68 Lease Agreement dated as of July 18, 1995 between 2060 Partnership,
L.P. and Telecom*USA Publishing Company. (Filed as Exhibit 10.68 to
November Form S-1 and incorporated herein by reference).
10.69 Lease Agreement dated April 26, 1995 by and between A.M. Henderson and
Telecom*USA Publishing Company. (Filed as Exhibit 10.69 to November
Form S-1 and incorporated herein by reference).
10.70 License Agreement dated as of April 19, 1994, between Ameritech
Information Industry Services and Telecom*USA Publishing Company.
(Filed as Exhibit 10.70 to November Form S-1 and incorporated herein
by reference).
10.71 License Agreement dated September 13, 1993 between U S WEST
Communications, Inc. and Telecom*USA Publishing Company. (Filed as
Exhibit 10.71 to November Form S-1 and incorporated herein by
reference).
10.72 Form of McLeod, Inc. Directors Stock Option Plan Option Agreement.
(Filed as Exhibit 10.72 to November Form S-1 and incorporated herein
by reference).
6
<PAGE>
Exhibit
Number Exhibit Description
------- -------------------
10.73 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Incentive Stock
Option Agreement. (Filed as Exhibit 10.73 to November Form S-1 and
incorporated herein by reference).
10.74 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Non-Incentive
Stock Option Agreement. (Filed as Exhibit 10.74 to November Form S-1
and incorporated herein by reference).
10.75 Option Agreement dated April 27, 1995 between Fronteer Directory
Company, Inc. and Telecom*USA Publishing Company. (Filed as Exhibit
10.75 to November Form S-1 and incorporated herein by reference).
10.76 Promissory Note dated May 5, 1995 between Telecom*USA Publishing
Company and Fronteer Directory Company, Inc. (Filed as Exhibit 10.76
to November Form S-1 and incorporated herein by reference).
10.77 Security Agreement dated May 5, 1995 between Telecom*USA Publishing
Company and Fronteer Directory Company, Inc. (Filed as Exhibit 10.77
to November Form S-1 and incorporated herein by reference).
10.78 Design/Build Construction Contract dated September 17, 1996 between
Ryan Construction Company of Minnesota, Inc. and McLeod, Inc. (Filed
as Exhibit 10.78 to November Form S-1 and incorporated herein by
reference).
10.79 Guaranty Agreement dated as of October 17, 1996 by McLeod, Inc. in
favor of Kirkwood Community College. (Filed as Exhibit 10.79 to
November Form S-1 and incorporated herein by reference).
10.80 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Telemanagement, Inc.
(Filed as Exhibit 10.80 to November Form S-1 and incorporated herein
by reference).
10.81 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Telecommunications, Inc.
(Filed as Exhibit 10.81 to November Form S-1 and incorporated herein
by reference).
10.82 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Network Services, Inc.
(Filed as Exhibit 10.82 to November Form S-1 and incorporated herein
by reference).
10.83 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod, Inc. (Filed as Exhibit
10.83 to November Form S-1 and incorporated herein by reference).
10.84 Change Order No. 1 to the Construction Services Agreement dated
November 22, 1995 by and between MWR TeIecom, Inc. and MFS Network
Technologies, Inc. (Filed as Exhibit 10.84 to November Form S-1 and
incorporated herein by reference).
10.85 Change Order No. 2 to the Construction Services Agreement dated August
14, 1996 between MWR Telecom, Inc. and MFS Network Technologies, Inc.
(Filed as Exhibit 10.85 to November Form S-1 and incorporated herein
by reference).
10.86 Change Order No. 3 to the Construction Services Agreement dated
October 31, 1996 between MWR Telecom, Inc. and MFS Network
Technologies, Inc. (Filed as Exhibit 10.86 to November Form S-1 and
incorporated herein by reference).
10.87 Independent Contractor Sales Agreement dated May, 1995 between Sprint
Communications Company L.P. and Ruffalo, Cody & Associates, Inc.
(Filed as Exhibit 10.87 to November Form S-1 and incorporated herein
by reference).
7
<PAGE>
Exhibit
Number Exhibit Description
------- -------------------
10.88 Second Amendment to Asset Purchase Agreement dated October 31, 1996
between Total Communication Services, Inc. and McLeod Telemanagement,
Inc. (Filed as Exhibit 10.88 to November Form S-1 and incorporated
herein by reference)
10.89 Escrow Agreement dated July 15, 1996 among McLeod, Inc., certain
shareholders of Ruffalo, Cody & Associates, Inc., Albert P. Ruffalo
and Norwest Bank N.A. (Filed as Exhibit 10.89 to November Form S-1 and
incorporated herein by reference).
10.90 Sale and Purchase Agreement dated January 27, 1997 among McLeodUSA
Publishing Company, Fronteer Financial Holdings, Ltd., Classified
Directories, Inc., Larry A. Scott, James Greff, Randall L. Gowin and
Edwin Dressler and certain directors, officers and shareholders of
Fronteer Financial Holdings, Ltd.
10.91 Sale and Purchase Agreement dated February 27, 1997 among McLeodUSA
Publishing Company, Indiana Directories, Inc., John Morgan, Hank
Meijer, Jack Hendricks, Brad Nelson and Talking Directories, Inc.
10.92 Amendment to Sale and Purchase Agreement dated February 28, 1997
between McLeodUSA Publishing Company and Indiana Directories, Inc.
10.93 Ameritech Centrex Service Confirmation of Service Orders dated
August 21, 1996 between McLeod Telemanagement, Inc. and Ameritech
Information Industry Services.
*10.94 Amended and Restated Program Enrollment Terms dated November 1, 1996
between WorldCom Network Services, Inc. d/b/a WilTel and McLeod
Telemanagement, Inc.
11.1 Statement regarding Computation of Per Share Earnings.
16.1 Letter regarding Change in Certifying Accountant.
21.1 Subsidiaries of McLeod, Inc.
23.1 Consent of McGladrey & Pullen, LLP.
27.1 Financial Data Schedule.
99.1 Purchase Agreement dated as of August 15, 1996 between Iowa Land and
Building Company and Ryan Properties, Inc. (Filed as Exhibit 99.1 to
November Form S-1 and incorporated herein by reference).
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. (Filed
as Exhibit 99.2 to November Form S-1 and incorporated herein by
reference).
- -----------------
+ Confidential treatment has been granted. The copy filed as an exhibit
omits the information subject to the confidential treatment request.
* To be filed by amendment.
8
<PAGE>
EXHIBIT 4.2
================================================================================
MCLEOD, INC.
$500,000,000
10-1/2% SENIOR DISCOUNT NOTES DUE 2007
________________
INDENTURE
Dated as of March 4, 1997
________________
United States Trust Company of New York,
Trustee
================================================================================
<PAGE>
CROSS-REFERENCE TABLE
Reconciliation and tie between the Trust Indenture Act of 1939, as amended, and
the Indenture, dated as of March 4, 1997
<TABLE>
<CAPTION>
Trust
Indenture
Act Indenture
Section Section
- --------- ---------
<S> <C>
(S)310(a)(1)......................................................... 7.10
(a)(2)...................................................... 7.10
(a)(3)...................................................... N.A.
(a)(4)...................................................... N.A.
(a)(5)...................................................... 7.10
(b)......................................................... 7.08; 7.10
(c)......................................................... N.A.
(S)311(a)............................................................ 7.11
(b)......................................................... 7.11
(c)......................................................... N.A.
(S)312(a)...................................................... 7.06(a); 7.06(b)
(b)......................................................... 7.06(c)
(c)......................................................... 7.06(d)
(S)313(a)............................................................ 7.06(e)
(b)......................................................... N.A.
(c)................................................... 7.06(e); 7.06(f)
(d)......................................................... 7.06
(S)314(a)............................................................ 4.18; 4.19
(b)......................................................... N.A.
(c)(1)...................................................... 10.03
(c)(2)...................................................... 10.03
(c)(3)...................................................... N.A.
(d)......................................................... N.A.
(e)......................................................... 10.04
(f)......................................................... 4.19
(S)315(a)............................................................ 7.01(b)
(b)......................................................... 7.05(a)
(c)......................................................... 7.01(a)
(d)......................................................... 7.01(c)
(e)......................................................... 6.10
(S)316(a)............................................................ 2.10
(a)(1)(A)................................................... 6.05
(a)(1)(B)................................................... 6.04
(a)(2)...................................................... N.A.
(b)......................................................... 6.07
(c)......................................................... 9.05
(S)317(a)(1)N.A.
(a)(2)...................................................... 6.08
(b)......................................................... 2.07
(S)318(a)............................................................ 10.01
</TABLE>
Note: This reconciliation and tie shall not, for any purpose, be deemed
to be part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I.
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 1.01. Definitions..................................................... 1
SECTION 1.02. Incorporation by Reference of Trust Indenture Act............... 23
SECTION 1.03. Rules of Construction........................................... 24
SECTION 1.04. Form of Documents Delivered to Trustee.......................... 24
SECTION 1.05. Acts of Holders................................................. 25
SECTION 1.06. Satisfaction and Discharge...................................... 25
ARTICLE II.
THE NOTES
SECTION 2.01. Form and Dating................................................. 26
SECTION 2.02. Form of Face of Note............................................ 27
SECTION 2.03. Form of Reverse of Note......................................... 32
SECTION 2.04. Form of Trustee's Certificate of Authentication................. 39
SECTION 2.05. Execution and Authentication.................................... 39
SECTION 2.06. Note Registrar and Paying Agent................................. 40
SECTION 2.07. Paying Agent to Hold Money in Trust............................. 41
SECTION 2.08. Registration, Registration of Transfer and Exchange............. 41
SECTION 2.09. Replacement Notes............................................... 47
SECTION 2.10. Outstanding Notes............................................... 48
SECTION 2.11. Temporary Notes................................................. 49
SECTION 2.12. Cancellation.................................................... 49
SECTION 2.13. Payment of Interest; Interest Rights Preserved.................. 49
SECTION 2.14. Authorized Denominations........................................ 51
SECTION 2.15. Computation of Interest......................................... 51
SECTION 2.16. Persons Deemed Owners........................................... 51
SECTION 2.17. CUSIP Numbers................................................... 51
SECTION 2.18. Holder Lists.................................................... 51
ARTICLE III.
REDEMPTION
SECTION 3.01. Notice to Trustee............................................... 52
SECTION 3.02. Selection of Notes to be Redeemed............................... 52
SECTION 3.03. Notice of Redemption............................................ 52
SECTION 3.04. Effect of Notice of Redemption.................................. 53
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 3.05. Deposit of Redemption Price..................................... 53
SECTION 3.06. Notes Redeemed in Part.......................................... 54
ARTICLE IV.
COVENANTS
SECTION 4.01. Payment of Notes................................................ 54
SECTION 4.02. Maintenance of Office or Agency................................. 54
SECTION 4.03. Money for the Note Payments to be Held in Trust................. 55
SECTION 4.04. Corporate Existence............................................. 55
SECTION 4.05. Maintenance of Property......................................... 56
SECTION 4.06. Payment of Taxes and Other Claims............................... 56
SECTION 4.07. Repurchase at the Option of Holders upon a Change of Control.... 56
SECTION 4.08. Limitation on Asset Sales....................................... 58
SECTION 4.09. Limitation on Consolidated Indebtedness......................... 61
SECTION 4.10 Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries................................................... 64
SECTION 4.11. Limitation on Restricted Payments............................... 66
SECTION 4.12. Limitation on Liens............................................. 69
SECTION 4.13. Limitation on Sale and Leaseback Transactions................... 70
SECTION 4.14. Limitation on Dividends and Other Payment Restrictions
Affecting Subsidiaries......................................... 71
SECTION 4.15. Limitation on Issuance and Sale of Capital Stock of Restricted
Subsidiaries................................................... 72
SECTION 4.16. Transactions with Affiliates.................................... 73
SECTION 4.17. Restricted and Unrestricted Subsidiaries........................ 74
SECTION 4.18. Reports......................................................... 75
SECTION 4.19. Compliance Certificate; Notice of Default or Event of Default... 75
ARTICLE V.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
SECTION 5.01. Merger, Consolidation or Sale of Assets......................... 76
SECTION 5.02. Successor Corporation Substituted............................... 77
ARTICLE VI.
DEFAULTS AND REMEDIES
SECTION 6.01. Events of Default............................................... 77
SECTION 6.02. Acceleration.................................................... 79
SECTION 6.03. Other Remedies.................................................. 81
SECTION 6.04. Waiver of Past Defaults......................................... 81
SECTION 6.05. Control by Majority............................................. 81
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 6.06. Limitation on Suits............................................. 82
SECTION 6.07. Rights of Holders to Receive Payment............................ 82
SECTION 6.08. Trustee May File Proofs of Claim................................ 83
SECTION 6.09. Priorities...................................................... 83
SECTION 6.10. Undertaking for Costs........................................... 84
SECTION 6.11. Waiver of Stay or Extension Laws................................ 84
SECTION 6.12. Trustee May Enforce Claims Without Possession of the Notes...... 84
SECTION 6.13. Restoration of Rights and Remedies.............................. 85
SECTION 6.14. Rights and Remedies Cumulative.................................. 85
SECTION 6.15. Delay or Omission Not Waiver.................................... 85
ARTICLE VII.
TRUSTEE
SECTION 7.01. Duties of Trustee............................................... 85
SECTION 7.02. Rights of Trustee............................................... 86
SECTION 7.03. Individual Rights of Trustee.................................... 87
SECTION 7.04. Trustee's Disclaimer............................................ 87
SECTION 7.05. Notice of Defaults.............................................. 88
SECTION 7.06. Preservation of Information; Reports by Trustee to Holders...... 88
SECTION 7.07. Compensation and Indemnity...................................... 89
SECTION 7.08. Replacement of Trustee.......................................... 90
SECTION 7.09. Successor Trustee by Merger..................................... 92
SECTION 7.10. Eligibility; Disqualification................................... 92
SECTION 7.11. Preferential Collection of Claims Against Company............... 93
ARTICLE VIII.
DEFEASANCE
SECTION 8.01. Company's Option to Effect Legal Defeasance or Covenant
Defeasance..................................................... 93
SECTION 8.02. Legal Defeasance and Discharge.................................. 93
SECTION 8.03. Covenant Defeasance............................................. 94
SECTION 8.04. Conditions to Defeasance or Covenant Defeasance................. 95
SECTION 8.05. Deposited Money and U.S. Government Obligations to be Held
in Trust; Miscellaneous Provisions............................. 96
ARTICLE IX.
AMENDMENTS
SECTION 9.01. Without Consent of Holders...................................... 97
SECTION 9.02. With Consent of Holders......................................... 98
SECTION 9.03. Effect of Supplemental Indentures............................... 99
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
SECTION 9.04. Compliance with Trust Indenture Act............................. 99
SECTION 9.05. Revocation and Effect of Consents and Waivers................... 99
SECTION 9.06. Notation on or Exchange of Notes................................ 99
SECTION 9.07. Trustee to Execute Supplemental Indentures...................... 99
ARTICLE X.
MISCELLANEOUS
SECTION 10.01. Trust Indenture Act Controls................................... 100
SECTION 10.02. Notices........................................................ 100
SECTION 10.03. Certificate and Opinion as to Conditions Precedent............. 100
SECTION 10.04. Statements Required in Certificate or Opinion.................. 101
SECTION 10.05. Rules by Trustee, Paying Agent and Note Registrar.............. 101
SECTION 10.06. Payments on Business Days...................................... 101
SECTION 10.07. Governing Law.................................................. 101
SECTION 10.08. No Recourse Against Others..................................... 101
SECTION 10.09. Successors..................................................... 101
SECTION 10.10. Counterparts................................................... 102
SECTION 10.11. Table of Contents; Headings.................................... 102
SECTION 10.12. Severability................................................... 102
SECTION 10.13. Further Instruments and Acts................................... 102
</TABLE>
ANNEX A FORM OF REGULATION S CERTIFICATE
ANNEX B FORM OF RESTRICTED SECURITIES CERTIFICATE
ANNEX C FORM OF UNRESTRICTED SECURITIES CERTIFICATE
iv
<PAGE>
INDENTURE, dated as of March 4, 1997, between MCLEOD, INC., a Delaware
corporation (the "Company"), having its principal office at 221 Third Avenue SE,
Suite 500, Cedar Rapids, Iowa 52401, and UNITED STATES TRUST COMPANY OF NEW
YORK, a bank and trust company organized under the New York banking law, as
trustee hereunder (the "Trustee"), having its Corporate Trust Office at 114 West
47th Street, New York, New York 10031.
RECITALS OF THE COMPANY
The Company has duly authorized the creation and issue of its 10-1/2%
Senior Discount Notes Due 2007 (the "Notes") of substantially the tenor and
amount hereinafter set forth, and to provide therefor the Company has duly
authorized the execution and delivery of this Indenture.
All things necessary to make the Notes, when executed by the Company and
authenticated and delivered by the Trustee hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid instrument of the Company, in accordance with their respective terms, have
been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that, for and in consideration
of the premises and the purchase of the Original Notes by the Holders thereof,
it is mutually covenanted and agreed, for the equal and proportionate benefit of
all Holders of the Notes, as follows:
ARTICLE I.
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.01. Definitions. For all purposes of this Indenture, except as
-----------
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Accreted Value" means, as of any date prior to March 1, 2002, an amount
--------------
per $1,000 principal amount at maturity of Notes that is equal to the sum of (a)
the offering price ($600 per $1,000 principal amount at maturity of Notes) of
such Notes and (b) the portion of the excess of the principal amount of such
Notes over such offering price which shall have been amortized through such
date, such amount to be so amortized on a daily basis and compounded semi-
annually on each March 1 and September 1 at the rate of 10-1/2% per
<PAGE>
annum from the date of original issue of the Notes through the date of
determination computed on the basis of a 360-day year of twelve 30-day months,
and as of any date on or after March 1, 2002, the principal amount of each Note.
"Acquired Indebtedness" means, with respect to any specified Person,
---------------------
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person; provided that such
Indebtedness was not incurred in connection with, or in anticipation or
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, but excluding Indebtedness which is
extinguished, retired or repaid in connection with such other Person merging
with or into or becoming a Subsidiary of such specified Person.
"Act" when used with respect to any Holder, has the meaning set forth in
---
Section 1.05 hereof.
"Affiliate" means, as to any Person, any other Person which directly or
---------
indirectly controls, or is under common control with, or is controlled by, such
Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of the Company and of each other Subsidiary of the Company; provided,
further, that neither the Company nor any of its Restricted Subsidiaries shall
be deemed to be Affiliates of each other. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling," "under
common control with" and "controlled by"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of Voting Stock, by agreement or otherwise.
"Affiliate Transaction" has the meaning set forth in Section 4.16 hereof.
---------------------
"Agent Member" means any member of, or participant in, the Depositary.
------------
"Applicable Procedures" means, with respect to any transfer or transaction
---------------------
involving a Global Note or beneficial interest therein, the rules and procedures
of the Depositary for such Note, Euroclear and Cedel, in each case to the extent
applicable to such transaction and as in effect from time to time.
"Asset Sale" by any Person means any transfer, conveyance, sale, lease or
----------
other disposition by such Person or any of its Restricted Subsidiaries
(including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified
Person, but excluding a disposition by a Restricted Subsidiary of such Person to
such Person or a Wholly-Owned Restricted Subsidiary of such Person or by such
Person to a Wholly-Owned Restricted Subsidiary of such Person) of (i) shares of
Capital Stock or other ownership interests of a Restricted Subsidiary of such
Person (other than as permitted by the
2
<PAGE>
provisions of Section 4.10 hereof), (ii) substantially all of the assets of such
Person or any of its Restricted Subsidiaries representing a division or line of
business (other than as part of as permitted by the Permitted Investment) or
(iii) other assets or rights of such Person or any of its Restricted
Subsidiaries outside of the ordinary course of business and, in each case, that
is not governed by Article V hereof; provided that "Asset Sale" shall not
include (i) sales or other dispositions of inventory, receivables and other
current assets in the ordinary course of business, (ii) simultaneous exchanges
by the Company or any Restricted Subsidiary of Telecommunications Assets for
other Telecommunications Assets in the ordinary course of business; provided
that the applicable Telecommunications Assets received by the Company or such
Restricted Subsidiary have at least substantially equal Fair Market Value to the
Company or such Restricted Subsidiary (as determined by the Board of Directors
whose good faith determination shall be conclusive and evidenced by a Board
Resolution), and (iii) sales or other dispositions of assets with a Fair Market
Value (as certified in an Officers' Certificate) not in excess of $1 million.
"Asset Sale Offer" has the meaning set forth in Section 4.08(c) hereof.
----------------
"Asset Sale Payment Date" has the meaning set forth in Section 4.08(d)(ii)
-----------------------
hereof.
"Asset Sale Purchase Price" has the meaning set forth in Section 4.08(c)
-------------------------
hereof.
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
-------------------------
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present value
(discounted at a rate consistent with accounting guidelines, as determined in
good faith by the responsible accounting officer of such Person) of the payments
during the remaining term of the lease (including any period for which such
lease has been extended or may, at the option of the lessor, be extended) or
until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of a penalty (in which case the rental payments shall
include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
------------
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
"Board of Directors" means the Board of Directors of the Company or any
------------------
committee thereof duly authorized to act on behalf of the Board of Directors.
3
<PAGE>
"Board Resolution" means a duly adopted resolution of the Board of
----------------
Directors in full force and effect at the time of determination.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
------------
that is not a day on which banking institutions in The City of New York are
authorized or obligated by law, executive order or regulation to close.
"Capital Lease Obligation" of any Person means the obligation to pay rent
------------------------
or other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person prepared in accordance with GAAP, and
the stated maturity thereof shall be the date of the last payment of rent or any
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
-------------
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to subscribe for or acquire an equity
interest in such Person.
"Cash Proceeds" means, with respect to any Asset Sale or issuance or sale
-------------
of Capital Stock by any Person, the aggregate consideration received in respect
of such sale or issuance by such Person in the form of cash and Eligible Cash
Equivalents.
"Cedel" means Cedel Bank, S.A. (or any successor securities clearing
-----
agency).
"Change of Control shall be deemed to occur if (i) the sale, conveyance,
-----------------
transfer or lease of all or substantially all of the assets of the Company to
any "Person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of
the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(i) under the Exchange Act), other
than any Permitted Holder or any Restricted Subsidiary of the Company, shall
have occurred; or (ii) any "Person" or "group" (within the meaning of Sections
13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to either
of the foregoing, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(i) under
the Exchange Act), other than any Permitted Holder, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35 percent
of the total voting power of all classes of the Voting Stock of the Company
(including any warrants, options or rights to acquire such Voting Stock),
calculated on a fully diluted basis, and such voting power percentage is greater
than or equal to the total voting power percentage then beneficially owned by
the Permitted Holders in the aggregate; or (iii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (together with any directors whose election or
appointment
4
<PAGE>
by the Board of Directors or whose nomination for election by the stockholders
of the Company was approved by a vote of a majority of the directors then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors then in office.
"Change of Control Offer" has the meaning set forth in Section 4.07(a)
-----------------------
hereof.
"Change of Control Payment Date" has the meaning set forth in Section
------------------------------
4.07(b)(ii) hereof.
"Change of Control Purchase Price" has the meaning set forth in Section
--------------------------------
4.07(a) hereof.
"clearing agency" has the meaning set forth in Section 3(a)(23) of the
---------------
Exchange Act.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Commission" means the United States Securities and Exchange Commission, as
----------
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this Indenture such commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, the body
performing such duties at such time.
"Common Stock" means Capital Stock other than Preferred Stock.
------------
"Company" means the party named as such in the preamble to this Indenture
-------
until a successor replaces it pursuant to the applicable provisions hereof and,
thereafter, means such successor.
"Company Order" means a written order signed in the name of the Company by
-------------
(i) its Chairman of the Board, President, a Vice Chairman or a Vice President,
and (ii) its Treasurer, an Assistant Treasurer, its Secretary or an Assistant
Secretary.
"Consolidated Capital Ratio" of any Person as of any date means the ratio
--------------------------
of (i) the aggregate consolidated principal amount of Indebtedness of such
Person then outstanding to (ii) the aggregate consolidated paid-in capital of
such Person as of such date.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
--------------------------------------------------
the Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of the
Company and its Restricted Subsidiaries for such period, plus (ii) Consolidated
Income Tax Expense of the Company and its Restricted Subsidiaries for such
period, plus (iii) the consolidated depreciation and amortization expense
included in the income statement of the Company and its Restricted
5
<PAGE>
Subsidiaries for such period, plus (iv) any non-cash expense related to the
issuance to employees of the Company or any Restricted Subsidiary of the Company
of options to purchase Capital Stock of the Company or such Restricted
Subsidiary, plus (v) any charge related to any premium or penalty paid in
connection with redeeming or retiring any Indebtedness prior to its stated
maturity; and plus (vi) any non-cash expense related to a purchase accounting
adjustment not requiring an accrual or reserve and separately disclosed in the
Company's Consolidated Income Statement, and decreased by the amount of any non-
cash item that increases such Consolidated Net Income, all as determined on a
consolidated basis in accordance with GAAP; provided that there shall be
excluded therefrom the Consolidated Cash Flow Available for Fixed Charges (if
positive) of any Restricted Subsidiary of the Company (calculated separately for
such Restricted Subsidiary in the same manner as provided above for the Company)
that is subject to a restriction which prevents the payment of dividends or the
making of distributions to the Company or another Restricted Subsidiary of the
Company to the extent of such restriction.
"Consolidated Income Tax Expense" for any period means the aggregate
-------------------------------
amounts of the provisions for income taxes of the Company and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means for any period the interest expense
-----------------------------
included in a consolidated income statement (excluding interest income) of the
Company and its Restricted Subsidiaries for such period in accordance with GAAP,
including without limitation or duplication (or, to the extent not so included,
with the addition of), (i) the amortization of Indebtedness discount; (ii) any
payments or fees with respect to letters of credit, bankers' acceptances or
similar facilities; (iii) fees with respect to interest rate swap or similar
agreements or foreign currency hedge, exchange or similar agreements; (iv)
Preferred Stock dividends of the Company and its Restricted Subsidiaries (other
than dividends paid in shares of Preferred Stock that is not Disqualified Stock)
declared and paid or payable; (v) accrued Disqualified Stock dividends of the
Company and its Restricted Subsidiaries, whether or not declared or paid; (vi)
interest on Indebtedness guaranteed by the Company and its Restricted
Subsidiaries; and (vii) the portion of any Capital Lease Obligation paid during
such period that is allocable to interest expense in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
-----------------------
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without duplication
(i) all items classified as extraordinary, (ii) any net income (or net loss) of
any Person other than such Person and its Restricted Subsidiaries, except to the
extent of the amount of dividends or other distributions actually paid to such
Person or its Restricted Subsidiaries by such other Person during such period,
(iii) the net income of any Person acquired by such Person or any of its
Restricted Subsidiaries in a pooling-of-interests transaction for any period
prior to the date of the related acquisition, (iv)
6
<PAGE>
any gain or loss, net of taxes, realized on the termination of any employee
pension benefit plan, (v) net gains (or net losses) in respect of Asset Sales by
such Person or its Restricted Subsidiaries, (vi) the net income (or net loss) of
any Restricted Subsidiary of such Person to the extent that the payment of
dividends or other distributions to such Person is restricted by the terms of
its charter or any agreement, instrument, contract, judgment, order, decree,
statute, rule, governmental regulation or otherwise, except for any dividends or
distributions actually paid by such Restricted Subsidiary to such Person, (vii)
with regard to a non-wholly owned Restricted Subsidiary, any aggregate net
income (or loss) in excess of such Person's or such Restricted Subsidiary's pro
rata share of such non-wholly owned Restricted Subsidiary's net income (or loss)
and (viii) the cumulative effect of changes in accounting principles.
"Consolidated Net Worth" of any Person means, at any date of determination,
----------------------
the consolidated stockholders' equity or partners' capital (excluding
Disqualified Stock) of such Person and its subsidiaries, as determined in
accordance with GAAP.
"Consolidated Tangible Assets" of any Person means the total amount of
----------------------------
assets (less applicable reserves and other properly deductible items) which
under GAAP would be included on a consolidated balance sheet of such Person and
its Subsidiaries after deducting therefrom all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, which in each case under GAAP would be included on such
consolidated balance sheet.
"Corporate Trust Office" means the principal office of the Trustee in the
----------------------
Borough of Manhattan, The City of New York, New York which at any particular
time its corporate trust business shall be principally administered, which at
the date hereof is located at 114 West 47th Street, New York, New York 10031.
"Covenant Defeasance" has the meaning set forth in Section 8.03 hereof.
-------------------
"Default" means any event, act or condition, the occurrence of which is, or
-------
after notice or the passage of time or both would be, an Event of Default.
"Defaulted Interest" has the meaning set forth in Section 2.13 hereof.
------------------
"Defeasance" has the meaning set forth in Section 8.02 hereof.
----------
"Depositary" means, with respect to the Notes issuable or issued in whole
----------
or in part in the form of one or more Global Notes, The Depository Trust Company
for so long as it shall be a clearing agency registered under the Exchange Act,
or such successor as the Company shall designate from time to time in an
Officers' Certificate delivered to the Trustee.
7
<PAGE>
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
------------------
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the Stated
Maturity of the Notes.
"Eligible Cash Equivalents" means (i) securities issued or directly and
-------------------------
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof, provided that the full faith and credit of the United
--------
States of America is pledged in support thereof; (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States
having capital and surplus in excess of $500,000,000 with a maturity date not
more than one year from the date of acquisition; (iii) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (ii) above; (iv) direct obligations issued by
any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing, or subject to tender
at the option of the holder thereof within 270 calendar days after the date of
acquisition thereof and, at the time of acquisition, having a rating of A or
better from Standard & Poor's or A-2 or better from Moody's; (v) commercial
paper issued by the parent corporation of any commercial bank organized in the
United States having capital and surplus in excess of $500,000,000 and
commercial paper issued by others having one of the two highest ratings
obtainable from either Standard & Poor's or Moody's and in each case maturing
within 270 calendar days after the date of acquisition; (vi) overnight bank
deposits and bankers' acceptances at any commercial bank organized in the United
States having capital and surplus in excess of $500,000,000; (vii) deposits
available for withdrawal on demand with a commercial bank organized in the
United States having capital and surplus in excess of $500,000,000; and (viii)
investments in money market funds substantially all of whose assets comprise
securities of the types described in clauses (i) through (vi).
"Euroclear" means the Euroclear Clearance System (or any successor
---------
securities clearing agency).
"Event of Default" has the meaning set forth in Section 6.01 hereof.
----------------
"Excess Proceeds" has the meaning set forth in Section 4.08(b) hereof.
---------------
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
------------
the rules and regulations promulgated thereunder.
"Exchange Note" means any Note issued in exchange for an Original Note or
-------------
Original Notes pursuant to the Registered Exchange Offer or otherwise registered
under the Securities
8
<PAGE>
Act and any Note with respect to which the next preceding Predecessor Note of
such Note was an Exchange Note.
"Exchange Offer Registration Statement" has the meaning set forth in the
-------------------------------------
form of the Notes contained in Section 2.02.
"Existing Indebtedness" means Indebtedness outstanding on the date of this
---------------------
Indenture (other than under the Senior Credit Facility).
"Fair Market Value" means, with respect to any asset or Property, the sale
-----------------
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy, as determined in good faith by the Board of
Directors.
"GAAP" means United States generally accepted accounting principles,
----
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided herein,
--------
all calculations made for purposes of determining compliance with Article IV or
Section 5.01 hereof shall utilize GAAP as in effect on the Issue Date.
"Global Note" means the Note or Notes that evidences all or part of the
-----------
Notes and bears the legend set forth in Section 2.02.
"Guarantee" means any direct or indirect obligation, contingent or
---------
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner. The terms
"Guaranteed," "Guaranteeing" and "Guarantor" shall have correlative meanings.
"Holder" means (i) in the case of any Certificated Note, the Person in
------
whose name such Certificated Note is registered in the Note Register and (ii) in
the case of any Global Note, the Depositary.
"Incur" means, with respect to any Indebtedness or other obligation of any
-----
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Indebtedness or other
obligation including by acquisition of Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and "Incurrence," "Incurred,"
"Incurrable" and "Incurring" shall have meanings correlative to the foregoing);
provided that a change in GAAP that results in an obligation of such Person that
exists at
9
<PAGE>
such time becoming Indebtedness shall not be deemed an Incurrence of such
Indebtedness and that neither the accrual of interest nor the accretion of
original issue discount shall be deemed an Incurrence of Indebtedness.
Indebtedness otherwise incurred by a Person before it becomes a Subsidiary of
the Company (whether by merger, consolidation, acquisition or otherwise) shall
be deemed to have been incurred at the time at which such Person becomes a
Subsidiary of the Company.
"Indebtedness" means, at any time (without duplication), with respect to
------------
any Person, whether recourse is to all or a portion of the assets of such
Person, and whether or not contingent, (i) any obligation of such Person for
money borrowed, (ii) any obligation of such Person evidenced by bonds,
debentures, notes, Guarantees or other similar instruments, including, without
limitation, any such obligations incurred in connection with the acquisition of
Property, assets or businesses, excluding trade accounts payable made in the
ordinary course of business, (iii) any reimbursement obligation of such Person
with respect to letters of credit, bankers' acceptances or similar facilities
issued for the account of such Person, (iv) any obligation of such Person issued
or assumed as the deferred purchase price of Property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith), (v) any Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Disqualified Stock of
such Person and, to the extent held by Persons other than such Person or its
Restricted Subsidiaries, the maximum fixed redemption or repurchase price of
Disqualified Stock of such Person's Restricted Subsidiaries, at the time of
determination, (vii) every obligation under Interest Rate and Currency
Protection Agreements of such Person, (viii) any Attributable Indebtedness with
respect to any Sale and Leaseback Transaction to which such Person is a party
and (ix) any obligation of the type referred to in clauses (i) through (viii) of
this definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has Guaranteed or is
responsible or liable, directly or indirectly, as obligor, Guarantor or
otherwise. For purposes of the preceding sentence, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to this Indenture; provided that, if
such Disqualified Stock is not then permitted to be repurchased, the repurchase
price shall be the book value of such Disqualified Stock. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation; provided that the amount outstanding
at any time of any Indebtedness issued with original issue discount (including,
without limitation, the Notes) is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP.
10
<PAGE>
"Indenture" means this instrument as originally executed or as it may from
---------
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including, for
all purposes of this instrument and any such supplemental indenture, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this instrument, and any such supplemental indenture, respectively.
"Interest Payment Date" means the Stated Maturity of an installment of
---------------------
interest on the Notes.
"Interest Rate or Currency Protection Agreement" of any Person means any
----------------------------------------------
forward contract, futures contract, swap, option, future option or other
financial agreement or arrangement (including, without limitation, caps, floors,
collars and similar agreements) relating to, or the value of which is dependent
upon, interest rates or currency exchange rates or indices.
"Investment" in any Person means any direct, indirect or contingent (i)
----------
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude commercially reasonable
--------
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, plus the cost of all additions thereto and minus the
---- -----
amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups, write-
downs or write-offs with respect to such Investment. In determining the amount
of any Investment involving a transfer of any Property other than cash, such
Property or asset shall be valued at its Fair Market Value at the time of such
transfer.
"Issue Date" means the date on which the Notes are first authenticated and
----------
delivered under this Indenture.
"Lien" means, with respect to any Property or other asset, any mortgage or
----
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), charge, easement, encumbrance, preference,
priority or other security or similar agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property or other asset
(including, without limitation, any conditional sale or title retention
agreement having substantially the same economic effect as any of the
foregoing).
"Maturity" means, when used with respect to a Note, the date on which the
--------
principal of such Note becomes due and payable as provided therein or in this
Indenture, whether on
11
<PAGE>
the date specified in such Note as the fixed date on which the principal of such
Note is due and payable, on the Change of Control Payment Date or Asset Sale
Payment Date, or by declaration of acceleration, call for redemption or
otherwise.
"Moody's" means Moody's Investors Service, Inc., or, if Moody's Investors
-------
Service, Inc. shall cease rating the specified debt securities and such ratings
business with respect thereto shall have been transferred to a successor Person,
such successor Person; provided that if Moody's Investors Service, Inc. ceases
rating the specified debt securities and its ratings business with respect
thereto shall not have been transferred to any successor Person or such
successor Person is Standard & Poor's, then "Moody's" shall mean any other
nationally recognized rating agency (other than Standard & Poor's) that rates
the specified debt securities and that shall have been designated by the Company
in an Officers' Certificate.
"NASD" means the National Association of Securities Dealers, Inc.
----
"Net Cash Proceeds" means, with respect to the sale of any Property or
-----------------
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or such
Restricted Subsidiary incurred in connection with such sale, including, without
limitation, all legal, title and recording tax expenses, commissions and other
fees and expenses incurred (but excluding any finder's fee or broker's fee
payable to any Affiliate of such Person) and all federal, state, foreign and
local taxes arising in connection with such sale that are paid or required to be
accrued as a liability under GAAP by such Person or its Restricted Subsidiaries;
(ii) all payments made or required to be made by such Person or its Restricted
Subsidiaries on any Indebtedness which is secured by such Properties or other
assets in accordance with the terms of any Lien upon or with respect to such
Properties or other assets or which must, by the terms of such Lien, or in order
to obtain a necessary consent to such transaction or by applicable law, be
repaid in connection with such sale; (iii) all contractually required
distributions and other payments made to minority interest holders (but
excluding distributions and payments to Affiliates of such Person) in Restricted
Subsidiaries of such Person as a result of such transaction; and (iv)
appropriate amounts to be provided by such Person or any Restricted Subsidiary
thereof, as the case may be, as a reserve in accordance with GAAP against any
liabilities associated with such assets and retained by such Person or any
Restricted Subsidiary thereof, as the case may be, after such transaction,
including, without limitation, liabilities under any indemnification obligations
and severance and other employee termination costs associated with such
transaction, in each case as determined by the Board of Directors of such
Person, in its reasonable good faith judgment evidenced by a resolution of the
Board of Directors filed with the Trustee; provided that, in the event that any
--------
consideration for a transaction (which would otherwise constitute Net Cash
Proceeds) is required to be held in escrow pending determination of whether a
purchase price adjustment will be made, such consideration (or any portion
thereof) shall become Net Cash Proceeds only at such time as it is released to
such Person or its Restricted Subsidiaries from escrow; and provided, further,
-------- -------
12
<PAGE>
that any non-cash consideration received in connection with any transaction,
which is subsequently converted to cash, shall be deemed to be Net Cash Proceeds
at such time, and shall thereafter be applied in accordance with the applicable
provisions of this Indenture.
"Note Register" and "Note Registrar" have the respective meanings specified
------------- --------------
in Section 2.06.
"Notes" has the meaning set forth in the Recitals of the Company and more
-----
particularly means any of the Notes authenticated and delivered under this
Indenture, including the Original Notes and the Registered Notes, as the context
may require.
"Officer" means the Chairman of the Board of Directors, a Vice Chairman of
-------
the Board of Directors, the President, a Vice President, the Chief Financial
Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary.
"Officers' Certificate" means a certificate signed by (i) the Chairman of
---------------------
the Board of Directors, a Vice Chairman of the Board of Directors, the
President, the Chief Executive Officer or a Vice President, and (ii) the Chief
Financial Officer, the Chief Accounting Officer, the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary, and delivered to the
Trustee, which certificate shall comply with the provisions of Section 10.04
hereof; provided that any Officers' Certificate delivered pursuant to the first
paragraph of Section 4.19 hereof shall be signed by the Chief Executive Officer,
the Chief Financial Officer or the Chief Accounting Officer.
"Opinion of Counsel" means a written opinion from legal counsel (who may be
------------------
counsel to the Company or the Trustee) who is acceptable to the Trustee, which
opinion shall comply with the provisions of Section 10.04 hereof.
"Original Notes" means all Notes other than Exchange Notes.
--------------
"Other Notes" means the Notes sold by the Purchasers in the initial
-----------
offering contemplated by the Purchase Agreement in reliance on an exemption from
the registration requirements of the Securities Act other than Rule 144A and
Regulation S.
"Paying Agent" means any Person authorized by the Company to make payments
------------
of principal, premium or interest with respect to the Notes on behalf of the
Company.
"Permitted Holders" means IES Industries Inc. and MidAmerican Energy
-----------------
Holdings Company and their respective successors and assigns, and Clark E. and
Mary E. McLeod and foundations and trusts controlled by them or either of them,
and Affiliates (other than the Company and the Restricted Subsidiaries) of each
of the foregoing.
13
<PAGE>
"Permitted Interest Rate or Currency Protection Agreement" of any Person
--------------------------------------------------------
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Indebtedness Incurred and which shall
have a notional amount no greater than the payments due with respect to the
Indebtedness being hedged thereby and not for purposes of speculation.
"Permitted Investments" means:
---------------------
(i) Eligible Cash Equivalents;
(ii) Investments in Property used in the ordinary course of
business;
(iii) Investments in any Person as a result of which such Person
becomes a Restricted Subsidiary in compliance with Section 4.17 hereof;
(iv) Investments pursuant to agreements or obligations of the
Company or a Restricted Subsidiary, in effect on the Issue Date, to make
such Investments;
(v) Investments in prepaid expenses, negotiable instruments held
for collection and lease, utility and workers' compensation, performance
and other similar deposits;
(vi) Permitted Interest Rate or Currency Protection Agreements with
respect to any floating rate Indebtedness that is permitted under Section
4.09 or Section 4.10 hereof to be outstanding;
(vii) bonds, notes, debentures or other debt securities received as a
result of Asset Sales permitted under Section 4.08 hereof;
(viii) Investments in existence at the Issue Date;
(ix) commission, payroll, travel and similar advances to employees
in the ordinary course of business to cover matters that are expected at
the time of such advances ultimately to be treated as expenses in
accordance with GAAP; and
(x) stock, obligations or securities received in satisfaction of
judgments.
"Permitted Joint Ventures" means Investments in an aggregate amount not to
------------------------
exceed $25 million at any time outstanding in Persons who are not Subsidiaries
engaged in the Telecommunications Business.
14
<PAGE>
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
---------------
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor; (ii) other Liens incidental to the conduct of the Company's and
its Restricted Subsidiaries' business or the ownership of its property and
assets not securing any Indebtedness, and which do not in the aggregate
materially detract from the value of the Company's and its Restricted
Subsidiaries' property or assets when taken as a whole, or materially impair the
use thereof in the operation of its business; (iii) Liens with respect to assets
of a Restricted Subsidiary granted by such Restricted Subsidiary to the Company
to secure Indebtedness owing to the Company; (iv) pledges and deposits made in
the ordinary course of business in connection with workers' compensation and
unemployment insurance, statutory Liens of landlords, carriers, warehousemen,
mechanics, materialmen, repairmen and other types of statutory obligations; (v)
deposits made to secure the performance of tenders, bids, leases, and other
obligations of like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (vi) zoning
restrictions, servitudes, easements, rights-of-way, restrictions and other
similar charges or encumbrances incurred in the ordinary course of business
which, in the aggregate, do not materially detract from the value of the
property subject thereto or interfere with the ordinary conduct of the business
of the Company or its Restricted Subsidiaries; (vii) Liens arising out of
judgments or awards against the Company or any Restricted Subsidiary with
respect to which the Company or such Restricted Subsidiary is prosecuting an
appeal or proceeding for review and the Company or such Restricted Subsidiary is
maintaining adequate reserves in accordance with GAAP; (viii) any interest or
title of a lessor in the property subject to any lease other than a Capital
Lease; (ix) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Issue Date; provided that (a) such Lien is
created solely for the purpose of securing Indebtedness Incurred, in accordance
with Section 4.09 hereof, (1) to finance the cost (including the cost of
improvement or construction) of the item of property or assets subject thereto
and such Lien is created prior to, at the time of or within six months after the
later of the acquisition, the completion of construction or the commencement of
full operation of such property or (2) to refinance any Indebtedness previously
so secured, (b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost and (c) any such Lien shall not extend to or
cover any property or assets other than such item of property or assets and any
improvements on such item; (x) leases or subleases granted to others that do not
materially interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries; (xi) Liens encumbering property or assets under
construction arising from progress or partial payments by a customer of the
Company or its Restricted Subsidiaries relating to such property or assets;
(xii) Liens arising from filing precautionary Uniform Commercial Code financing
statements regarding leases; (xiii) Liens on property of, or on shares of stock
or Indebtedness of, any corporation existing at the time such corporation
becomes, or becomes a part of, any Restricted Subsidiary; provided that such
Liens do not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets acquired; (xiv) Liens in
favor of the Company or
15
<PAGE>
any Restricted Subsidiary; (xv) Liens securing reimbursement obligations with
respect to letters of credit that encumber documents and other property relating
to such letters of credit and the products and proceeds thereof; (xvi) Liens in
favor of customs and revenue authorities arising as a matter of law to secure
payment of customs duties in connection with the importation of goods; (xvii)
Liens encumbering customary initial deposits and margin deposits, and other
Liens that are either within the general parameters customary in the industry
and incurred in the ordinary course of business, in each case, securing
Indebtedness under Permitted Interest Rate Agreements and Currency Agreements;
and (xviii) Liens arising out of conditional sale, title retention, consignment
or similar arrangements for the sale of goods entered into by the Company or any
of its Restricted Subsidiaries in the ordinary course of business in accordance
with the past practices of the Company and its Restricted Subsidiaries prior to
the Issue Date.
"Person" means any individual, corporation, limited liability company,
------
partnership, limited liability partnership, joint venture, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Predecessor Note" of any particular Note means every previous Note
----------------
evidencing all or a portion of the same Indebtedness as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 2.09 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Note shall be deemed to evidence the same
debt as the mutilated, destroyed, lost or stolen Note.
"Preferred Stock" of any Person means Capital Stock of such Person of any
---------------
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"pro forma" means, with respect to any calculation made or required to be
---------
made pursuant to the terms hereof, a calculation in accordance with Article 11
of Regulation S-X promulgated under the Securities Act (to the extent
applicable), as interpreted in good faith by the Board of Directors, or
otherwise, a calculation made in good faith by the Board of Directors, as the
case may be.
"Property" means, with respect to any Person, any interest of such Person
--------
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, excluding Capital Stock in any other Person.
"Purchase Agreement" means the Purchase Agreement, dated as of February 26,
------------------
1997, between the Company and the Purchasers, as such agreement may be amended
from time to time.
16
<PAGE>
"Purchase Money Indebtedness" means Indebtedness of the Company (including
---------------------------
Acquired Indebtedness and Capital Lease Obligations, mortgage financings and
purchase money obligations) incurred for the purpose of financing all or any
part of the cost of construction, acquisition, development or improvement by the
Company or any Restricted Subsidiary of any telecommunications Assets of the
Company or any Restricted Subsidiary and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Purchasers" means Salomon Brothers Inc and Morgan Stanley & Co.,
----------
Incorporated.
"Qualified Receivable Facility" means Indebtedness of the Company or any
-----------------------------
Subsidiary Incurred from time to time pursuant to either (x) credit facilities
secured by Receivables or (y) receivable purchase facilities, and including any
related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified or restated from time to time.
"Qualified Receivable Subsidiary" means a Restricted Subsidiary formed
-------------------------------
solely for the purpose of obtaining a Qualified Receivable Facility and
substantially all of the Property of which is Receivables.
"Qualified Stock" of any Person means a class of Capital Stock other than
---------------
Disqualified Stock.
"Receivables" means receivables, chattel paper, instruments, documents or
-----------
intangibles evidencing or relating to the right to payment of money and proceeds
and products thereof in each case generated in the ordinary course of business.
"Redemption Date" means, when used with respect to any Note or part thereof
---------------
to be redeemed hereunder, the date fixed for redemption of such Notes pursuant
to the terms of the Notes and this Indenture.
"Redemption Price" means, when used with respect to any Note or part
----------------
thereof to be redeemed hereunder, the price fixed for redemption of such Note
pursuant to the terms of the Notes and this Indenture, plus accrued and unpaid
interest thereon, if any, to the Redemption Date.
"Registered Exchange Offer" has the meaning set forth in the form of the
-------------------------
Notes contained in Section 2.02 hereof.
"Registered Notes" means the Exchange Notes and all other Notes sold or
----------------
otherwise disposed of pursuant to an effective registration statement under the
Securities Act, together with their respective Successor Notes.
17
<PAGE>
"Regular Record Date" means, for the interest payable on any Interest
-------------------
Payment Date, the date specified in Section 2.13 hereof.
"Regulation S" means Regulation S under the Securities Act (or any
------------
successor provision), as it may be amended from time to time.
"Regulation S Certificate" means a certificate substantially in the form
------------------------
set forth in Annex A hereof.
"Regulation S Global Note" has the meaning specified in Section 2.01
------------------------
hereof.
"Regulation S Legend" means a legend substantially in the form of the
-------------------
legend required in the form of Note set forth in Section 2.02 hereof to be
placed upon each Regulation S Note.
"Regulation S Notes" means all Notes required pursuant to Section 2.08(c)
------------------
hereof to bear a Regulation S Legend. Such term includes the Regulation S
Global Note.
"Restricted Global Note" has the meaning specified in Section 2.01 hereof.
----------------------
"Restricted Notes" means all Notes required pursuant to Section 2.08(c)
----------------
hereof to bear any Restricted Notes Legend. Such term includes the Restricted
Global Note.
"Restricted Notes Certificate" means a certificate substantially in the
----------------------------
form set forth in Annex B hereof.
"Restricted Notes Legend" means, collectively, the legends substantially in
-----------------------
the forms of the legends required in the form of Note set forth in Section 2.02
hereof to be placed upon each Restricted Note.
"Restricted Payment" means (i) a dividend or other distribution declared or
------------------
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary of the Company on the Capital Stock of any
Restricted Subsidiary, in each case, other than dividends, distributions or
payments made solely in Qualified Stock of the Company or such Restricted
Subsidiary, (ii) a payment made by the Company or any of its Restricted
Subsidiaries (other than to the Company or any Restricted Subsidiary) to
purchase, redeem, acquire or retire any Capital Stock of the Company or of a
Restricted Subsidiary, (iii) a payment made by the Company or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock of
the Company) to redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including pursuant to
mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of the Company or
such Restricted
18
<PAGE>
Subsidiary which is subordinate (whether pursuant to its terms or by operation
of law) in right of payment to the Notes and which was scheduled to mature on or
after the maturity of the Notes or (iv) an Investment in any Person, including
an Unrestricted Subsidiary or the designation of a Subsidiary as an Unrestricted
Subsidiary, other than (a) a Permitted Investment or a Permitted Joint Venture,
(b) an Investment by the Company in a Wholly-Owned Restricted Subsidiary of the
Company or (c) an Investment by a Restricted Subsidiary in the Company or a
Wholly-Owned Restricted Subsidiary of the Company.
"Restricted Period" means the period of 41 consecutive days beginning on
-----------------
and including the later of (i) the day on which Notes are first offered to
persons other than distributors (as defined in Regulation S) in reliance on
Regulation S and (ii) the original issuance date of the Notes.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
---------------------
been designated as an Unrestricted Subsidiary pursuant to Section 4.17 hereof.
"Rule 144" means Rule 144 under the Securities Act (or any successor
--------
provision), as it may be amended from time to time.
"Rule 144A" means Rule 144A under the Securities Act (including any
---------
successor regulation thereto), as it may be amended from time to time.
"Rule 144A Notes" means the Notes purchased by the Purchasers from the
---------------
Company pursuant to the Purchase Agreement, other than the Other Notes and the
Regulation S Notes.
"Sale and Leaseback Transaction" means, with respect to any Person, any
------------------------------
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Securities Act Legend" means a Restricted Note Legend or a Regulation S
---------------------
Legend.
"Senior Credit Facility" means Indebtedness of the Company and its
----------------------
Subsidiaries Incurred from time to time pursuant to one or more credit
agreements or similar facilities made available from time to time to the Company
and its Subsidiaries, whether or not secured, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
19
<PAGE>
"Shelf Registration Statement" has the meaning set forth in the form of the
----------------------------
Notes contained in Section 2.02 hereof.
"Special Interest" has the meaning set forth in the form of Note contained
----------------
in Section 2.02 hereof. Unless the context otherwise requires, references
herein to "interest" on the Notes shall include Special Interest.
"Special Record Date" means a date fixed by the Trustee pursuant to Section
-------------------
2.13 hereof for the payment of Defaulted Interest.
"Standard & Poor's" means Standard & Poor's Ratings Group, a division of
-----------------
McGraw Hill Corporation, or, if Standard & Poor's Ratings Group shall cease
rating the specified debt securities and such ratings business with respect
thereto shall have been transferred to a successor Person, such successor
Person; provided that if Standard & Poor's Ratings Group ceases rating the
specified debt securities and its ratings business with respect thereto shall
not have been transferred to any successor Person or such successor Person is
Moody's, then "Standard & Poor's" shall mean any other nationally recognized
rating agency (other than Moody's) that rates the specified debt securities and
that shall have been designated by the Company in an Officers' Certificate.
"Stated Maturity" means, with respect to any security, the date specified
---------------
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred), and, when used with respect
to any installment of interest on such security, the fixed date on which such
installment of interest is due and payable.
"Step-Up" has the meaning set forth in the form of the Note contained in
-------
Section 2.02 hereof.
"Strategic Equity Investment" means an equity investment made by a
---------------------------
Strategic Investor in the Company in an aggregate amount of not less than $25
million.
"Strategic Investor" means a Person (other than the Permitted Holders)
------------------
engaged in one or more Telecommunications Businesses that has, or 80% or more of
the Voting Stock of which is owned by a Person that has, an equity market
capitalization at the time of its initial Investment in the Company in excess of
$2.0 billion.
"Subordinated Indebtedness" means Indebtedness of the Company as to which
-------------------------
the payment of principal of (and premium, if any) and interest and other payment
obligations in respect of such Indebtedness shall be subordinate to the prior
payment in full of the Notes to at least the following extent: (i) no payments
of principal of (or premium, if any) or interest
20
<PAGE>
on or otherwise due in respect of such Indebtedness may be permitted for so long
as any default in the payment or principal (or premium, if any) or interest on
the Notes exists; (ii) in the event that any other default that with the passing
of time or the giving of notice, or both, would constitute an event of default
exists with respect to the Notes, upon notice by 25% or more in principal amount
of the Notes to a Trust Officer, the Trustee shall give notice to the Company
and the holders of such Indebtedness (or trustees or agents therefor) of a
payment blockage, and thereafter no payments of principal of (or premium, if
any) or interest on or otherwise due in respect of such Indebtedness may be made
for a period of 179 days from the date of such notice; and (iii) such
Indebtedness may not (x) provide for payments of principal of such Indebtedness
at the stated maturity thereof or by way of a sinking fund applicable thereto or
by way of any mandatory redemption, defeasance, retirement or repurchase thereof
by the Company (including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement required
by virtue of acceleration of such Indebtedness upon an event of default
thereunder), in each case prior to the final Stated Maturity of the Notes or (y)
permit redemption or other retirement (including pursuant to an offer to
purchase made by the Company) of such other Indebtedness at the option of the
holder thereof prior to the final Stated Maturity of the Notes, other than a
redemption or other retirement at the option of the holder of such Indebtedness
(including pursuant to an offer to purchase made by the Company) which is
conditioned upon a change of control of the Company pursuant to provisions
substantially similar to those contained in Section 4.07 hereof (and which shall
provide that such Indebtedness will not be repurchased pursuant to such
provisions prior to the Company's repurchase of the Notes required to be
repurchased by the Company pursuant to Section 4.07 hereof).
"Subsidiary" means, with respect to any Person, (i) any corporation more
----------
than 50 percent of the outstanding shares of Voting Stock of which is owned,
directly or indirectly, by such Person, or by one of more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries of such
Person, (ii) any general partnership, joint venture or similar entity, more than
50 percent of the outstanding partnership or similar interests of which are
owned, directly or indirectly, by such Person, or by one or more other
Subsidiaries of such Person, or by such Person and one or more other
Subsidiaries of such Person and (iii) any limited partnership of which such
Person or any Subsidiary of such Person is a general partner.
"Successor Note" of any particular Note means every Note issued after, and
--------------
evidencing all or a portion of the same Indebtedness as that evidenced by, such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 2.09 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Note shall be deemed to evidence the same
debt as the mutilated, destroyed, lost or stolen Note.
"Surviving Entity" has the meaning set forth in Section 5.01(a) hereof.
----------------
21
<PAGE>
"Telecommunications Assets" means all assets, rights (contractual or
-------------------------
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
---------------------------
providing services relating to the transmission of, voice, video or data through
owned or leased wireline or wireless transmission facilities, (ii) creating,
developing, constructing, installing, repairing, maintaining or marketing
communications-related systems, network equipment and facilities, software and
other products, (iii) creating, developing, producing or marketing audiotext or
videotext, (iv) publishing or distributing telephone (including Internet)
directories, whether in paper, electronic, audio or video format, (v) marketing
(including direct marketing and telemarketing), or (vi) evaluating,
participating in or pursuing any other business that is primarily related to
those identified in the foregoing clauses (i), (ii), (iii), (iv) or (v) above
(in the case of clauses (iii), (iv) and (v), however, in a manner consistent
with the Company's manner of business on the Issue Date), and shall, in any
event, include all businesses in which the Company or any of its Subsidiaries
are engaged on the Issue Date; provided that the determination of what
constitutes a Telecommunications Business shall be made in good faith by the
Board of Directors.
"Temporary Notes" has the meaning set forth in Section 2.11 hereof.
---------------
"Trading Day" means, with respect to a security traded on a securities
-----------
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
-------------------
(S)(S)77aaa-77bbbb) as in effect on the date of this Indenture except as
required by Section 9.04 hereof; provided that in the event the Trust Indenture
Act of 1939 is amended after such date, "Trust Indenture Act" means, to the
extent required by any such amendment, the Trust Indenture Act of 1939, as so
amended.
"Trust Officer" means any officer assigned to the Corporate Trust Division
-------------
(or any successor thereto), including any Vice President, Assistant Vice
President, Trust Officer, any Assistant Secretary, any trust officer or any
other officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and having direct
responsibility for the administration of this Agreement.
"Trustee" means the party named as such in this Indenture until a successor
-------
replaces it in accordance with the provisions of this Indenture and, thereafter,
means such successor.
"Unrestricted Notes Certificate" means a certificate substantially in the
------------------------------
form set forth in Annex C hereof.
22
<PAGE>
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
-----------------------
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to Section 4.17 hereof.
"U.S. Government Obligations" means (x) securities that are (i) direct
---------------------------
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such Bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest of the U.S. Government Obligation evidenced by such
depository receipt.
"Voting Stock" means, with respect to any Person, securities of any class
------------
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such Person.
"Wholly-Owned Restricted Subsidiary" of any Person means a Subsidiary of
----------------------------------
such Person all of the outstanding Capital Stock or other ownership interests
(other than director's qualifying shares) of which shall at the time be owned by
such Person or by one or more other Wholly-Owned Restricted Subsidiary of such
Person or by such Person and one or more other Wholly-Owned Restricted
Subsidiary of such Person.
SECTION 1.02. Incorporation by Reference of Trust Indenture Act.
-------------------------------------------------
Whenever this Indenture refers to a provision of the Trust Indenture Act,
the provision is incorporated by reference in and made a part of this Indenture.
The following Trust Indenture Act terms incorporated by reference in this
Indenture have the following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a Holder.
23
<PAGE>
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company or other obligor on
the Notes, if any.
All other Trust Indenture Act terms used or incorporated by reference in
this Indenture that are defined by the Trust Indenture Act, defined by Trust
Indenture Act reference to another statute or defined by Commission rule have
the meanings assigned to them therein.
SECTION 1.03. Rules of Construction. Unless the context otherwise
---------------------
requires:
(a) the words "herein," "hereof" and "hereunder," and other words of
similar import, refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;
(b) "or" is not exclusive;
(c) "including" means including without limitation;
(d) the principal amount of any noninterest bearing or other discount
security (other than the Notes), at any date shall be the principal amount
thereof that would be shown on a balance sheet of the issuer dated such
date prepared in accordance with GAAP;
(e) when used with respect to the Notes, the term "principal amount"
shall mean the principal amount thereof at the Stated Maturity of such
principal amount; and
(f) unless otherwise expressly provided herein, the principal amount
of any Preferred Stock shall be the greater of (i) the maximum liquidation
value of such Preferred Stock or (ii) the maximum mandatory redemption or
mandatory repurchase price with respect to such Preferred Stock.
SECTION 1.04. Form of Documents Delivered to Trustee. In any case where
--------------------------------------
several matters are required to be certified by, or covered by an opinion of,
any specified Person, it is not necessary that all such matters be certified by,
or covered by the opinion of, only one such Person, or that they be so certified
or covered by only one document, but one such Person may certify or give an
opinion with respect to some matters and one or more other such Persons as to
other matters, and any such Person may certify or give an opinion as to such
matters in one or several documents.
24
<PAGE>
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous. Where any Person is required to make, give or execute
two or more applications, requests, consents, certificates, statements, opinions
or other instruments under this Indenture, they may, but need not, be
consolidated and form one instrument.
SECTION 1.05. Acts of Holders. (a) Any request, demand, authorization,
---------------
direction, notice, consent, waiver or other action provided by this Indenture to
be given or taken by Holders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Holders in person or
by an agent duly appointed in writing; and, except as herein otherwise expressly
provided, such action shall become effective when such instrument or instruments
are delivered to the Trustee and, where it is hereby expressly required, to the
Company. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Indenture and (subject to Section 7.01) conclusive in favor of
the Trustee and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by an acknowledgment of a notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than such signer's
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of the signer's authority. The fact and date of the execution
of any such instrument or writing, or the authority of the person executing the
same, may also be proved in any other manner which the Trustee deems sufficient.
SECTION 1.06. Satisfaction and Discharge. This Indenture shall cease to
--------------------------
be of further effect (except as to the rights of Holders under Sections 2.09,
2.11, 4.02, 4.03 and 4.04 hereof) and the Trustee, on receipt of a Company Order
requesting such action, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when (a) either (i) all
outstanding Notes have been delivered to the Trustee for cancellation or (ii)
all such Notes not theretofore delivered to the Trustee for cancellation (A)
have become due
25
<PAGE>
and payable, (B) will become due and payable at their Stated Maturity within one
year or (C) are to be called for redemption within one year under irrevocable
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name, and at the expense, of the Company, and the Company,
in the case of (A), (B) or (C) above, has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust for the purpose an amount
sufficient to pay and discharge the entire indebtedness on such Notes, for
principal (and premium, if any) and interest to the date of such deposit (in the
case of Notes which have become due and payable) or to the Stated Maturity or
Redemption Date, as the case may be, together with irrevocable instructions from
the Company in form and substance satisfactory to the Trustee directing the
Trustee to apply such funds to the payment thereof; (b) the Company has paid or
caused to be paid all other sums payable hereunder by the Company; and (c) the
Company has delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that all conditions precedent herein provided for relating
to the satisfaction and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture pursuant to
this Section 1.06, the obligations of the Company to the Trustee under Section
7.07 hereof, and, if money shall have been deposited with the Trustee in trust
for the Holders pursuant to this Section 1.06, the obligations of the Trustee
under this Section 1.06 and Section 4.03 hereof shall survive.
All money deposited with the Trustee pursuant to this Section 1.06 shall be
held in trust and applied by it, in accordance with the provisions of the Notes
and this Indenture, to the payment, either directly or through any Paying Agent,
to the Persons entitled thereto, of the principal (and premium, if any) and
interest for the payment of which such money has been deposited with the
Trustee. If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with this Section 1.06 by reason of any
legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Company's obligations under this Indenture and the Notes shall
be revived and reinstated as though no deposit had occurred pursuant to this
Section 1.06 until such time as the Trustee or Paying Agent is permitted to
apply all such money or U.S. Government Obligations in accordance with this
Section 1.06; provided that, if the Company has made any payment of interest on
or principal of any Notes because of the reinstatement of its obligations, the
Company shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the cash or U.S. Government Obligations held by the
Trustee or Paying Agent.
ARTICLE II.
THE NOTES
SECTION 2.01. Form and Dating. (a) The Notes and the certificate of
---------------
authentication of the Trustee thereon shall be substantially in the form
contained in this Article II, with such appropriate insertions, substitutions
and other variations as are required
26
<PAGE>
or permitted under this Indenture. Upon issuance, any such Note shall be duly
executed by the Company and authenticated by the Trustee as hereinafter
provided.
(b) The Notes may have such letters, numbers or other marks of
identification and such legends and endorsements, stamped, printed, lithographed
or engraved thereon, (i) as the Company may deem appropriate and as are not
inconsistent with the provisions of this Indenture, (ii) as may be required to
comply with this Indenture, any law or any rule of any securities exchange on
which the Notes may be listed and (iii) as may be necessary to conform to
customary usage. Each Note shall be dated the date of its authentication by the
Trustee.
(c) Upon their original issuance, Rule 144A Notes shall be issued in the
form of one or more Global Notes registered in the name of the Depositary or its
nominee and deposited with the Trustee, as custodian for the Depositary, for
credit by the Depositary to the respective accounts of beneficial owners of the
Notes represented thereby (or such other accounts as they may direct). Such
Global Notes, together with their Successor Notes which are Global Notes other
than the Regulation S Global Note, are collectively herein called the
"Restricted Global Note". Upon their original issuance, Regulation S Notes
shall be issued in the form of one or more Global Notes registered in the name
of the Depositary, or its nominee and deposited with the Trustee, as custodian
for the Depositary, for credit to the respective accounts of the beneficial
owners of the Notes represented thereby (or such other accounts as they may
direct), provided that upon such deposit all such Notes shall be credited to or
through accounts maintained at the Depositary by or on behalf of Euroclear or
Cedel. Such Global Notes, together with their Successor Notes which are Global
Notes other than the Restricted Global Note, are collectively herein called the
"Regulation S Global Note".
Upon their original issuance, Other Notes shall not be issued in the form
of a Global Note or in any other form intended to facilitate book-entry trading
in beneficial interests in such Notes.
SECTION 2.02. Form of Face of Note.
--------------------
[If a Global Note, then insert -- THIS NOTE IS A GLOBAL NOTE WITHIN THE
MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME
OF A DEPOSITARY OR A NOMINEE THEREOF. THIS NOTE MAY NOT BE EXCHANGEABLE IN
WHOLE OR IN PART FOR A NOTE REGISTERED, AND NO TRANSFER OF THIS NOTE IN WHOLE OR
IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY
OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE.]
[If a Global Note to be held by The Depository Trust Company, then insert--
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
27
<PAGE>
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT,
AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
[If Restricted Notes, then insert -- THIS NOTE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER
HEREOF, BY PURCHASING THIS NOTE, AGREES FOR THE BENEFIT OF THE COMPANY AND THE
INITIAL PURCHASERS OF THIS NOTE THAT THIS NOTE MAY NOT BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED (X) PRIOR TO THE THIRD ANNIVERSARY OF THE ISSUANCE HEREOF
(OR A PREDECESSOR NOTE HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE
COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER,
IN EITHER CASE OTHER THAN (1) TO THE COMPANY, (2) SO LONG AS THIS NOTE IS
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE
OF TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX
CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS
NOTE), AND, IF SUCH TRANSFER IS BEING EFFECTED BY CERTAIN TRANSFERORS SPECIFIED
IN THE INDENTURE (AS DEFINED BELOW) PRIOR TO THE EXPIRATION OF THE "40-DAY
RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(C)(3) OF REGULATION S UNDER
THE SECURITIES ACT), A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY OR THE
TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (4) TO AN
INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2),
(3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE
TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS NOTE) THAT IS
ACQUIRING THIS NOTE FOR INVESTMENT PURPOSES
28
<PAGE>
AND NOT FOR DISTRIBUTION, AND A CERTIFICATE IN THE FORM ATTACHED TO THIS NOTE IS
DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE (PROVIDED THAT
CERTAIN HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS NOTE PURSUANT
TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "40-DAY RESTRICTED PERIOD"
(WITHIN THE MEANING OF RULE 903(C)(3) OF REGULATION S UNDER THE SECURITIES
ACT)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6) PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS NOTE AGREES IT WILL
FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION
AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS NOTE
COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS
NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS (1) A
"QUALIFIED INSTITUTIONAL BUYER" WITHIN THE MEANING OF RULE 144A OR (2) AN
INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2),
(3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS NOTE FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE
THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE
REQUIREMENTS OF PARAGRAPH (O)(2) OF RULE 902 UNDER) REGULATION S UNDER THE
SECURITIES ACT.]
THIS NOTE WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT. FOR PURPOSES OF
SECTIONS 1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986,
AS AMENDED, THE ISSUE PRICE OF THIS NOTE IS ____% OF ITS PRINCIPAL AMOUNT, THE
AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $_____ PER $1,000 OF STATED FACE AMOUNT,
THE ISSUE DATE IS __________, 1997 AND THE YIELD TO MATURITY IS _____%.
_____% SENIOR DISCOUNT NOTES DUE _________, 2007
[IF RESTRICTED GLOBAL NOTE - CUSIP NO. ________]
[IF ANY REGULATION S NOTE - CUSIP NO. _________]
[IF REGULATION S GLOBAL NOTE - ISIN NO. __________]
[IF OTHER NOTE - CUSIP NO. ___________]
No. _______________ $__________________
29
<PAGE>
McLeod, Inc., a corporation duly organized and existing under the laws of
Delaware (herein called the "Company", which term includes any successor Person
under the Indenture hereinafter referred to), for value received, hereby
promises to pay to _____________, or registered assigns, the principal sum of
________________ Dollars [if this Note is a Global Note, then insert: (which
principal amount may from time to time be increased or decreased to such other
principal amounts (which, taken together with the principal amounts of all other
outstanding Notes, shall not exceed $__________ in the aggregate at any time) by
adjustments made on the records of the Trustee hereinafter referred to in
accordance with the Indenture)] on ____________, 2007, and to pay interest
thereon from ___________, 2002 or from the most recent Interest Payment Date to
which interest has been paid or duly provided for, semi-annually on __________ 1
and _____________ 1 in each year, commencing ________, 2002 at the rate of ____%
per annum, until the principal hereof is paid or made available for payment [If
Original Notes, then insert: provided, however, that if (i) the Company has not
filed a registration statement (the "Exchange Offer Registration Statement")
under the Securities Act of 1933, as amended (the " Act"), registering a
security substantially identical to this Note (except that such Note will not
contain terms with respect to the Special Interest payments described below or
transfer restrictions) pursuant to an exchange offer (the "Registered Exchange
Offer") (or, in lieu thereof, a registration statement registering this Note for
resale (a "Shelf Registration Statement")) by __________, 1997, or (ii) the
Exchange Offer Registration Statement relating to the Registered Exchange Offer
has not become or been declared effective by ______________, 1997, or (iii)
neither the Registered Exchange Offer has been consummated nor the Shelf
Registration Statement has been declared effective prior to _____________, 1997,
or (iv) either the Exchange Offer Registration Statement or, if applicable, the
Shelf Registration Statement is filed and declared effective (except as
specifically permitted therein) but shall thereafter cease to be effective
without being succeeded promptly by an additional registration statement filed
and declared effective, in each case (i) through (iv) upon the terms and
conditions set forth in the Registration Agreement (each such event referred to
in clauses (i) through (iv), a "Registration Default"), then interest will
accrue (in addition to the original issue discount and any stated interest on
the Notes) (the "Step-Up") at a rate of 0.5% per annum, determined daily, on the
Accreted Value of the Notes, during the 90-day period from and including the
date on which any such Registration Default shall occur to but excluding the
date on which all Registration Defaults have been cured and shall increase by
0.25% per annum at the end of each subsequent 90-day period, but in no event
shall such rate exceed 2.00% per annum, in the aggregate regardless of the
number of Registration Defaults. Interest accruing as a result of the Step-Up is
referred to herein as "Special Interest." Accrued Special Interest, if any,
shall be paid semi-annually on _________ 1 and _________ 1 in each year; and the
amount of accrued Special Interest shall be determined on the basis of the
number of days actually elapsed. Any accrued and unpaid interest (including
Special Interest) on this Note upon the issuance of an Exchange Note (as defined
in the Indenture) in exchange for this Note shall cease to be payable to the
Holder hereof but such accrued and unpaid interest (including Special Interest)
shall be payable on the next Interest Payment Date for such Exchange Note to the
Holder thereof on the related Regular Record Date.] The
30
<PAGE>
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, as provided in such Indenture, be paid to the Person in whose
name this Note (or one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest, which shall be __________
15 or __________ 15 (whether or not a Business Day), as the case may be,
immediately preceding such Interest Payment Date. Any such interest not so
punctually paid or duly provided for will forthwith cease to be payable to the
Holder on such Regular Record Date and may either be paid to the Person in whose
name this Note (or one or more Predecessor Notes) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee, notice whereof shall be given to Holders of Notes not
more than 15 calendar days and not less than 10 calendar days prior to such
Special Record Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the Notes
may be listed, and upon such notice as may be required by such exchange, all as
more fully provided in said Indenture.
The principal of this Note shall not accrue interest (other than Special
Interest, if any) until __________, 2002, except in the case of a default in
payment of principal and premium, if any, upon acceleration or redemption, in
which case interest shall be payable pursuant to the preceding paragraph on such
overdue principal (and premium, if any), such interest shall be payable on
demand and, if not so paid on demand, such interest shall itself bear interest
at the rate of _____% per annum (to the extent that the payment of such interest
shall be legally enforceable), and shall accrue from the date of such demand for
payment to the date payment of such interest has been made or duly provided for,
and such interest on unpaid interest shall also be payable on demand.
Payment of the principal of (and premium, if any) and interest on this Note
will be made at the corporate trust office of the Trustee and at the office or
agency of the Company maintained for that purpose in the Borough of Manhattan,
The City of New York, New York, and at any other office or agency maintained by
the Company for such purpose, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company payment of
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Note Register.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Note shall
not be entitled to any benefit under the Indenture or be valid or obligatory for
any purpose.
31
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated:
MCLEOD, INC.
By____________________________
Attest:
______________________________
SECTION 2.03. Form of Reverse of Note.
-----------------------
This Note is one of a duly authorized issue of Notes of the Company
designated as its ____% Senior Discount Notes due ______________ 1, 2007 (the
"Notes") issued under an Indenture, dated as of ___________, 1997 (herein called
the "Indenture"), between the Company and ________________, as trustee (herein
called the "Trustee", which term includes any successor trustee under the
Indenture). The Notes are limited in aggregate principal amount at maturity to
$___________. Reference is hereby made to the Indenture and all indentures
supplemental thereto for a statement of the respective rights, limitations of
rights, duties and immunities thereunder of the Company, the Trustee and the
Holders of the Notes and of the terms upon which the Notes are, and are to be,
authenticated and delivered.
The Notes are subject to redemption upon not less than 30 nor more than 60
days' notice by mail to each Holder of Notes to be redeemed at such Holder's
address appearing in the Note Register, in amounts of $1,000 or an integral
multiple of $1,000, at any time on or after ___________ 1, 2002 and prior to
maturity, as a whole or in part, at the election of the Company, at the
following Redemption Prices (expressed as percentages of the principal amount)
plus accrued interest to but excluding the Redemption Date (subject to the right
of Holder on the relevant Regular Record Date to receive interest due on an
Interest Payment
32
<PAGE>
Date that is on or prior to the Redemption Date), if redeemed
during the 12-month period beginning ________ 1, of each of the years indicated
below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2002 _____%
2003 _____%
2004 _____%
</TABLE>
and thereafter at a Redemption Price equal to 100% of the principal amount,
together in the case of any such redemption with accrued interest to but
excluding the Redemption Date, but interest installments whose Stated Maturity
is on or prior to such Redemption Date will be payable to the Holders of such
Notes, or one or more Predecessor Notes, of record at the close of business on
the relevant Regular Record Dates referred to on the face hereof, all as
provided in the Indenture.
The Notes are further subject to redemption prior to _________ 1, 2000 only
in the event that the Company receives net proceeds from any sale of its Common
Stock in a Strategic Equity Investment on or before __________ 1, 2000, in which
case the Company may, at its option, use all or a portion of any such net
proceeds to redeem Notes in a principal amount of up to an aggregate amount
equal to 33 1/3% of the original principal amount of the Notes, provided,
however, that Notes in an amount equal to at least 66 2/3% of the original
principal amount of the Notes remain outstanding after such redemption. Such
redemption must occur on a Redemption Date within 90 days of any such sale and
upon not less than 30 nor more than 60 days' notice by mail to each Holder of
Notes to be redeemed at such Holder's address appearing in the Note Register, in
amounts of $1,000 or an integral multiple of $1,000 at a Redemption Price of
110.5% of the Accreted Value of the Notes to but excluding the Redemption Date.
The Notes do not have the benefit of any sinking fund obligations.
The Indenture provides that, subject to certain conditions, if (i) a Change
of Control (as defined in the Indenture) occurs or (ii) certain Excess Proceeds
are available to the Company as a result of any Asset Sale, the Company shall be
required to make a Change of Control Offer or an Asset Sale Offer, as the case
may be, for all or a specified portion of the Notes.
[If not a Global Note -- In the event of redemption or purchase pursuant to
an Asset Sale Offer of this Note in part only, a new Note or Notes of like tenor
for the unredeemed or
33
<PAGE>
unpurchased portion hereof will be issued in the name of the Holder hereof upon
the cancellation hereof.]
[If a Global Note insert -- In the event of a deposit or withdrawal of an
interest in this Note (including upon an exchange, transfer, redemption or
repurchase of this Note in part only) effected in accordance with the Applicable
Procedures, the Note Registrar, upon receipt of notice of such event from the
Depositary's custodian for this Note, shall make an adjustment on its records to
reflect an increase or decrease of the outstanding principal amount of this Note
resulting from such deposit or withdrawal, as the case may be.]
If an Event of Default shall occur and be continuing, the principal of all
the Notes may be declared due and payable in the manner and with the effect
provided in the Indenture.
The Indenture contains provisions for defeasance at any time of (i) the
entire indebtedness of this Note, or (ii) certain restrictive covenants and
Events of Default with respect to this Note, in each case upon compliance with
certain conditions set forth therein.
Unless the context otherwise requires, the Original Notes (as defined in
the Indenture) and the Exchange Notes (as defined in the Indenture) shall
constitute one series for all purposes under the Indenture, including without
limitation, amendments, waivers, redemptions, Change of Control Offers and Asset
Sale Offers.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Notes under the Indenture at any
time by the Company and the Trustee with the consent of the Holders of a
majority in aggregate principal amount of the Notes at the time outstanding.
The Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Notes at the time outstanding,
on behalf of the Holders of all the Notes, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Note at the times, place and rate, and in the coin or currency,
herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Note is registrable in the Note Register, upon
surrender of this Note for
34
<PAGE>
registration of transfer at the office or agency of the Company in the Borough
of Manhattan, The City of New York, New York, duly endorsed by, or accompanied
by a written instrument of transfer in form satisfactory to the Company and the
Note Registrar duly executed by, the Holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Notes, of authorized
denominations and like tenor and for the same aggregate principal amount, will
be issued to the designated transferee or transferees.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Notes are
exchangeable for a like tenor and aggregate principal amount of Notes of a
different authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
Interest on this Note shall be computed on the basis of a 360-day year of
twelve 30-day months; provided, however, that Special Interest shall be computed
on the basis of a 365-or 366-day year, as the case may be, and the number of
days actually elapsed.
All terms used in this Note which are defined in the Indenture shall have
the meanings assigned to them in the Indenture.
CERTIFICATE OF TRANSFER
The transferor hereof (the "Transferor") hereby certifies in connection
with the transfer of this Note as follows:
(Please check one)
[_] The Transferor has requested that this Note be transferred to a person
(the "Transferee") who will take delivery in the form of a Regulation S Note.
In connection with such transfer, the Transferor hereby certifies that, unless
such transfer is being effected pursuant to an effective registration statement
under the Securities Act, it is being effected in
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<PAGE>
accordance with Rule 904 or Rule 144 under the Securities Act and with all
applicable securities laws of the states of the United States and other
jurisdictions. Accordingly, the Transferor hereby further certifies as follows:
(1) Rule 904 Transfers. If the transfer is being effected in
------------------
accordance with Rule 904:
(A) the Transferor is not a distributor of the Notes, an
affiliate of the Company or any such distributor or a person acting on
behalf of any of the foregoing;
(B) the offer of this Note was not made to a person in the
United States;
(C) either:
(i) at the time the buy order was originated, the Transferee
was outside the United States or the Transferor and any person
acting on its behalf reasonably believed that the Transferee was
outside the United States, or
(ii) the transaction is being executed in, on or through
the facilities of the Eurobond market, as regulated by the
Association of International Bond Dealers, or another designated
offshore securities market and neither the Owner nor any person
acting on its behalf knows that the transaction has been
prearranged with a buyer in the United States;
(D) no directed selling efforts have been made in the United
States by or on behalf of the Transferor or any affiliate thereof;
(E) if the Transferor is a dealer in securities or has received
a selling concession, fee or other remuneration in respect of this
Note, and the transfer is to occur during the Restricted Period, then
the requirements of Rule 904(c)(1) have been satisfied; and
(F) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
(2) Rule 144 Transfers. If the transfer is being effected pursuant to
------------------
Rule 144:
36
<PAGE>
(A) the transfer is occurring after a holding period of at least
two years (computed in accordance with paragraph (d) of Rule 144) has
elapsed since this Note was last acquired from the Company or from an
affiliate of the Company, whichever is later, and is being effected in
accordance with the applicable amount, manner of sale and notice
requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
three years has elapsed since this Note was last acquired from the
Company or from an affiliate of the Company, whichever is later, and
the Transferor is not, and during the preceding three months has not
been, an affiliate of the Company.
[_] The Transferor has requested that this Note be transferred to the
Transferee who will take delivery in the form of a Restricted Note. In
connection with such transfer, the Transferor hereby certifies that, unless such
transfer is being effected pursuant to an effective registration statement under
the Securities Act, it is being effected in accordance with Rule 144A, Rule 144
or to an Institutional Accredited Investor under Rule 501(a)(1), (2), (3) or (7)
under the Securities Act and in compliance with all applicable securities laws
of the states of the United States and other jurisdictions. Accordingly, the
Transferor hereby further certifies as follows:
(1) Rule 144A Transfers. If the transfer is being effected in
-------------------
accordance with Rule 144A:
(A) this Note is being transferred to a person that the
Transferor and any person acting on its behalf reasonably believe is a
"qualified institutional buyer" within the meaning of Rule 144A,
acquiring for its own account or for the account of a qualified
institutional buyer; and
(B) the Transferor and any person acting on its behalf have
taken reasonable steps to ensure that the Transferee is aware that the
Transferor may be relying on Rule 144A in connection with the
transfer; and
(2) Rule 144 Transfers. If the transfer is being effected pursuant
------------------
to Rule 144:
(A) the transfer is occurring after a holding period of at least
two years (computed in accordance with paragraph (d) of Rule 144) has
elapsed since this Note was last acquired from the Company or from an
affiliate of the Company, whichever is later, and is being effected in
accordance with the applicable amount, manner of sale and notice
requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
three years has elapsed since this Note was last acquired from the
Company or from
37
<PAGE>
an affiliate of the Company, whichever is later, and the Transferor is
not, and during the preceding three months has not been, an affiliate
of the Company.
(3) Institutional Accredited Investor Transfers. If the transfer is
-------------------------------------------
being effected to an Institutional Accredited Investor as defined under
Rule 501(a)(1), (2), (3) or (7), this Note is being transferred to such an
Institutional Accredited Investor as therein so defined who is purchasing
for investment purposes and not for distribution.
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company pursuant to
Section 4.07 or 4.08 of the Indenture, check the box:
[_]
If you want to elect to have only a part of this Note purchased by the
Company pursuant to Section 4.07 or 4.08 of the Indenture, state the amount:
$_________________
Dated:____________________ Your Signature:______________________
(Sign exactly as name appears
on the other side of this Note)
Signature Guarantee:____________________________________________________________
Notice: Signature(s) must be guaranteed by an "eligible guarantor
institution" meeting the requirements of the Note Registrar which
requirements will include membership or participation in STAMP or such
other "signature guarantee program" as may be determined by the
Trustee in addition to, or in substitution for STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.
38
<PAGE>
SECTION 2.04. Form of Trustee's Certificate of Authentication.
-----------------------------------------------
This is one of the Notes referred to in the within-mentioned Indenture.
Date:
_______________________,
as Trustee
By__________________________
Authorized Signatory
SECTION 2.05. Execution and Authentication. The aggregate principal
----------------------------
amount at maturity of Notes outstanding at any time shall not exceed
$500,000,000, except as provided in Section 2.10 hereof. The Notes shall be
executed on behalf of the Company by its Chief Executive Officer, its President
or any Executive Vice President and shall be attested by the Company's Secretary
or one of its Assistant Secretaries, in each case by manual or facsimile
signature.
The Notes shall be authenticated by manual signature of an authorized
officer of the Trustee and shall not be valid for any purpose unless so
authenticated.
In case any officer of the Company whose signature shall have been placed
upon any of the Notes shall cease to be such officer of the Company before
authentication of such Notes by the Trustee and the issuance and delivery
thereof, such Notes may, nevertheless, be authenticated by the Trustee and
issued and delivered with the same force and effect as though such Person had
not ceased to be such officer of the Company.
Notwithstanding any other provision hereof, the Trustee shall authenticate
and deliver Notes only upon receipt by the Trustee of an Officers' Certificate
complying with Section 10.04 hereof with respect to satisfaction of all
conditions precedent contained in this Indenture to authentication and delivery
of such Notes.
Upon compliance by the Company with the provisions of the previous
paragraph, the Trustee shall, upon receipt of a Company Order requesting such
action, authenticate Notes for original issuance in an aggregate principal
amount at maturity not to exceed $500,000,000. Such Company Order shall specify
the amount of Notes to be authenticated and the date on which the Notes are to
be authenticated and shall further provide instructions concerning registration,
amounts for each Holder and delivery.
A Note shall not be valid or entitled to any benefit under this Indenture
or obligatory for any purpose unless executed by the Company and authenticated
by the manual signature of the Trustee as provided herein. The signature of an
authorized officer of the Trustee shall
39
<PAGE>
be conclusive evidence, and the only evidence, that such Note has been
authenticated and delivered under this Indenture.
The Trustee may appoint an authenticating agent reasonably acceptable to
the Company to authenticate the Notes. Unless limited by the terms of such
appointment, an authenticating agent may authenticate Notes whenever the Trustee
may do so. Each reference in this Indenture to authentication by the Trustee
includes authentication by such agent. Any authenticating agent of the Trustee
shall have the same rights hereunder as any Registrar or Paying Agent. The
Trustee shall not be liable for any failure to act of the authenticating agent
in performing any duty either required herein or authorized herein to be
performed by such person in accordance with the Indenture.
SECTION 2.06. Note Registrar and Paying Agent. The Company shall
-------------------------------
maintain, pursuant to Section 4.02 hereof, an office or agency where the Notes
may be presented for registration of transfer or for exchange. The Company
shall cause to be kept at such office a register (the register maintained in
such office being herein sometimes referred to as the "Note Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Notes and of transfers of Notes entitled to be
registered or transferred as provided herein. The Trustee, at its Corporate
Trust Office, is initially appointed "Note Registrar" for the purpose of
registering Notes and transfers of Notes as herein provided. The Company may,
upon written notice to the Trustee, change the designation of the Trustee as
Note Registrar and appoint another Person to act as Note Registrar for purposes
of this Indenture. If any Person other than the Trustee acts as Note Registrar,
the Trustee shall have the right at any time, upon reasonable notice, to inspect
or examine the Note Register and to make such inquiries of the Note Registrar as
the Trustee shall in its discretion deem necessary or desirable in performing
its duties hereunder.
The Company shall enter into an appropriate agency agreement with any
Person designated by the Company as Note Registrar or Paying Agent that is not a
party to this Indenture, which agreement shall incorporate the provisions of the
Trust Indenture Act and shall implement the provisions of this Indenture that
relate to such Note Registrar or Paying Agent. Prior to the designation of any
such Person, the Company shall, by written notice (which notice shall include
the name and address of such Person), inform the Trustee of such designation.
If the Company fails to maintain a Note Registrar or Paying Agent, the Trustee
shall act as such.
Upon surrender for registration of transfer of any Note at an office or
agency of the Company designated for such purpose, the Company shall execute,
and the Trustee shall authenticate and deliver, in the name of the designated
transferee or transferees, one or more new Initial Notes or Exchange Notes, as
the case may be, of any authorized denomination or denominations, of like tenor
and aggregate principal amount, all as requested by the transferor.
40
<PAGE>
Every Note presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company, the Trustee or the Note
Registrar) be duly endorsed, or be accompanied by a duly executed instrument of
transfer in form satisfactory to the Company, the Trustee and the Note
Registrar, by the Holder thereof or such Holder's attorney duly authorized in
writing.
SECTION 2.07. Paying Agent to Hold Money in Trust. On or prior to 10:00
-----------------------------------
a.m. on each due date of the principal, premium, or any payment of interest with
respect to any Note, the Company shall deposit with the Paying Agent a sum
sufficient to pay such principal, premium or interest when so becoming due.
The Company shall require each Paying Agent (other than the Trustee) to
agree in writing that such Paying Agent, shall hold in trust for the benefit of
Holders or the Trustee all money held by such Paying Agent for the payment of
principal, premium, or interest with respect to the Notes, shall notify the
Trustee of any default by the Company in making any such payment and at any time
during the continuance of any such default, upon the written request of the
Trustee, shall forthwith pay to the Trustee all sums held in trust by such
Paying Agent.
The Company at any time may require a Paying Agent to pay all money held by
it to the Trustee and to account for any funds disbursed by such Paying Agent.
Upon complying with this Section 2.07, the Paying Agent shall have no further
liability for the money delivered to the Trustee.
SECTION 2.08. Registration, Registration of Transfer and Exchange.
---------------------------------------------------
(a) At the option of the Holder, and subject to the other provisions of
this Section 2.08, Notes may be exchanged for other Notes of any authorized
denominations and of a like tenor and aggregate principal amount, upon surrender
of the Notes to be exchanged at such office or agency. Whenever any Notes are
so surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Notes which the Holder making the exchange is
entitled to receive.
All Notes issued upon any registration of transfer or exchange of Notes
shall be the valid obligations of the Company, evidencing the same debt, and
(subject to the provisions in the Original Notes regarding the payment of
Special Interest) entitled to the same benefits under this Indenture, as the
Notes surrendered upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company or the Trustee) be duly endorsed,
or be accompanied by a written instrument of transfer in form satisfactory to
the Company and the Note Registrar duly executed, by the Holder thereof or his
attorney duly authorized in writing.
41
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No service charge shall be made to the Holder for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Notes, other than
exchanges pursuant to Sections 2.11, 3.06 or 9.06 or in accordance with any
offer pursuant to Section 4.07 or 4.08 not involving any transfer.
Any holder of a Global Note shall, by acceptance of such Global Note, agree
that transfers of beneficial interests in such Global Note may be effected
through a book entry system maintained by the holder of such Global Note (or its
agent) and the ownership of a beneficial interest in the Note shall be reflected
in a book entry.
The Company shall not be required (i) to issue, register the transfer of or
exchange any Note during a period beginning at the opening of business 15 days
before the day of the mailing of a notice of redemption of Notes selected for
redemption under Section 3.03 and ending at the close of business on the day of
such mailing, or (ii) to register the transfer of or exchange any Note so
selected for redemption in whole or in part, except the unredeemed portion of
any Note being redeemed in part.
(b) Certain Transfers and Exchanges. Notwithstanding any other provision
-------------------------------
of this Indenture or the Notes, transfers and exchanges of Notes and beneficial
interests in a Global Note of the kinds specified in this Section 2.08(b) shall
be made only in accordance with this Section 2.08(b).
(i) Restricted Global Note to Regulation S Global Note. If the
--------------------------------------------------
owner of a beneficial interest in the Restricted Global Note wishes at any
time to transfer such interest to a Person who wishes to acquire the same
in the form of a beneficial interest in the Regulation S Global Note, such
transfer may be effected only in accordance with the provisions of this
Clause (b)(i) and Clause (b)(vii) below and subject to the Applicable
Procedures. Upon receipt by the Trustee, as Note Registrar, of (A) an order
given by the Depositary or its authorized representative directing that a
beneficial interest in the Regulation S Global Note in a specified
principal amount be credited to a specified Agent Member's account and that
a beneficial interest in the Restricted Global Note in an equal principal
amount be debited from another specified Agent Member's account and (B) a
Regulation S Certificate, satisfactory to the Trustee and duly executed by
the owner of such beneficial interest in the Restricted Global Note or his
attorney duly authorized in writing, then the Trustee, as Note Registrar
but subject to Clause (b)(vii) below, shall reduce the principal amount of
the Restricted Global Note and increase the principal amount of the
Regulation S Global Note by such specified principal amount as provided in
Section 2.08(d)(3).
(ii) Regulation S Global Note to Restricted Global Note. If the
--------------------------------------------------
owner of a beneficial interest in the Regulation S Global Note wishes at
any time to transfer such interest to a Person who wishes to acquire the
same in the form of a beneficial
42
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interest in the Restricted Global Note, such transfer may be effected only
in accordance with this Clause (b)(ii) and subject to the Applicable
Procedures. Upon receipt by the Trustee, as Note Registrar, of (A) an order
given by the Depositary or its authorized representative directing that a
beneficial interest in the Restricted Global Note in a specified principal
amount be credited to a specified Agent Member's account and that a
beneficial interest in the Regulation S Global Note in an equal principal
amount be debited from another specified Agent Member's account and (B) if
such transfer is to occur during the Restricted Period, a Restricted Notes
Certificate, satisfactory to the Trustee and duly executed by the owner of
such beneficial interest in the Regulation S Global Note or his attorney
duly authorized in writing, then the Trustee, as Note Registrar, shall
reduce the principal amount of the Regulation S Global Note and increase
the principal amount of the Restricted Global Note by such specified
principal amount as provided in Section 2.08(d)(3).
(iii) Restricted Non-Global Note to Restricted Global Note or
---------------------------------------- --------------
Regulation S Global Note. Subject to Section 2.08(d)(2) hereof, if the
------------------------
Holder of a Restricted Note (other than a Global Note) wishes at any time
to transfer all or any portion of such Restricted Note to a Person who
wishes to take delivery thereof in the form of a beneficial interest in the
Restricted Global Note or the Regulation S Global Note, such transfer may
be effected only in accordance with the provisions of this Clause (b)(iii)
and Clause (b)(vii) below and subject to the Applicable Procedures. Upon
receipt by the Trustee, as Note Registrar, of (A) such Restricted Note as
provided in Section 2.08(a) and instructions satisfactory to the Trustee
directing that a beneficial interest in the Restricted Global Note or
Regulation S Global Note in a specified principal amount not greater than
the principal amount of such Note be credited to a specified Agent Member's
account and (B) a Restricted Notes Certificate (or the completion of the
Certificate of Transfer on the Note), if the specified account is to be
credited with a beneficial interest in the Restricted Global Note, or a
Regulation S Certificate (or the completion of the Certificate of Transfer
on the Note), if the specified account is to be credited with a beneficial
interest in the Regulation S Global Note, in either case satisfactory to
the Trustee and duly executed by such Holder or his attorney duly
authorized in writing, then the Trustee, as Note Registrar but subject to
Clause (b)(vii) below, shall cancel such Restricted Note (and issue a new
Restricted Note in respect of any untransferred portion thereof) as
provided in Section 2.08(a) and increase the principal amount of the
Restricted Global Note or the Regulation S Global Note, as the case may be,
by the specified principal amount as provided in Section 2.08(d)(3).
(iv) Regulation S Non-Global Note to Restricted Global Note or
------------------------------------------ --------------
Regulation S Global Note. Subject to Section 2.08(d)(2) hereof, if the
------------------------
Holder of a Regulation S Note (other than a Global Note) wishes at any time
to transfer all or any portion of such Regulation S Note to a Person who
wishes to acquire the same in the form of a beneficial interest in the
Restricted Global Note or the Regulation S Global Note, such
43
<PAGE>
transfer may be effected only in accordance with this Clause (b)(iv) and
Clause (b)(vii) below and subject to the Applicable Procedures. Upon
receipt by the Trustee, as Note Registrar, of (A) such Regulation S Note as
provided in Section 2.08(a) and instructions satisfactory to the Trustee
directing that a beneficial interest in the Restricted Global Note or
Regulation S Global Note in a specified principal amount not greater than
the principal amount of such Note be credited to a specified Agent Member's
account and (B) if the transfer is to occur during the Restricted Period
and the specified account is to be credited with a beneficial interest in
the Restricted Global Note, a Restricted Notes Certificate (or the
completion of the Certificate of Transfer on the Note) satisfactory to the
Trustee and duly executed by such Holder or his attorney duly authorized in
writing, then the Trustee, as Note Registrar but subject to Clause (b)(vii)
below, shall cancel such Regulation S Note (and issue a new Regulation S
Note in respect of any untransferred portion thereof) as provided in
Section 2.08(a) and increase the principal amount of the Restricted Global
Note or the Regulation S Global Note, as the case may be, by the specified
principal amount as provided in Section 2.08(d)(3).
(v) Non-Global Note to Non-Global Note. A Note that is not a
----------------------------------
Global Note may be transferred, in whole or in part, to a Person who takes
delivery in the form of another Note that is not a Global Note as provided
in Section 2.08(a), provided that, if the Note to be transferred in whole
or in part is a Restricted Note, or is a Regulation S Note and the transfer
is to occur during the Restricted Period, then the Trustee shall have
received (A) a Restricted Notes Certificate (or the completion of the
Certificate of Transfer on the Note), satisfactory to the Trustee and duly
executed by the transferor Holder or his attorney duly authorized in
writing, in which case the transferee Holder shall take delivery in the
form of a Restricted Note or (B) a Regulation S Certificate (or the
completion of the Certificate of Transfer on the Note), satisfactory to the
Trustee and duly executed by the transferor Holder or his attorney duly
authorized in writing; in which case the transferee Holder shall take
delivery in the form of a Regulation S Note (subject in every case to
Section 2.08(c)).
(vi) Exchanges between Global Note and Non-Global Note. A
-------------------------------------------- ----
beneficial interest in a Global Note may be exchanged for a Note that is
not a Global Note as provided in Section 2.08(d)(2), provided that, if such
interest is a beneficial interest in the Restricted Global Note, or if such
interest is a beneficial interest in the Regulation S Global Note and such
exchange is to occur during the Restricted Period, then such interest shall
be exchanged for a Restricted Note (subject in each case to Section
2.08(c)). A Note that is not a Global Note may be exchanged for a
beneficial interest in a Global Note only if (A) such exchange occurs in
connection with a transfer effected in accordance with Clause (b)(iii) or
(iv) above or (B) such Note is a Regulation S Note and such exchange occurs
after the Restricted Period.
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(vii) Regulation S Global Note to be Held Through Euroclear or Cedel
------------------------------------------- ------------------
during Restricted Period. The Company shall use its best efforts to cause
------------------------
the Depositary to ensure that, until the expiration of the Restricted
Period, beneficial interests in the Regulation S Global Note may be held
only in or through accounts maintained at the Depositary by Euroclear or
Cedel (or by Agent Members acting for the account thereof), and no person
shall be entitled to effect any transfer or exchange that would result in
any such interest being held otherwise than in or through such an account;
provided that this Clause (b)(vii) shall not prohibit any transfer or
exchange of such an interest in accordance with Clause (b)(ii) or (vi)
above.
(c) Securities Act Legends. Rule 144A Notes, Other Notes and their
----------------------
respective Successor Notes shall bear a Restricted Note Legend, and the
Regulation S Notes and their Successor Notes shall bear a Regulation S Legend,
subject to the following:
(i) subject to the following Clauses of this Section 2.08(c), a
Note or any portion thereof which is exchanged, upon transfer or otherwise,
for a Global Note or any portion thereof shall bear the Securities Act
Legend borne by such Global Note while represented thereby;
(ii) subject to the following Clauses of this Section 2.08(c), a new
Note which is not a Global Note and is issued in exchange for another Note
(including a Global Note) or any portion thereof, upon transfer or
otherwise, shall bear the Securities Act Legend borne by such other Note,
provided that, if such new Note is required pursuant to Section 2.08(b)(v)
or (vi) to be issued in the form of a Restricted Note, it shall bear a
Restricted Note Legend and, if such new Note is so required to be issued in
the form of a Regulation S Note, it shall bear a Regulation S Legend;
(iii) Registered Notes shall not bear a Securities Act Legend;
(iv) at any time after the Notes may be freely transferred without
registration under the Securities Act or without being subject to transfer
restrictions pursuant to the Securities Act, a new Note which does not bear
a Securities Act Legend may be issued in exchange for or in lieu of a Note
(other than a Global Note) or any portion thereof which bears such a legend
if the Trustee has received an Unrestricted Note Certificate, satisfactory
to the Trustee and duly executed by the Holder of such legended Note or his
attorney duly authorized in writing, and after such date and receipt of
such certificate, the Trustee shall authenticate and deliver such a new
Note in exchange for or in lieu of such other Note as provided in this
Article II;
(v) a new Note which does not bear a Securities Act Legend may be
issued in exchange for or in lieu of a Note (other than a Global Note) or
any portion thereof which bears such a legend if, in the Company's
judgment, placing such a legend upon such new Note is not necessary to
ensure compliance with the registration
45
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requirements of the Securities Act, and the Trustee, at the direction of
the Company, shall authenticate and deliver such a new Note as provided in
this Article II; and
(vi) notwithstanding the foregoing provisions of this Section
2.08(c), a Successor Note of a Note that does not bear a particular form of
Securities Act Legend shall not bear such form of legend unless the Company
has reasonable cause to believe that such Successor Note is a "restricted
security" within the meaning of Rule 144, in which case the Trustee, at the
direction of the Company, shall authenticate and deliver a new Note bearing
a Restricted Note Legend in exchange for such Successor Note as provided in
this Article II.
(d) The provisions of Clauses (1), (2), (3), (4) and (5) below shall apply
only to Global Notes:
(1) Each Global Note authenticated under this Indenture shall be
registered in the name of the Depositary or a nominee thereof and delivered
to the Depositary or a nominee thereof or custodian therefor, and each such
Global Note shall constitute a single Note for all purposes of this
Indenture.
(2) Notwithstanding any other provision in this Indenture, no Global
Note may be exchanged in whole or in part for Notes registered, and no
transfer of a Global Note in whole or in part may be registered, in the
name of any Person other than the Depositary or a nominee thereof unless
(i) the Depositary notifies the Company that it is unwilling or unable to
continue as a depositary for such Global Note or if at any time the
Depositary ceases to be a clearing agency registered under the Exchange
Act, and a successor depositary is not appointed by the Company within 90
days, (ii) the Company executes and delivers to the Trustee a notice that
such Global Note shall be so transferable, registrable and exchangeable,
and such transfer shall be registrable or (iii) there shall have occurred
and be continuing an Event of Default with respect to the Notes represented
by such Global Note.
(3) If any Global Note is to be exchanged for other Notes or
cancelled in whole, it shall be surrendered by or on behalf of the
Depositary or its nominee to the Trustee, as Note Registrar, for exchange
or cancellation as provided in this Article II. If any Global Note is to be
exchanged for other Notes or cancelled in part, or if another Note is to be
exchanged in whole or in part for a beneficial interest in any Global Note,
then either (i) such Global Note shall be so surrendered for exchange or
cancellation as provided in this Article II or (ii) the principal amount
thereof shall be reduced or increased by an amount equal to the portion
thereof to be so exchanged or cancelled, or equal to the principal amount
of such other Note to be so exchanged for a beneficial interest therein, as
the case may be, by means of an appropriate adjustment made on the records
of the Trustee, as Note Registrar, whereupon the Trustee, in accordance
with the Applicable Procedures, shall instruct the Depositary
46
<PAGE>
or its authorized representative to make a corresponding adjustment to its
records. Upon any such surrender or adjustment of a Global Note, the
Trustee shall, subject to Section 2.08(d)(2) and as otherwise provided in
this Article II, authenticate and deliver any Notes issuable in exchange
for such Global Note (or any portion thereof) to or upon the order of, and
registered in such names as may be directed by, the Depositary or its
authorized representative. Upon the request of the Trustee in connection
with the occurrence of any of the events specified in the preceding
paragraph, the Company shall promptly make available to the Trustee a
reasonable supply of Notes that are not in the form of Global Notes. The
Trustee shall be entitled to rely upon any order, direction or request of
the Depositary or its authorized representative which is given or made
pursuant to this Article II if such order, direction or request is given or
made in accordance with the Applicable Procedures.
(4) Every Note authenticated and delivered upon registration of
transfer of, or in exchange for or in lieu of, a Global Note or any portion
thereof, whether pursuant to this Section, Section 2.05, 2.09, 3.06, 4.07,
4.08 or 9.06 or otherwise, shall be authenticated and delivered in the form
of, and shall be, a Global Note, unless such Note is registered in the name
of a Person other than the Depositary or a nominee thereof.
(5) None of the Company, the Trustee, any agent of the Trustee, any
Paying Agent or the Note Registrar will have any responsibility or
liability for any aspect of the Depository's records (or the records of the
participant of such Depository) relating to or payments made on account of
beneficial ownership interests of a Global Note or for maintaining,
supervising or reviewing any records of the Depository relating to such
beneficial ownership interests.
SECTION 2.09. Replacement Notes. If any mutilated Note is surrendered to
-----------------
the Trustee, the Company shall execute and upon its written request the Trustee
shall authenticate and deliver, in exchange for any such mutilated Note, a new
Note containing identical provisions and of like principal amount, bearing a
number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Note and (ii) such
security or indemnity as may be required by them to save either of them and any
agent of each of them harmless, then, in the absence of notice to the Company or
the Trustee that such Note has been acquired by a bona fide purchaser, the
Company shall execute and upon its request the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Note, a new Note
containing identical provisions and of like principal amount, bearing a number
not contemporaneously outstanding.
47
<PAGE>
In case any such mutilated, destroyed, lost or stolen Note has become or is
about to become due and payable, the Company in its discretion may, instead of
issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section 2.09, the Company may
require the payment by the Holder of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Note issued pursuant to this Section 2.09 in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all the benefits of this Indenture equally and proportionately with any and all
other Notes duly issued hereunder.
The provisions of this Section 2.09 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 2.10. Outstanding Notes. Notes outstanding at any time are all
-----------------
Notes authenticated by the Trustee except for those canceled by it, those
delivered to it for cancellation and those described in this Section 2.10 as not
outstanding. A Note does not cease to be outstanding because the Company or an
Affiliate of the Company holds such Note.
If a Note is replaced pursuant to Section 2.09 hereof, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that such replaced Note is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance with this
Indenture, on a redemption date or Maturity date money sufficient to pay all
principal, premium, if any, and interest payable on that date with respect to
the Notes (or portions thereof) to be redeemed or maturing, as the case may be,
then on and after that date such Notes (or such portions thereof) shall cease to
be outstanding and interest on them shall cease to accrue or the principal of
such Notes shall cease to accrete, as the case may be.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent or any amendment,
modification or other change to this Indenture, Notes held or beneficially owned
by the Company or a Restricted Subsidiary of the Company or by an Affiliate of
the Company or a Restricted Subsidiary of the Company or by agents of any of the
foregoing shall be disregarded, except that for the purposes of determining
whether the Trustee shall be protected in relying on any such direction, waiver
or consent or any amendment, modification or other change to this
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Indenture, only Notes which a Trust Officer knows are so owned shall be so
disregarded. Notes so owned which have been pledged in good faith shall not be
disregarded if the pledgee establishes to the satisfaction of the Trustee such
pledgee's right so to act with respect to the Notes and that the pledgee is not
the Company or an Affiliate of the Company or any of their agents.
SECTION 2.11. Temporary Notes. Pending the preparation of definitive
---------------
Notes, the Company may execute, and the Trustee shall authenticate, temporary
notes ("Temporary Notes") which are printed, lithographed, or otherwise
produced, substantially of the tenor of the definitive Notes in lieu of which
they are issued and with such appropriate insertions, omissions, substitutions
and other variations.
If Temporary Notes are issued, the Company shall cause definitive Notes to
be prepared without unreasonable delay. After the preparation of definitive
Notes, the Temporary Notes shall be exchangeable for definitive Notes upon
surrender of the Temporary Notes to the Trustee, without charge to the Holder.
Until so exchanged, Temporary Notes will evidence the same debt and will be
entitled to the same benefits under this Indenture as the definitive Notes in
lieu of which they have been issued.
SECTION 2.12. Cancellation. The Company at any time may deliver Notes to
------------
the Trustee for cancellation. The Note Registrar and the Paying Agent shall
forward to the Trustee any Notes surrendered to them for registration of
transfer, exchange, purchase or payment. The Trustee shall cancel all Notes
surrendered for registration of transfer, exchange, purchase, payment or
cancellation and shall destroy such canceled Notes unless the Company shall by
Company Order otherwise direct. The Company may not issue new Notes to replace
Notes that have been delivered to the Trustee for cancellation.
SECTION 2.13. Payment of Interest; Interest Rights Preserved. Interest on
----------------------------------------------
any Note which is payable, and is punctually paid or duly provided for, on any
Interest Payment Date shall be paid to the Person in whose name such Note is
registered at the close of business on the Regular Record Date for such interest
payment, which shall be the February 15 or August 15 (whether or not a Business
Day) immediately preceding such Interest Payment Date.
Any interest on any Note which is payable, but is not punctually paid or
duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to be payable to the registered Holder on the
relevant Regular Record Date, and, except as hereinafter provided, such
Defaulted Interest, and any interest payable on such Defaulted Interest, may be
paid by the Company, at its election, as provided in clause (a) or (b) below:
(a) The Company may elect to make payment of any Defaulted Interest,
and any interest payable on such Defaulted Interest, to the Persons in
whose names
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<PAGE>
the Notes are registered at the close of business on a Special Record Date
for the payment of such Defaulted Interest, which shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on the Notes and the date
of the proposed payment, and at the same time the Company shall deposit
with the Trustee an amount of money equal to the aggregate amount proposed
to be paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as provided in
this Clause. Thereupon the Trustee shall fix a Special Record Date for the
payment of such Defaulted Interest which shall be not more than 15 calendar
days and not less than 10 calendar days prior to the date of the proposed
payment and not less than 10 calendar days after the receipt by a Trust
Officer of the Trustee of the notice of the proposed payment. The Trustee
shall promptly notify the Company of such Special Record Date and, in the
name and at the expense of the Company, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor to
be sent, first class mail, postage prepaid, to each Holder at such Holder's
address as it appears in the Note Register, not less than 10 calendar days
prior to such Special Record Date. Notice of the proposed payment of such
Defaulted Interest and the Special Record Date therefor having been mailed
as aforesaid, such Defaulted Interest shall be paid to the Persons in whose
names the Notes are registered at the close of business on such Special
Record Date and shall no longer be payable pursuant to the following clause
(b).
(b) The Company may make payment of any Defaulted Interest, and any
interest payable on such Defaulted Interest, on the Notes in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed, and upon such notice as may be
required by such exchange, if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this clause, such manner of
payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section 2.13, each Note
delivered under this Indenture upon registration of transfer of, or in exchange
for, or in lieu of, any other Note, shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Note.
SECTION 2.14. Authorized Denominations. The Notes shall be issuable in
------------------------
minimum denominations of $1,000 at maturity and any integral multiple thereof.
SECTION 2.15. Computation of Interest. Interest on the Notes shall be
-----------------------
computed on the basis of a 360-day year of twelve 30-day months; provided that
Special Interest shall be computed on the basis of a 365- or 366-day year, as
the case may be, and the number of
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days actually elapsed from the date Special Interest commences to accrue to but
not including the date on which Special Interest ceases to accrue.
SECTION 2.16. Persons Deemed Owners. Prior to the due presentation for
---------------------
registration of transfer of any Note, the Company, the Trustee, the Paying
Agent, the Note Registrar or any co-registrar may deem and treat the person in
whose name Note is registered as the absolute owner of such Note for the purpose
of receiving payment of principal of, premium, if any, and interest on such Note
and for all other purposes whatsoever, whether or not such Note is overdue, and
none of the Company, the Trustee, the Paying Agent, the Note Registrar or any
co-Registrar shall be affected by notice to the contrary.
SECTION 2.17. CUSIP Numbers. The Company, in issuing the Notes, may use
-------------
"CUSIP" and "ISIN" numbers for each series of Notes and, if so, the Trustee
shall use the relevant CUSIP and ISIN numbers in any notices to Holders as a
convenience to such Holders; provided that any such notice may state that no
representation is made as to the correctness or accuracy of the CUSIP and ISIN
numbers printed in the notice or on the Notes and that reliance may be placed
only on the other identification numbers printed on the Notes. The Company
shall promptly notify the Trustee of any change in any CUSIP or "ISIN" numbers
used.
SECTION 2.18. Holder Lists. The Trustee shall preserve in as current a
------------
form as is reasonably practicable the most recent list available to it of the
names and addresses of Holders and shall otherwise comply with Trust Indenture
Act (S) 312(a). If the Trustee is not the Note Registrar, the Company shall
furnish to the Trustee as of each Regular Record Date and at such other times as
the Trustee may request in writing a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of Holders,
including the aggregate principal amount of Notes held by each Holder.
ARTICLE III.
REDEMPTION
SECTION 3.01. Notice to Trustee. If the Company elects to redeem Notes
-----------------
pursuant to paragraph two or three of the reverse side of the Notes, it shall
notify the Trustee in writing of the Redemption Date and the principal amount of
Notes to be redeemed. The Company shall give each such notice to the Trustee at
least 60 calendar days prior to the Redemption Date unless the Trustee consents
in writing to a shorter period. Such notice shall be accompanied by an
Officers' Certificate and an Opinion of Counsel from the Company to the effect
that such redemption will comply with any conditions to such redemption set
forth herein and in the Notes.
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SECTION 3.02. Selection of Notes to be Redeemed. If less than all the
---------------------------------
Notes are to be redeemed at any time, the Trustee shall select the Notes to be
redeemed by lot, on a pro rata or other basis as it shall deem fair and
appropriate; provided that the Trustee may select for redemption in part only
Notes in denominations larger than $1,000 at maturity. In selecting Notes to be
redeemed pursuant to this Section 3.02, the Trustee shall make such adjustments,
reallocations and eliminations as it shall deem proper so that the principal
amount at maturity of each Note to be redeemed shall be $1,000 or an integral
multiple thereof, by increasing, decreasing or eliminating any amount less than
$1,000 which would be allocable to any Holder. If the Notes to be redeemed are
Certificated Notes, the Certificated Notes to be redeemed shall be selected by
the Trustee by prorating, as nearly as may be, the principal amount of
Certificated Notes to be redeemed among the Holders of Certificated Notes
registered in their respective names. The Trustee in its discretion may
determine the particular Notes (if there are more than one) registered in the
name of any Holder which are to be redeemed, in whole or in part. Provisions of
this Indenture that apply to Notes called for redemption also apply to portions
of Notes called for redemption. The Trustee shall notify the Company promptly of
the Notes or portions of Notes to be redeemed.
SECTION 3.03. Notice of Redemption. At least 30 calendar days but not
--------------------
more than 60 calendar days before a Redemption Date, the Company shall send a
notice of redemption, first class mail, postage prepaid, to Holders of Notes to
be redeemed at the addresses of such Holders as they appear in the Note
Register.
The notice shall identify the Notes to be redeemed and shall state:
(a) the Redemption Date;
(b) the Redemption Price (and shall specify the portion of such
Redemption Price that constitutes the amount of accrued and unpaid interest
to be paid, if any);
(c) the name and address of the Paying Agent;
(d) that the Notes called for redemption must be surrendered to the
Paying Agent to collect the Redemption Price;
(e) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the Redemption
Date, a new Note or Notes in principal amount equal to the unredeemed
portion will be issued;
(f) if fewer than all the outstanding Notes are to be redeemed, the
identification and principal amounts of the particular Notes to be
redeemed;
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(g) that, unless the Company defaults in making the redemption
payment, interest on, or the accretion of the value of, the Notes (or
portions thereof) called for redemption shall cease and such Notes (or
portions thereof) shall cease to accrue interest or cease to accrete in
value, as the case may be, on and after the Redemption Date;
(h) the paragraph of the Notes pursuant to which the Notes are being
called for redemption; and
(i) any other information necessary to enable Holders to comply with
the notice of redemption.
At the Company's request, the Trustee shall give the notice of redemption
in the Company's name and at the Company's expense. In such event, the Company
shall provide the Trustee with the information required by this Section 3.03 in
a timely manner.
SECTION 3.04. Effect of Notice of Redemption. Once notice of redemption
------------------------------
is mailed, Notes called for redemption shall become due and payable on the
Redemption Date and at the Redemption Price stated in such notice. Upon
surrender to the Paying Agent, such Notes shall be paid at the Redemption Price
stated in such notice. Failure to give notice or any defect in the notice to
any Holder shall not affect the validity of the notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. On or prior to 10:00 a.m., New
---------------------------
York City time, on each Redemption Date, the Company shall deposit with the
Paying Agent (or, if the Company, one of its Subsidiaries or any of their
Affiliates is the Paying Agent, the Paying Agent shall segregate and hold in
trust for the benefit of the Holders) money, in federal or other immediately
available funds, sufficient to pay the Redemption Price on all Notes to be
redeemed on that date other than Notes or portions of Notes called for
redemption on such date which have been delivered by the Company to the Trustee
for cancellation.
So long as the Company complies with the preceding paragraph and the other
provisions of this Article III, interest on the Notes to be redeemed on the
applicable Redemption Date shall cease to accrue or such Notes shall cease to
accrete in value, as the case may be, from and after such date and such Notes or
portions thereof shall be deemed not to be entitled to any benefit under this
Indenture except to receive payment of the Redemption Price on the Redemption
Date. If any Note called for redemption shall not be so paid upon surrender for
redemption, then, from the Redemption Date until such principal is paid,
interest shall be paid on the unpaid principal and, to the extent permitted by
law, on any accrued but unpaid interest thereon, in each case at the rate
prescribed therefor by such Notes, or such Notes shall continue to accrete in
value, as the case may be.
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SECTION 3.06. Notes Redeemed in Part. Upon surrender and cancellation of
----------------------
a Note that is redeemed in part, the Company shall issue and the Trustee shall
authenticate and deliver to the surrendering Holder (at the Company's expense) a
new Note equal in principal amount to the unredeemed portion of the Note
surrendered and canceled; provided that each such Note shall be in a principal
amount at maturity of $1,000 or an integral multiple thereof.
ARTICLE IV.
COVENANTS
SECTION 4.01. Payment of Notes. The Company shall promptly pay the
----------------
principal of, premium, if any, and interest on, the Notes on the dates and in
the manner provided in the Notes and in this Indenture. Principal, premium and
interest shall be considered paid on the date due if, on such date, the Trustee
or the Paying Agent holds in accordance with this Indenture money sufficient to
pay all principal, premium and interest then due.
To the extent lawful, the Company shall pay interest on (i) if prior to
March 1, 2002, any overdue Accreted Value of (and premium, if any, on) the
Notes, or if on or after March 1, 2002, any overdue principal of (and premium,
if any, on) the Notes, at the accretion rate or interest rate, as the case may
be, borne on the Notes, plus 1% per annum, and (ii) Defaulted Interest (without
regard to any applicable grace period), at the same rate. The Company's
obligation pursuant to the previous sentence shall apply whether such overdue
amount is due at its Stated Maturity, as a result of the Company's obligations
pursuant to Section 3.05, Section 4.07 or Section 4.08 hereof, or otherwise.
SECTION 4.02. Maintenance of Office or Agency. The Company shall maintain
-------------------------------
in the Borough of Manhattan, The City of New York, an office or agency where
Notes may be presented or surrendered for payment, where Notes may be
surrendered for registration of transfer or exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may be
served. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee its agent to
receive all presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other offices
or agencies (in or outside of The City of New York) where the Notes may be
presented or surrendered for any or all of such purposes, and may from time to
time rescind such designations; provided that no such designation or rescission
shall in any manner relieve the
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Company of its obligation to maintain an office or agency in The City of New
York, for such purposes. The Company shall give prompt written notice to the
Trustee of any such designation and any change in the location of any such other
office or agency.
SECTION 4.03. Money for the Note Payments to be Held in Trust. If the
-----------------------------------------------
Company, any Subsidiary of the Company or any of their respective Affiliates
shall at any time act as Paying Agent with respect to the Notes, such Paying
Agent shall, on or before each due date of the principal of (and premium, if
any) or interest on any of the Notes, segregate and hold in trust for the
benefit of the Persons entitled thereto money sufficient to pay the principal
(and premium, if any) or interest so becoming due until such money shall be paid
to such Persons or otherwise disposed of as herein provided, and shall promptly
notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents with respect to
the Notes, it shall, prior to or on each due date of the principal of (and
premium, if any) or interest on any of the Notes, deposit with a Paying Agent a
sum sufficient to pay the principal (and premium, if any) or interest so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest, and (unless such Paying Agent
is the Trustee) the Paying Agent shall promptly notify the Trustee of the
Company's action or failure so to act.
SECTION 4.04. Corporate Existence. Subject to the provisions of Article
-------------------
IV and Article V hereof, the Company shall do or cause to be done all things
necessary to preserve and keep in full force and effect the corporate existence,
rights (charter and statutory) and franchises of the Company and each of its
Restricted Subsidiaries; provided that the Company and any such Restricted
Subsidiary shall not be required to preserve the corporate existence of any such
Restricted Subsidiary or any such right or franchise if the Board of Directors
shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company and provided further that any Restricted
Subsidiary may consolidate with, merge into, or sell, convey, lease or otherwise
dispose of all of its property and assets to the Company or any wholly owned
Restricted Subsidiary.
SECTION 4.05. Maintenance of Property. The Company shall cause all
-----------------------
Property used or useful in the conduct of its business or the business of any of
its Restricted Subsidiaries and material to the Company and its Restricted
Subsidiaries taken as a whole to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and shall
cause to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as, in the judgment of the Company, may be necessary
so that the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided that nothing in this Section
4.05 shall prevent the Company from discontinuing the operation or maintenance
of any of such Property if such discontinuance is, in the judgment of the
Company, desirable in the conduct of its business or the business of any of its
Restricted Subsidiaries.
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SECTION 4.06. Payment of Taxes and Other Claims. The Company shall pay or
---------------------------------
discharge or cause to be paid or discharged, before the same shall become
delinquent, (a) all material taxes, assessments and governmental charges levied
or imposed upon the Company or any of its Restricted Subsidiaries or upon the
income, profits or Property of the Company or any of its Restricted Subsidiaries
and (b) all material lawful claims for labor, materials and supplies which, if
unpaid, might by law become a Lien upon the Property of the Company or any of
its Restricted Subsidiaries; provided that the Company shall not be required to
pay or discharge or cause to be paid or discharged any such tax, assessment,
charge or claim whose amount, applicability or validity is being contested in
good faith by appropriate proceedings upon stay of execution or the enforcement
thereof and for which adequate reserves in accordance with GAAP or other
appropriate provision has been made.
SECTION 4.07. Repurchase at the Option of Holders upon a Change of
----------------------------------------------------
Control. (a) Upon the occurrence of a Change of Control, each Holder shall
have the right to require the Company to purchase such Holder's Notes, in whole,
or in part in a principal amount at maturity that is an integral multiple of
$1,000, pursuant to the offer described in Section 4.07(b) hereof (the "Change
of Control Offer"), at a purchase price (the "Change of Control Purchase Price")
in cash equal to 101 percent of the Accreted Value of such Notes (or portions
thereof) on any Change of Control Payment Date prior to March 1, 2002, or 101
percent of the principal amount of such Notes (or portions thereof) on any
Change of Control Payment Date on or after March 1, 2002, plus accrued and
unpaid interest, if any, to the Change of Control Payment Date.
(b) Within 30 calendar days of the date of any Change of Control, the
Company, or the Trustee at the request and expense of the Company, shall send to
each Holder by first class mail, postage prepaid, a notice prepared by the
Company stating:
(i) that a Change of Control has occurred and a Change of Control
Offer is being made pursuant to this Section 4.07, and that all Notes that
are timely tendered will be accepted for payment;
(ii) the Change of Control Purchase Price, and the date Notes are
to be purchased pursuant to the Change of Control Offer (the "Change of
Control Payment Date"), which date shall be a date occurring no earlier
than 30 calendar days nor later than 60 calendar days subsequent to the
date such notice is mailed;
(iii) that any Notes or portions thereof not tendered or accepted
for payment will continue to accrete in value or accrue interest, as the
case may be;
(iv) that, unless the Company defaults in the payment of the Change
of Control Purchase Price with respect thereto, all Notes or portions
thereof accepted for payment pursuant to the Change of Control Offer shall
cease to accrete in value or
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accrue interest, as the case may be, from and after the Change of Control
Payment Date;
(v) that any Holder electing to have any Notes or portions thereof
purchased pursuant to a Change of Control Offer will be required to
surrender such Notes, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of such Notes completed, to the Paying Agent at
the address specified in the notice, prior to the close of business on the
third Business Day preceding the Change of Control Payment Date;
(vi) that any Holder shall be entitled to withdraw such election if
the Paying Agent receives, not later than the close of business on the
second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter, setting forth the name
of the Holder, the principal amount of Notes delivered for purchase, and a
statement that such Holder is withdrawing such Holder's election to have
such Notes or portions thereof purchased pursuant to the Change of Control
Offer;
(vii) that any Holder electing to have Notes purchased pursuant to
the Change of Control Offer must specify the principal amount that is being
tendered for purchase, which principal amount at maturity must be $1,000 or
an integral multiple thereof;
(viii) that any Holder whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased
portion of the Note or Notes surrendered, which unpurchased portion will be
equal in principal amount to $1,000 or an integral multiple thereof; and
(ix) any other information necessary to enable any Holder to tender
Notes and to have such Notes purchased pursuant to this Section 4.07.
(c) On the Change of Control Payment Date, the Company shall (i) accept
for payment any Notes or portions thereof properly tendered pursuant to the
Change of Control Offer; (ii) irrevocably deposit with the Paying Agent, by
10:00 a.m., New York City time, on such date, in immediately available funds, an
amount equal to the Change of Control Purchase Price in respect of all Notes or
portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee the Notes so accepted together with an Officers' Certificate listing
the Notes or portions thereof tendered to the Company and accepted for payment.
The Paying Agent shall promptly send by first class mail, postage prepaid, to
each Holder of Notes or portions thereof so accepted for payment, payment in an
amount equal to the Change of Control Purchase Price for such Notes or portions
thereof. The Company shall publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
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(d) Upon surrender and cancellation of a Note that is purchased in part
pursuant to the Change of Control Offer, the Company shall promptly issue and
the Trustee shall authenticate and deliver to the surrendering Holder of such
Note, a new Note equal in principal amount to the unpurchased portion of such
surrendered Note; provided that each such new Note shall be in a principal
amount at maturity of $1,000 or an integral multiple thereof.
(e) The Company shall comply with the requirements of Section 14(e) under
the Exchange Act and any other securities laws or regulations, to the extent
such laws and regulations are applicable, in connection with the purchase of
Notes pursuant to a Change of Control Offer.
SECTION 4.08. Limitation on Asset Sales. (a) The Company shall not, and
-------------------------
shall not permit any of its Restricted Subsidiaries, directly or indirectly, to,
consummate any Asset Sale, unless:
(i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration for such Asset Sale at least equal to the Fair
Market Value (as evidenced by a Board Resolution delivered to the Trustee)
of the Property or assets sold or otherwise disposed of;
(ii) at least 75 percent of the consideration received in respect
of such Asset Sale by the Company or such Restricted Subsidiary, as the
case may be, for such Property or assets consists of (a) Cash Proceeds
and/or Telecommunications Assets; (b) shares of publicly-traded Voting
Stock of any Person engaged in the Telecommunications Business in the
United States; or (c) the assumption of Indebtedness of the Company or such
Restricted Subsidiary (other than Indebtedness that is subordinated to the
Notes) and the release of the Company or the Restricted Subsidiary, as the
case may be, from all liability on the Indebtedness assumed; and
(iii) the Company or such Restricted Subsidiary, as the case may be,
uses the Net Cash Proceeds from such Asset Sale in the manner set forth in
Section 4.08(b) hereof.
(b) Within 360 calendar days after the closing of any Asset Sale, the
Company or such Restricted Subsidiary, as the case may be, may, at its option:
(i) reinvest an amount equal to the Net Cash Proceeds, or any
portion thereof, from such Asset Sale in Telecommunications Assets or in
Capital Stock of any Person engaged in the Telecommunications Business;
and/or
(ii) apply an amount equal to such Net Cash Proceeds, or remaining
Net Cash Proceeds, to the permanent reduction of Indebtedness of the
Company (other than
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Indebtedness to a Restricted Subsidiary of the Company) that is senior to
or pari passu with the Notes or to the permanent reduction of Indebtedness
---- -----
or Preferred Stock of any Restricted Subsidiary of the Company (other than
Indebtedness to, or Preferred Stock owned by, the Company or another
Restricted Subsidiary of the Company).
Net Cash Proceeds from any Asset Sale that are not applied pursuant to clause
(i) or (ii) above within 360 calendar days of the closing of such Asset Sale
shall constitute "Excess Proceeds."
(c) If at any time the aggregate amount of Excess Proceeds calculated as
of such date exceeds $5 million, the Company shall use the then-existing Excess
Proceeds to make an offer, as described in Section 4.08(d) hereof (an "Asset
Sale Offer"), to purchase from all Holders, on a pro rata basis, Notes in an
aggregate principal amount equal to the maximum principal amount that may be
purchased out of the then-existing Excess Proceeds, at a purchase price (the
"Asset Sale Purchase Price") in cash equal to 100 percent of the Accreted Value
of such Notes on any Asset Sale Payment Date occurring prior to March 1, 2002,
or 100 percent of the principal amount of such Notes on any Asset Sale Payment
Date on or after March 1, 2002, plus accrued and unpaid interest, if any, to the
Asset Sale Payment Date.
(d) Within 30 calendar days of the date the amount of Excess Proceeds
exceeds $5 million, the Company, or the Trustee at the request and expense of
the Company, shall send to each Holder by first class mail, postage prepaid, a
notice prepared by the Company stating:
(i) that an Asset Sale Offer is being made pursuant to this
Section 4.08, and that all Notes that are timely tendered will be accepted
for payment, subject to proration in the event the amount of Excess
Proceeds is less than the aggregate Asset Sale Purchase Price of all Notes
timely tendered pursuant to the Asset Sale Offer;
(ii) the Asset Sale Purchase Price, the amount of Excess Proceeds
that are available to be applied to purchase tendered Notes, and the date
Notes are to be purchased pursuant to the Asset Sale Offer (the "Asset Sale
Payment Date"), which date shall be a date no earlier than 30 calendar days
nor later than 40 calendar days subsequent to the date such notice is
mailed;
(iii) that any Notes or portions thereof not tendered or accepted
for payment will continue to accrete in value or accrue interest, as the
case may be;
(iv) that, unless the Company defaults in the payment of the Asset
Sale Purchase Price with respect thereto, all Notes or portions thereof
accepted for payment pursuant to the Asset Sale Offer shall cease to
accrete in value or accrue interest, as the case may be, from and after the
Asset Sale Payment Date;
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(v) that any Holder electing to have any Notes or portions thereof
purchased pursuant to the Asset Sale Offer will be required to surrender
such Notes, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of such Notes completed, to the Paying Agent at the address
specified in the notice, prior to the close of business on the third
Business Day preceding the Asset Sale Payment Date;
(vi) that any Holder shall be entitled to withdraw such election if
the Paying Agent receives, not later than the close of business on the
second Business Day preceding the Asset Sale Payment Date, a telegram,
telex, facsimile transmission or letter, setting forth the name of the
Holder, the principal amount of Notes delivered for purchase, and a
statement that such Holder is withdrawing such Holder's election to have
such Notes or portions thereof purchased pursuant to the Asset Sale Offer;
(vii) that any Holder electing to have Notes purchased pursuant to
the Asset Sale Offer must specify the principal amount that is being
tendered for purchase, which principal amount at maturity must be $1,000 or
an integral multiple thereof;
(viii) that any Holder whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased
portion of the Note or Notes surrendered, which unpurchased portion will be
equal in principal amount at maturity to $1,000 or an integral multiple
thereof; and
(ix) any other information necessary to enable any Holder to tender
Notes and to have such Notes purchased pursuant to this Section 4.08.
(e) If the aggregate Asset Sale Purchase Price of the Notes surrendered by
Holders exceeds the amount of Excess Proceeds as indicated in the notice
required by Section 4.08(d) hereof, the Trustee shall select the Notes to be
purchased on a pro rata basis based on the Accreted Value, as of the Asset Sale
Payment Date, if such Asset Sale Payment Date is prior to March 1, 2002, or
principal amount, if such Asset Sale Payment Date is on or after March 1, 2002,
of the Notes tendered, with such adjustments as may be deemed appropriate by the
Trustee, so that only Notes in denominations of $1,000 or integral multiples
thereof shall be purchased.
(f) On the Asset Sale Payment Date, the Company shall (i) accept for
payment any Notes or portions thereof properly tendered and selected for
purchase pursuant to the Asset Sale Offer and Section 4.08(e) hereof; (ii)
irrevocably deposit with the Paying Agent, by 10:00 a.m., New York City time, on
such date, in immediately available funds, an amount equal to the Asset Sale
Purchase Price in respect of all Notes or portions thereof so accepted; and
(iii) deliver, or cause to be delivered, to the Trustee the Notes so accepted
together with an Officers' Certificate listing the Notes or portions thereof
tendered to the Company and accepted for payment. The Paying Agent shall
promptly send by first class mail, postage prepaid, to each Holder of Notes or
portions thereof so accepted for payment,
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payment in an amount equal to the Asset Sale Purchase Price for such Notes or
portions thereof. The Company shall publicly announce the results of the Asset
Sale Offer on or as soon as practicable after the Asset Sale Payment Date.
(g) Upon surrender and cancellation of a Note that is purchased in part,
the Company shall promptly issue and the Trustee shall authenticate and deliver
to the surrendering Holder of such Note a new Note equal in principal amount to
the unpurchased portion of such surrendered Note; provided that each such new
Note shall be in a principal amount at maturity of $1,000 or an integral
multiple thereof.
(h) Upon completion of an Asset Sale Offer (including payment of the Asset
Sale Purchase Price for accepted Notes), any surplus Excess Proceeds that were
the subject of such offer shall cease to be Excess Proceeds, and the Company may
then use such amounts for general corporate purposes.
(i) The Company shall comply with the requirements of Section 14(e) under
the Exchange Act and any other securities laws or regulations, to the extent
such laws and regulations are applicable, in connection with the purchase of
Notes pursuant to an Asset Sale Offer.
SECTION 4.09. Limitation on Consolidated Indebtedness. (a) The Company
---------------------------------------
shall not, and shall not permit any Restricted Subsidiary to, Incur any
Indebtedness after the Issue Date unless either (a) the ratio of (i) the
aggregate consolidated principal amount of Indebtedness of the Company
outstanding as of the most recent available quarterly or annual balance sheet,
after giving pro forma effect to the Incurrence of such Indebtedness and any
other Indebtedness Incurred since such balance sheet date and the receipt and
application of the proceeds thereof, to (ii) Consolidated Cash Flow Available
for Fixed Charges for the four full fiscal quarters immediately preceding the
Incurrence of such Indebtedness for which consolidated financial statements of
the Company have been filed with the Commission or have otherwise become
publicly available, determined on a pro forma basis as if any such Indebtedness
had been Incurred and the proceeds thereof had been applied at the beginning of
such four fiscal quarters, would be less than 5.5 to 1.0 for such four-quarter
periods ending on or prior to December 31, 2000 and 5.0 to 1.0 for such periods
ending thereafter, or (b) the Company's Consolidated Capital Ratio as of the
most recent quarterly or annual balance sheet of the Company that has been filed
with the Commission or has otherwise become publicly available, after giving pro
forma effect to (x) the Incurrence of such Indebtedness and any other
Indebtedness Incurred since such balance sheet date and (y) paid-in capital
received since such balance sheet date or concurrently with the Incurrence of
such Indebtedness, and in each case the receipt and application of the proceeds
thereof, is less than 2.0 to 1.0.
(b) Notwithstanding the foregoing limitation, the Company and any
Restricted Subsidiary may Incur each and all of the following:
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(i) Indebtedness under Senior Credit Facilities in an aggregate
principal amount outstanding or available at any one time not to exceed
$100 million, and any renewal, extension, refinancing or refunding thereof
in an amount which, together with any principal amount remaining
outstanding or available under all Senior Credit Facilities, does not
exceed the aggregate principal amount outstanding or available under all
Senior Credit Facilities immediately prior to such renewal, extension,
refinancing or refunding;
(ii) Indebtedness under Qualified Receivable Facilities in an
aggregate principal amount outstanding or available at any one time not to
exceed the greater of (x) $150 million or (y) an amount equal to 85% of net
Receivables determined in accordance with GAAP, and any renewal, extension,
refinancing or refunding thereof in an amount which, together with any
principal amount remaining outstanding or available under all Qualified
Receivable Facilities, does not exceed the aggregate principal amount
outstanding or available under all Qualified Receivable Facilities
immediately prior to such renewal, extension, refinancing or refunding;
(iii) Purchase Money Indebtedness, provided that the amount of such
Purchase Money Indebtedness does not exceed 90% of the cost of the
construction, acquisition or improvement of the applicable
Telecommunications Assets;
(iv) Indebtedness owed by the Company to any Wholly-Owned
Restricted Subsidiary of the Company or Indebtedness owed by a Restricted
Subsidiary of the Company to the Company or a Wholly-Owned Restricted
Subsidiary of the Company; provided that upon either (x) the transfer or
other disposition by such Wholly-Owned Restricted Subsidiary or the Company
of any Indebtedness so permitted to a Person other than the Company or
another Wholly-Owned Restricted Subsidiary of the Company or (y) the
issuance (other than directors' qualifying shares), sale, lease, transfer
or other disposition of shares of Capital Stock (including by consolidation
or merger) of such Wholly-Owned Restricted Subsidiary to a Person other
than the Company or another such Wholly-Owned Restricted Subsidiary, the
provisions of this clause (iv) shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed to have been Incurred at
the time of such transfer or other disposition;
(v) Indebtedness Incurred to renew, extend, refinance or refund
(each, a "refinancing") the Notes or Indebtedness outstanding at the date
of the Indenture or Purchase Money Indebtedness Incurred pursuant to clause
(iii) of this paragraph in an aggregate principal amount not to exceed the
aggregate principal amount of and accrued interest on the Indebtedness so
refinanced plus the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the Indebtedness so
refinanced or the amount of any premium reasonably determined by the
Company as necessary to accomplish such refinancing by means of a tender
offer
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or privately negotiated repurchase, plus the expenses of the Company
incurred in connection with such refinancing; provided that Indebtedness
the proceeds of which are used to refinance the Notes or Indebtedness which
is pari passu to the Notes or Indebtedness which is subordinate in right of
payment to the Notes shall only be permitted under this clause (v) if (A)
in the case of any refinancing of the Notes or Indebtedness which is pari
passu to the Notes, the refinancing Indebtedness is made pari passu to the
Notes or constitutes Subordinated Indebtedness, and, in the case of any
refinancing of Subordinated Indebtedness, the refinancing Indebtedness
constitutes Subordinated Indebtedness and (B) in any case, the refinancing
Indebtedness by its terms, or by the terms of any agreement or instrument
pursuant to which such Indebtedness is issued, (x) does not provide for
payments of principal of such Indebtedness at stated maturity or by way of
a sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof by the Company (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of the
acceleration of any payment with respect to such Indebtedness upon any
event of default thereunder), in each case prior to the time the same are
required by the terms of the Indebtedness being refinanced and (y) does not
permit redemption or other retirement (including pursuant to an offer to
purchase made by the Company) of such Indebtedness at the option of the
Holder thereof prior to the time the same are required by the terms of the
Indebtedness being refinanced, other than a redemption or other retirement
at the option of the Holder of such Indebtedness (including pursuant to an
offer to purchase made by the Company) which is conditioned upon a change
of control pursuant to provisions substantially similar to those described
in Section 4.07 hereof;
(vi) Indebtedness consisting of Permitted Interest Rate and
Currency Protection Agreements;
(vii) Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business or (B) arising from
customary agreements providing for indemnification, adjustment of purchase
price for closing balance sheet changes within 90 days after closing, or
similar obligations, or from Guarantees or letters of credit, surety bonds
or performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred
in connection with the disposition of any business, assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness Incurred
by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary of the Company for the purpose of financing such
acquisition) and in an aggregate principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; and
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(viii) Indebtedness not otherwise permitted to be Incurred pursuant
to clauses (i) through (vii) above, which, together with any other
outstanding Indebtedness Incurred pursuant to this clause (viii), has an
aggregate principal amount not in excess of $10 million at any time
outstanding.
(c) Notwithstanding any other provision of this Section 4.09, the maximum
amount of Indebtedness that the Company or a Restricted Subsidiary may Incur
pursuant to this Section 4.09, shall not be deemed to be exceeded due solely as
the result of fluctuations in the exchange rates of currencies.
(d) For purposes of determining any particular amount of Indebtedness
under this Section 4.09, (1) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (2) any Liens
granted pursuant to the equal and ratable provisions referred to in Section 4.12
hereof shall not be treated as Indebtedness. For purposes of determining
compliance with this Section 4.09, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the above clauses, the Company, in its sole discretion, shall classify such item
of Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
SECTION 4.10 Limitation on Indebtedness and Preferred Stock of Restricted
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Subsidiaries. The Company shall not permit any Restricted Subsidiary of the
- ------------
Company to Incur any Indebtedness or issue any Preferred Stock except:
(i) Indebtedness or Preferred Stock outstanding on the date of the
Indenture after giving effect to the application of the proceeds of the
Notes;
(ii) Indebtedness Incurred or Preferred Stock issued to and held by
the Company or a Wholly-Owned Restricted Subsidiary of the Company
(provided that such Indebtedness or Preferred Stock is at all times held by
the Company or a Wholly-Owned Restricted Subsidiary of the Company);
(iii) Indebtedness Incurred or Preferred Stock issued by a Person
prior to the time (A) such Person became a Restricted Subsidiary of the
Company, (B) such Person merges into or consolidates with a Restricted
Subsidiary of the Company or (C) another Restricted Subsidiary of the
Company merges into or consolidates with such Person (in a transaction in
which such Person becomes a Restricted Subsidiary of the Company), which
Indebtedness or Preferred Stock was not Incurred or issued in anticipation
of such transaction and was outstanding prior to such transaction;
(iv) Indebtedness under a Senior Credit Facility which is permitted
to be outstanding under clause (i) of the second paragraph of Section 4.09;
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(v) in the case of a Restricted Subsidiary that is a Qualified
Receivable Subsidiary, Indebtedness under a Qualified Receivable Facility
which is permitted to be outstanding under clause (ii) of the second
paragraph of Section 4.09;
(vi) Indebtedness consisting of Permitted Interest Rate and
Currency Protection Agreements;
(vii) Indebtedness (A) in respect of performance, surety and appeal
bonds provided in the ordinary course of business or (B) arising from
customary agreements providing for indemnification, adjustment of purchase
price for closing balance sheet changes within 90 days after closing, or
similar obligations, or from Guarantees or letters of credit, surety bonds
or performance bonds securing any obligation of such Restricted Subsidiary
pursuant to such agreements, in each case Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary of such
Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition) and in
an aggregate principal amount not to exceed the gross proceeds actually
received by such Restricted Subsidiary in connection with such disposition;
and
(viii) Indebtedness or Preferred Stock which is exchanged for, or the
proceeds of which are used to refinance, refund or redeem, any Indebtedness
or Preferred Stock permitted to be outstanding pursuant to clauses (i) and
(iii) hereof or any extension or renewal thereof (for purposes hereof, a
"refinancing"), in an aggregate principal amount, in the case of
Indebtedness, or with an aggregate liquidation preference in the case of
Preferred Stock, not to exceed the aggregate principal amount of the
Indebtedness so refinanced or the aggregate liquidation preference of the
Preferred Stock so refinanced, plus the amount of any premium required to
be paid in connection with such refinancing pursuant to the terms of the
Indebtedness or Preferred Stock so refinanced or the amount of any premium
reasonably determined by the Company as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase,
plus the amount of expenses of the Company and the applicable Restricted
Subsidiary Incurred in connection therewith and provided the Indebtedness
or Preferred Stock Incurred or issued upon such refinancing is by its
terms, or by the terms of any agreement or instrument pursuant to which
such Indebtedness or Preferred Stock is Incurred or issued, (x) does not
provide for payments of principal or liquidation value at the stated
maturity of such Indebtedness or Preferred Stock or by way of a sinking
fund applicable to such Indebtedness or Preferred Stock or by way of any
mandatory redemption, defeasance, retirement or repurchase of such
Indebtedness or Preferred Stock by the Company or any Restricted Subsidiary
of the Company (including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement
required by virtue of acceleration of such Indebtedness upon an event of
default
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thereunder), in each case prior to the time the same are required by the
terms of the Indebtedness or Preferred Stock being refinanced and (y) does
not permit redemption or other retirement (including pursuant to an offer
to purchase made by the Company or a Restricted Subsidiary of the Company)
of such Indebtedness or Preferred Stock at the option of the Holder thereof
prior to the stated maturity of the Indebtedness or Preferred Stock being
refinanced, other than a redemption or other retirement at the option of
the Holder of such Indebtedness or Preferred Stock (including pursuant to
an offer to purchase made by the Company or a Restricted Subsidiary of the
Company) which is conditioned upon the change of control of the Company
pursuant to provisions substantially similar to those described in Section
4.07 hereof and provided, further, that in the case of any exchange or
redemption of Preferred Stock of a Restricted Subsidiary of the Company,
such Preferred Stock may only be exchanged for or redeemed with Preferred
Stock of such Restricted Subsidiary.
SECTION 4.11. Limitation on Restricted Payments. (a) The Company shall
---------------------------------
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Restricted Payment unless, at the time of and after giving
effect to such proposed Restricted Payment:
(i) no Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof;
(ii) after giving effect, on a pro forma basis, to such Restricted
Payment and the incurrence of any Indebtedness the net proceeds of which
are used to finance such Restricted Payment, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
Section 4.09 hereof; and
(iii) after giving effect to such Restricted Payment on a pro forma
basis, the aggregate amount expended (the amount so expended, if other than
cash, to be determined in good faith by a majority of the disinterested
members of the Board of Directors, whose determination shall be conclusive
and evidenced by a resolution thereof) or declared for all Restricted
Payments after the Issue Date does not exceed the sum of (A) 50% of the
Consolidated Net Income of the Company (or, if Consolidated Net Income
shall be a deficit, minus 100% of such deficit) for the period (taken as
one accounting period) beginning on the last day of the fiscal quarter
immediately preceding the Issue Date and ending on the last day of the
fiscal quarter for which the Company's financial statements have been filed
with the Commission or otherwise become publicly available immediately
preceding the date of such Restricted Payment, plus (B) 100% of the net
reduction in Investments, subsequent to the Issue Date, in any Person,
resulting from payments of interest on Indebtedness, dividends, repayments
of loans or advances, or other transfers of Property (but only to the
extent such interest, dividends, repayments or other transfers of Property
are not included in the calculation of Consolidated Net Income), in each
case to the Company or any
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Restricted Subsidiary from any Person (including, without limitation, from
Unrestricted Subsidiaries) or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in
the definition of "Investments" in Section 1.01 hereof), not to exceed in
the case of any Person the amount of Investments previously made subsequent
to the Issue Date by the Company or any Restricted Subsidiary in such
Person and which was treated as a Restricted Payment; provided that the
Company or a Restricted Subsidiary of the Company may make any Restricted
Payment with the aggregate net proceeds received after the date of the
Indenture, including the fair value of property other than cash (determined
in good faith by the Board of Directors as evidenced by a resolution of the
Board of Directors filed with the Trustee), (x) as capital contributions to
the Company, (y) from the issuance (other than to a Restricted Subsidiary)
of Capital Stock (other than Disqualified Stock) of the Company and
warrants, rights or options on Capital Stock (other than Disqualified
Stock) of the Company, or (z) from the conversion of Indebtedness of the
Company into Capital Stock (other than Disqualified Stock and other than by
a Restricted Subsidiary) of the Company after the date of this Indenture.
(b) The foregoing limitations shall not prevent the Company from:
(i) paying a dividend on its Capital Stock at any time within 60
days after the declaration thereof if, on the declaration date, the Company
could have paid such dividend in compliance with the preceding paragraph of
this Section 4.11;
(ii) retiring (A) any Capital Stock of the Company or any
Restricted Subsidiary of the Company, (B) Indebtedness of the Company that
is subordinated in right of payment to the Notes, or (C) Indebtedness of a
Restricted Subsidiary of the Company, in exchange for, or out of the
proceeds of the substantially concurrent sale of Qualified Stock of the
Company;
(iii) retiring any Indebtedness of the Company subordinated in right
of payment to the Notes in exchange for, or out of the proceeds of, the
substantially concurrent incurrence of Indebtedness of the Company (other
than Indebtedness to a Subsidiary of the Company), provided that such new
Indebtedness (A) is subordinated in right of payment to the Notes at least
to the same extent as, (B) has an Average Life at least as long as, and (C)
has no scheduled principal payments due in any amount earlier than, any
equivalent amount of principal under the Indebtedness so retired;
(iv) retiring any Indebtedness of a Restricted Subsidiary of the
Company in exchange for, or out of the proceeds of, the substantially
concurrent incurrence of Indebtedness of the Company or any Restricted
Subsidiary that is permitted under Section 4.09 hereof (in the case of
Indebtedness of the Company) and Section 4.10 hereof (in the case of
Indebtedness of Restricted Subsidiaries) and that (A) is not
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secured by any assets of the Company or any Restricted Subsidiary to a
greater extent than the retired Indebtedness was so secured, (B) has an
Average Life at least as long as the retired Indebtedness, and (C) is
subordinated in right of payment to the Notes at least to the same extent
as the retired Indebtedness;
(v) retiring any Capital Stock or options to acquire Capital Stock
of the Company or any Restricted Subsidiary of the Company held by any
directors, officers or employees of the Company or any Restricted
Subsidiary, provided that the aggregate price paid for all such retired
Capital Stock shall not exceed, in the aggregate, the sum of $2 million
plus the aggregate cash proceeds received by the Company subsequent to the
Issue Date from issuances of Capital Stock or options to acquire Capital
Stock by the Company to directors, officers or employees of the Company and
its Subsidiaries;
(vi) making payments or distributions to dissenting stockholders
pursuant to applicable law in connection with a consolidation, merger or
transfer of assets permitted in Article V hereof;
(vii) retiring any Capital Stock of the Company to the extent
necessary (as determined in good faith by a majority of the disinterested
members of the Board of Directors, whose determination shall be conclusive
and evidenced by a resolution thereof) to prevent the loss, or to secure
the renewal or reinstatement, of any license or franchise held by the
Company or any Restricted Subsidiary from any governmental agency; and
(viii) making Investments not otherwise permitted in an aggregate
amount not to exceed $15 million at any time outstanding.
(c) In determining the amount of Restricted Payments permissible under
this Section 4.11, amounts expended pursuant to clauses (ii), (iii) and (iv) of
the foregoing paragraph shall not be included as Restricted Payments.
(d) Not later than the date of making any Restricted Payment (including
any Restricted Payment permitted to be made pursuant to the two previous
paragraphs), the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the required calculations were computed, which calculations may be
based upon the Company's latest available financial statements.
SECTION 4.12. Limitation on Liens. (a) The Company shall not, and shall
-------------------
not permit any Restricted Subsidiary of the Company to, Incur or suffer to exist
any Lien on or with respect to any property or assets now owned or hereafter
acquired to secure any Indebtedness without making, or causing such Restricted
Subsidiary to make, effective
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provision for securing the Notes (x) equally and ratably with such Indebtedness
as to such property for so long as such Indebtedness will be so secured or (y)
in the event such Indebtedness is Indebtedness of the Company which is
subordinate in right of payment to the Notes, prior to such Indebtedness as to
such property for so long as such Indebtedness will be so secured.
(b) The foregoing restrictions shall not apply to:
(i) Liens existing on the date of the Indenture and securing
Indebtedness outstanding on the date of the Indenture or Incurred on or
after the Issue Date pursuant to any Senior Credit Facility or Qualified
Receivable Facility;
(ii) Liens securing Indebtedness in an amount which, together with
the aggregate amount of Indebtedness then outstanding or available under
all Senior Credit Facilities (or under refinancings or amendments of such
Senior Credit Facilities), does not exceed 1.5 times the Company's
Consolidated Cash Flow Available for Fixed Charges for the four full fiscal
quarters preceding the Incurrence of such Lien for which the Company's
consolidated financial statements have been filed with the Commission or
become publicly available, determined on a pro forma basis as if such
Indebtedness had been Incurred and the proceeds thereof had been applied at
the beginning of such four fiscal quarters;
(iii) Liens in favor of the Company or any Wholly-Owned Restricted
Subsidiary of the Company;
(iv) Liens on Property of the Company or a Restricted Subsidiary
acquired, constructed or constituting improvements made after the Issue
Date of the Notes to secure Purchase Money Indebtedness which is otherwise
permitted under the Indenture, provided that (a) the principal amount of
any Indebtedness secured by any such Lien does not exceed 100% of such
purchase price or cost of construction or improvement of the Property
subject to such Lien, (b) such Lien attaches to such property prior to, at
the time of or within 180 days after the acquisition, completion of
construction or commencement of operation of such Property and (c) such
Lien does not extend to or cover any Property other than the specific item
of Property (or portion thereof) acquired, constructed or constituting the
improvements made with the proceeds of such Purchase Money Indebtedness;
(v) Liens to secure Acquired Indebtedness, provided that (a) such
Lien attaches to the acquired asset prior to the time of the acquisition of
such asset and (b) such Lien does not extend to or cover any other
Property;
(vi) Liens to secure Indebtedness Incurred to extend, renew,
refinance or refund (or successive extensions, renewals, refinancings or
refundings), in whole or in
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part, Indebtedness secured by any Lien referred to in the foregoing clauses
(i), (ii), (iv) and (v) so long as such Lien does not extend to any other
Property and the principal amount of Indebtedness so secured is not
increased except as otherwise permitted under clause (v) of the second
paragraph of Section 4.09 hereof (in the case of Indebtedness of the
Company) or clause (viii) of Section 4.10 hereof (in the case of
Indebtedness of Restricted Subsidiaries);
(vii) Liens not otherwise permitted by the foregoing clauses (i)
through (vi) in an aggregate amount not to exceed 5% of the Company's
Consolidated Tangible Assets;
(viii) Liens granted after the Issue Date pursuant to the immediately
preceding paragraph to secure the Notes; and
(ix) Permitted Liens.
SECTION 4.13. Limitation on Sale and Leaseback Transactions. The Company
---------------------------------------------
shall not, and shall not permit any of its Restricted Subsidiaries to, directly
or indirectly, enter into, assume, Guarantee or otherwise become liable with
respect to any Sale and Leaseback Transaction (other than a Sale and Leaseback
Transaction between the Company or a Restricted Subsidiary on the one hand and a
Restricted Subsidiary or the Company on the other hand), unless (i) the Company
or such Restricted Subsidiary, as the case may be, receives consideration at the
time of such Sale and Leaseback Transaction at least equal to the Fair Market
Value (as evidenced by a Board Resolution delivered to the Trustee) of the
Property subject to such transaction; (ii) the Attributable Indebtedness of the
Company or such Restricted Subsidiary with respect thereto is included as
Indebtedness and would be permitted by Section 4.09 hereof or Section 4.10
hereof, as the case may be; (iii) the Company or such Restricted Subsidiary
would be permitted to create a Lien on such Property without securing the Notes
by Section 4.12 hereof; and (iv) the Net Cash Proceeds from such transaction are
applied in accordance with Section 4.08 hereof; provided that the Company shall
be permitted to enter into Sale and Leaseback Transactions for up to $25 million
with respect to phase I of the Company's headquarters buildings located in Cedar
Rapids, Iowa, provided that such transaction is entered into on or before
December 31, 1997 and up to $30 million with respect to other phases of such
headquarters building, provided that any such transaction is entered into within
180 days of the earlier of (x) substantial completion or (y) occupation of the
applicable phase of such headquarters building.
SECTION 4.14. Limitation on Dividends and Other Payment Restrictions
------------------------------------------------------
Affecting Subsidiaries. The Company shall not, and shall not permit any
- ----------------------
Restricted Subsidiary to, directly or indirectly, cause or suffer to exist or
become effective, or enter into, any encumbrance or restriction (other than
pursuant to law or regulation) on the ability of any Restricted Subsidiary (i)
to pay dividends or make any other distributions in respect of its Capital Stock
or pay any Indebtedness or other obligation owed to the Company or any
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Restricted Subsidiary; (ii) to make loans or advances to the Company or any
Restricted Subsidiary; or (iii) to transfer any of its Property to the Company
or any other Restricted Subsidiary, except:
(a) any encumbrance or restriction existing as of the Issue Date or
any other agreement relating to any Existing Indebtedness or any
Indebtedness under a Qualified Receivable Facility otherwise permitted
under this Indenture;
(b) any encumbrance or restriction pursuant to an agreement relating
to an acquisition of Property, so long as the encumbrances or restrictions
in any such agreement relate solely to the Property so acquired;
(c) any encumbrance or restriction relating to any Indebtedness of any
Restricted Subsidiary existing on the date on which such Restricted
Subsidiary is acquired by the Company or another Restricted Subsidiary
(other than any such Indebtedness Incurred by such Restricted Subsidiary in
connection with or in anticipation of such acquisition);
(d) any encumbrance or restriction pursuant to an agreement effecting
a permitted refinancing of Indebtedness issued pursuant to an agreement
referred to in the foregoing clauses (a) through (c), so long as the
encumbrances and restrictions contained in any such refinancing agreement
are not materially more restrictive than the encumbrances and restrictions
contained in such agreements;
(e) customary provisions (A) that restrict the subletting, assignment
or transfer of any property or asset that is a lease, license, conveyance
or contract or similar property or asset; (B) existing by virtue of any
transfer of, agreement to transfer, option or right with respect to, or
Lien on, any property or assets of the Company or any Restricted Subsidiary
not otherwise prohibited by the Indenture or (C) arising or agreed to in
the ordinary course of business, not relating to any Indebtedness, and that
do not, individually or in the aggregate, detract from the value of
property or assets of the Company or any Restricted Subsidiary in any
manner material to the Company or any Restricted Subsidiary;
(f) in the case of clause (iii) above, restrictions contained in any
security agreement (including a Capital Lease Obligation) securing
Indebtedness of the Company or a Restricted Subsidiary otherwise permitted
under the Indenture, but only to the extent such restrictions restrict the
transfer of the property subject to such security agreement; and
(g) any restriction with respect to a Restricted Subsidiary of the
Company imposed pursuant to an agreement which has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted
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Subsidiary, provided that the consummation of such transaction would not
result in an Event of Default or an event that, with the passing of time or
the giving of notice or both, would constitute an Event of Default, that
such restriction terminates if such transaction is not consummated and that
the consummation or abandonment of such transaction occurs within one year
of the date such agreement was entered into.
Nothing contained in this Section 4.14 shall prevent the Company or any
other Restricted Subsidiary from (1) creating, incurring, assuming or suffering
to exist any Liens otherwise permitted under Section 4.12 or (2) restricting the
sale or other disposition of property or assets of the Company or any of its
Restricted Subsidiaries that secure Indebtedness of the Company or any of its
Restricted Subsidiaries otherwise permitted under Section 4.09 hereof or Section
4.10 hereof, as the case may be.
SECTION 4.15. Limitation on Issuance and Sale of Capital Stock of
---------------------------------------------------
Restricted Subsidiaries. The Company (i) shall not permit any Restricted
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Subsidiary to issue any Capital Stock other than to the Company or a Wholly-
Owned Restricted Subsidiary unless immediately after giving effect thereto such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any
Investment of the Company or any other Restricted Subsidiary in such Restricted
Subsidiary would have been permitted under Section 4.11 hereof if made on the
date of such issuance and (ii) shall not permit any Person other than the
Company or a Wholly-Owned Restricted Subsidiary to own any Capital Stock of any
Restricted Subsidiary, other than directors' qualifying shares and except for:
(a) a sale of 100% of the Capital Stock of a Restricted Subsidiary
sold in a transaction not prohibited by the covenant described under
Section 4.08 hereof;
(b) Capital Stock of a Restricted Subsidiary issued and outstanding on
the Issue Date and held by Persons other than the Company or any Restricted
Subsidiary;
(c) Capital Stock of a Restricted Subsidiary issued and outstanding
prior to the time that such Person becomes a Restricted Subsidiary so long
as such Capital Stock was not issued in anticipation or contemplation of
such Person's becoming a Restricted Subsidiary or otherwise being acquired
by the Company; and
(d) any Preferred Stock permitted to be issued under Section 4.10
hereof.
SECTION 4.16. Transactions with Affiliates. The Company shall not, and
----------------------------
shall not permit any of its Restricted Subsidiaries to, directly or indirectly,
sell, lease, transfer, or otherwise dispose of, any of its Properties or assets
to, or purchase any Property or assets from, or enter into any contract,
agreement, understanding, loan, advance or Guarantee with or for the benefit of,
any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (a)
such Affiliate Transaction or series of Affiliate Transactions is on terms that
are no less favorable to the Company or such Restricted Subsidiary than those
that would have been
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obtained in a comparable arm's-length transaction by the Company or such
Restricted Subsidiary with a Person that is not an Affiliate (or, in the event
that there are no comparable transactions involving Persons who are not
Affiliates of the Company or the relevant Restricted Subsidiary to apply for
comparative purposes, is otherwise on terms that, taken as a whole, the Company
has determined to be fair to the Company or the relevant Restricted Subsidiary)
and (b) the Company delivers to the Trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1 million, a certificate
of the chief executive, operating or financial officer of the Company evidencing
such officer's determination that such Affiliate Transaction or series of
Affiliate Transactions complies with clause (a) above and is in the best
interests of the Company or such Restricted Subsidiary and (ii) with respect to
any Affiliate Transaction or series of Affiliate Transactions involving
aggregate payments in excess of $5 million, a Board Resolution certifying that
such Affiliate Transaction or series of Affiliate Transactions complies with
clause (a) above and that such Affiliate Transaction or series of Affiliate
Transactions has been approved by a majority of the disinterested members of the
Board of Directors who have determined that such Affiliate Transaction or series
of Affiliate Transactions is in the best interest of the Company or such
Restricted Subsidiary; provided that the following shall not be deemed Affiliate
Transactions:
(i) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and
consistent with industry practice;
(ii) any agreement or arrangement with respect to the compensation
of a director or officer of the Company or any Restricted Subsidiary
approved by a majority of the disinterested members of the Board of
Directors and consistent with industry practice;
(iii) transactions between or among the Company and its Restricted
Subsidiaries;
(iv) transactions permitted by Section 4.11 hereof;
(v) transactions pursuant to any agreement or arrangement existing
on the Issue Date; and
(vi) transactions with respect to wireline or wireless transmission
capacity, the lease or sharing or other use of cable or fiberoptic lines,
equipment, rights-of-way or other access rights, between the Company or any
Restricted Subsidiary and any other Person; provided, in any case, that
such transaction is on terms that are no less favorable, taken as a whole,
to the Company or the relevant Restricted Subsidiary than those that could
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with Persons who are not Affiliates of the Company or
the relevant Restricted Subsidiary (or, in the event that there are no
comparable
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transactions involving Persons who are not Affiliates of the Company or the
relevant Restricted Subsidiary to apply for comparative purposes, is
otherwise on terms that, taken as a whole, the Company has determined to be
fair to the Company or the relevant Restricted Subsidiary).
SECTION 4.17. Restricted and Unrestricted Subsidiaries. (a) The Company
----------------------------------------
may designate a Subsidiary (including a newly formed or newly acquired
Subsidiary) of the Company or any of its Restricted Subsidiaries as an
Unrestricted Subsidiary if such Subsidiary does not have any obligations which,
if in Default, would result in a cross default on Indebtedness of the Company or
a Restricted Subsidiary (other than Indebtedness to the Company or a Wholly-
Owned Restricted Subsidiary), and (i) such Subsidiary has total assets of $1,000
or less, (ii) such Subsidiary has assets of more than $1,000 and an Investment
in such Subsidiary in an amount equal to the Fair Market Value of such
Subsidiary would then be permitted under Section 4.11(a) hereof or (iii) such
designation is effective immediately upon such Person becoming a Subsidiary.
Unless so designated as an Unrestricted Subsidiary, any Person that becomes a
Subsidiary of the Company or any of its Restricted Subsidiaries shall be
classified as a Restricted Subsidiary thereof.
(b) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person (other than a newly formed Subsidiary
having no outstanding Indebtedness (other than Indebtedness to the Company or a
Restricted Subsidiary) at the date of determination) becoming a Restricted
Subsidiary (whether through an acquisition, the redesignation of an Unrestricted
Subsidiary or otherwise), unless, after giving effect to such action,
transaction or series of transactions on a pro forma basis, (i) the Company
could incur at least $1 of additional Indebtedness pursuant to Section 4.09(a)
and (ii) no Default or Event of Default would occur.
(c) Subject to clause (b), an Unrestricted Subsidiary may be redesignated
as a Restricted Subsidiary. The designation of a Subsidiary as an Unrestricted
Subsidiary or the designation of an Unrestricted Subsidiary as a Restricted
Subsidiary in compliance with clause (b) shall be made by the Board of Directors
pursuant to a Board Resolution delivered to the Trustee and shall be effective
as of the date specified in such Board Resolution, which shall not be prior to
the date such Board Resolution is delivered to the Trustee.
SECTION 4.18. Reports. For as long as any Notes remain outstanding, the
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Company shall furnish to the Holders of the Notes and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act. The Company
shall file with the Trustee within 15 days after it files them with the
Commission copies of the annual and quarterly reports and the information,
documents, and other reports that the Company is required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC
Reports"). In the event the Company shall cease to be required to file SEC
Reports pursuant to the
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Exchange Act, the Company shall nevertheless continue to file such reports with
the Commission (unless the Commission shall not accept such a filing) and in any
event with the Trustee. The Company shall furnish copies of the SEC Reports to
the Holders of Notes at the time the Company is required to file the same with
the Trustee and will make such information available to investors who request it
in writing.
SECTION 4.19. Compliance Certificate; Notice of Default or Event of
-----------------------------------------------------
Default. The Company shall deliver to the Trustee within 120 calendar days
- -------
after the end of each fiscal year of the Company ending after the date hereof,
an Officers' Certificate stating whether or not, to the best knowledge of such
officer, the Company has complied with all conditions and covenants under this
Indenture, and, if the Company shall be in Default, specifying all such Defaults
and the nature thereof of which such officer may have knowledge.
For the purposes of this Section 4.19, compliance shall be determined
without regard to any period of grace or requirement of notice under this
Indenture.
The Company shall deliver written notice to the Trustee within 30 calendar
days after any executive officer of the Company becomes aware of the occurrence
of any event which constitutes, or with the giving of notice or the lapse of
time or both would constitute, a Default or Event of Default, describing such
Default or Event of Default, its status and what action the Company is taking or
proposes to take with respect thereto.
ARTICLE V.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
SECTION 5.01. Merger, Consolidation or Sale of Assets. The Company shall
---------------------------------------
not in any transaction or series of related transactions, consolidate with, or
merge with or into, any other Person or permit any other Person to merge with or
into the Company (other than a
merger of a Restricted Subsidiary of the Company into the Company in which the
Company is the continuing corporation), or sell, convey, assign, transfer, lease
or otherwise dispose of all or substantially all of the Property and assets of
the Company and its Restricted Subsidiaries taken as a whole to any other
Person, unless:
(a) either (i) the Company shall be the continuing corporation or (ii)
the corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of the Company and its
Restricted Subsidiaries taken as a whole (any such corporation or Person
being the "Surviving Entity") shall be a corporation organized and validly
existing under the laws of the United States of America, any political
subdivision thereof, any state thereof or the District of Columbia, and
shall expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee,
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in form reasonably satisfactory to the Trustee, the due and punctual
payment of the principal of (and premium, if any) and interest on all the
Notes and the performance of every covenant and obligation in this
Indenture on the part of the Company to be performed or observed;
(b) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of related transactions), no
Default or Event of Default shall have occurred and be continuing;
(c) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of transactions), the Company
(or the Surviving Entity, if the Company is not continuing) would (A) be
permitted to Incur $1.00 of additional Indebtedness under Section 4.09(a)
hereof and (B) have a Consolidated Net Worth that is not less than the
Consolidated Net Worth of the Company immediately before such transaction
or series of transactions; and
(d) if, as a result of any such transaction, Property of the Company
would become subject to a Lien prohibited by the provisions of the
Indenture described under Section 4.12 hereof, the Company or the successor
entity to the Company shall have secured the Notes as required thereby.
In connection with any consolidation, merger, conveyance, lease or other
disposition contemplated by this Section 5.01, the Company shall deliver, or
cause to be delivered, to the Trustee, in form reasonably satisfactory to the
Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger, conveyance, lease or disposition and any
supplemental indenture in respect thereto comply with this Article V and that
all conditions precedent herein provided for relating to such transaction have
been complied with.
SECTION 5.02. Successor Corporation Substituted. Upon any consolidation
---------------------------------
with, or merger by the Company with or into, any other corporation, or any sale,
assignment, transfer, lease, conveyance or other disposition of all or
substantially all of the Property and assets of the Company and its Restricted
Subsidiaries taken as a whole in accordance with Section 5.01 hereof, the
successor corporation formed by such consolidation or into which the Company is
merged, or the Person to which such sale, conveyance, assignment, transfer,
lease, conveyance or other disposition is made, shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person has been named
as the Company herein; and thereafter the predecessor corporation shall be
relieved of all obligations and covenants under this Indenture
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and the Notes, except for the obligation to pay the principal of (and premium,
if any) and interest on the Notes.
ARTICLE VI.
DEFAULTS AND REMEDIES
SECTION 6.01. Events of Default. "Event of Default," wherever used herein
-----------------
with respect to the Notes, means any one of the following events (whatever the
reason for such event, and whether it shall be voluntary or involuntary, or be
effected by operation of law, pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body):
(a) default in the payment of interest on any Note when the same
becomes due and payable, and the continuance of such Default for a period
of 30 calendar days; or
(b) default in the payment of the principal of (or premium, if any,
on) any Note when the same becomes due and payable whether upon Maturity,
optional redemption, required repurchase (including pursuant to a Change of
Control Offer or an Asset Sale Offer) or otherwise, or the failure to make
an offer to purchase any Note as herein required; or
(c) default in the performance, or breach, of any covenant or
agreement contained in Section 4.07, Section 4.08 or Article V hereof; or
(d) default in the performance, or breach, of any covenant or warranty
of the Company contained in this Indenture or the Notes (other than a
covenant or warranty addressed in Section 6.01(a), Section 6.01(b) or
Section 6.01(c) hereof), and the continuance of such Default or breach for
a period of 60 calendar days after written notice thereof has been given to
the Company by the Trustee or to the Company and the Trustee by the Holders
of at least 25 percent of the aggregate principal amount of the outstanding
Notes specifying such Default and stating that such notice is a "Notice of
Default" delivered in connection with this Indenture; or
(e) a default or defaults under any bond, debenture, note or other
evidence of Indebtedness by the Company or any Restricted Subsidiary of the
Company (or under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness by the Company or any such Restricted Subsidiary) having,
individually or in the aggregate, a principal or similar amount outstanding
of at least $10 million, whether such indebtedness now exists or shall
hereafter be created, which default or defaults shall have resulted in the
acceleration of the maturity of such Indebtedness prior to its express
maturity or shall
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constitute a failure to pay such Indebtedness when due and payable after
the expiration of any applicable grace period with respect thereto or shall
have resulted in such Indebtedness becoming or being declared due and
payable; or
(f) a final judgment or final judgments for the payment of money
(other than to the extent covered by insurance as to which the insurance
company has acknowledged coverage and other than to the extent covered by
an indemnity given by an insurance company) is entered against the Company
or any Restricted Subsidiary of the Company in an aggregate amount in
excess of $10 million by a court or courts of competent jurisdiction, which
judgment is not discharged, waived, stayed, bonded or satisfied for a
period of 45 consecutive calendar days; or
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Restricted
Subsidiary of the Company in an involuntary case or proceeding under United
States bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state, or foreign bankruptcy, insolvency, or other
similar law or (ii) a decree or order adjudging the Company or any
Restricted Subsidiary of the Company a bankrupt or insolvent, or approving
as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of, or in respect of, the Company or any
Restricted Subsidiary of the Company under United States bankruptcy laws,
as now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency, or similar law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other similar
official of the Company or any Restricted Subsidiary of the Company or of
any substantial part of the Property or assets of the Company or any
Restricted Subsidiary of the Company, or ordering the winding-up or
liquidation of the affairs of the Company or any Restricted Subsidiary of
the Company, and the continuance of any such decree or order for relief or
any such other decree or order unstayed and in effect for a period of 60
consecutive calendar days; or
(h) the commencement by the Company or any Restricted Subsidiary of
the Company of a voluntary case or proceeding under United States
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency or other similar law or
of any other case or proceeding to be adjudicated a bankrupt or insolvent;
or (ii) the consent by the Company or any Restricted Subsidiary of the
Company to the entry of a decree or order for relief in respect of the
Company or any Restricted Subsidiary of the Company in an involuntary case
or proceeding under United States bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state, or foreign bankruptcy,
insolvency, or other similar law or to the commencement of any bankruptcy
or insolvency case or proceeding against the Company or any Restricted
Subsidiary of the Company; or (iii) the filing by the Company or any
Restricted Subsidiary of the Company of a petition or answer or consent
seeking reorganization or relief under
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United States bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal, state or foreign bankruptcy, insolvency or other
similar law; or (iv) the consent by the Company or any Restricted
Subsidiary of the Company to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee, sequestrator or similar official of the Company or any
Restricted Subsidiary of the Company or of any substantial part of the
Property or assets of the Company or any Restricted Subsidiary of the
Company, or the making by the Company or any Restricted Subsidiary of the
Company of an assignment for the benefit of creditors; or (v) the admission
by the Company or any Restricted Subsidiary of the Company in writing of
its inability to pay its debts generally as they become due; or (vi) the
taking of corporate action by the Company or any Restricted Subsidiary of
the Company in furtherance of any such action.
SECTION 6.02. Acceleration. If any Event of Default (other than an Event
------------
of Default specified in Section 6.01(g) or Section 6.01(h) hereof) occurs and is
continuing, then and in every such case, the Trustee by a notice in writing to
the Company may, and at the direction of the Holders of not less than 25 percent
of the outstanding aggregate principal amount of Notes by a notice in writing to
the Company and the Trustee, shall declare the Accreted Value and any accrued
and unpaid interest on all Notes then outstanding to be immediately due and
payable. Upon any such declaration, such Accreted Value and any accrued and
unpaid interest on all Notes then outstanding will become and be immediately due
and payable.
If an Event of Default specified in Section 6.01(g) or Section 6.01(h)
hereof occurs, the Accreted Value and any accrued and unpaid interest on all
Notes then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder of Notes.
In the event of a declaration of acceleration because an Event of Default
set forth in Section 6.01(e) hereof has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if the
event of default triggering such Event of Default pursuant to Section 6.01(e)
hereof shall be remedied, or cured, or waived by the holders of the relevant
Indebtedness, within 60 calendar days after such event of default; provided no
judgment or decree for the payment of the money due on the Notes has been
obtained by the Trustee as hereinafter in this Article VI provided.
At any time after a declaration of acceleration with respect to Notes has
been made and before a judgment or decree for payment of the money due has been
obtained by the Trustee as hereinafter in this Article VI provided, the Holders
of a majority in principal amount of the outstanding Notes, by written notice to
the Company and the Trustee, may rescind and annul such declaration and its
consequences if,
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(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(i) all overdue installments of interest on all Notes,
(ii) the principal of (and premium, if any, on) any Notes which
have become due otherwise than by such declaration of acceleration and
interest thereon at the rate or rates prescribed therefor in such Notes,
(iii) to the extent that payment of such interest is lawful,
interest on the Defaulted Interest at the rate prescribed therefor in the
Notes and this Indenture, and
(iv) all moneys paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and all other amounts due to the Trustee
pursuant to Section 7.07 hereof; and
(b) all Events of Default with respect to the Notes, other than
the non-payment of the principal of Notes which have become due solely by
such declaration of acceleration, have been cured or waived by the Holders
as provided herein.
No such rescission shall affect any subsequent Default or impair any right
consequent thereon.
SECTION 6.03. Other Remedies. The Company covenants that if an Event of
--------------
Default specified in Section 6.01(a) or Section 6.01(b) occurs the Company
shall, upon demand of the Trustee, pay to the Trustee, for the benefit of the
Holders, the whole amount then due and payable on the Notes for principal (and
premium, if any) and interest and, to the extent that payment of such interest
shall be legally enforceable, interest upon the overdue principal (and premium,
if any) and upon Defaulted Interest, at the rate or rates prescribed therefor in
such Notes; and, in addition thereto, such further amount as shall be sufficient
to cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel and all other amounts due to the Trustee pursuant to Section 7.07
hereof.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may and, at the
direction of the Holders of not less than a majority of the outstanding
aggregate principal amount of the Notes, shall institute a judicial proceeding
for the collection of the sums so due and unpaid, and may prosecute such
proceeding to judgment or final decree, and may enforce the same against the
Company or any other obligor upon such Notes and collect the moneys adjudged or
decreed to be payable in the manner provided by law out of the Property and
assets of the Company or any other obligor upon such Notes, wherever situated.
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If an Event of Default with respect to the Notes occurs and is continuing,
the Trustee may in its discretion proceed to protect and enforce its rights and
the rights of the Holders by such appropriate judicial proceedings as the
Trustee shall deem most effectual to protect and enforce any such rights,
whether for the specific enforcement of any covenant or agreement in this
Indenture or in aid of the exercise of any power granted herein, or to enforce
any other proper remedy.
SECTION 6.04. Waiver of Past Defaults. The Holders of not less than a
-----------------------
majority in principal amount of the outstanding Notes may, on behalf of the
Holders of all the Notes, waive any past Default and its consequences under this
Article VI, except a Default (a) in the payment of the principal of (or
premium, if any) or interest on, any Note, or (b) in respect of a covenant or
provision hereof which under Section 9.02 hereof cannot be modified or amended
without the consent of the Holders of each outstanding Note affected.
SECTION 6.05. Control by Majority. The Holders of not less than a
-------------------
majority in principal amount of the outstanding Notes shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee; provided that
(a) such direction shall not be in conflict with any rule of law or
with this Indenture or unduly prejudicial to the rights of other Holders
and would not subject the Trustee to personal liability, and
(b) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction.
SECTION 6.06. Limitation on Suits. No Holder of Notes shall have any
-------------------
right to institute any proceeding, judicial or otherwise, with respect to this
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless
(a) such Holder has previously given written notice to the Trustee of
a continuing Event of Default with respect to the Notes;
(b) the Holders of not less than 25 percent in principal amount of the
outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name
as Trustee hereunder;
(c) such Holder or Holders have offered and, if requested, provided to
the Trustee security or indemnity satisfactory to the Trustee in its
reasonable discretion against the costs, expenses and liabilities to be
incurred in compliance with such request;
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(d) the Trustee for 30 calendar days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding;
and
(e) no direction inconsistent with such written request has been given
to the Trustee during such 30-day period by the Holders of a majority in
principal amount of the outstanding Notes;
in any event, it being understood and intended that no one or more Holders of
Notes shall have any right in any manner whatever by virtue of, or by availing
of, any provision of this Indenture to affect, disturb or prejudice the rights
of any other Holders of Notes, or to obtain or to seek to obtain priority or
preference over any other of such Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all Holders of Notes.
SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding any
------------------------------------
other provision of this Indenture, the right of any Holder to receive payment of
principal of (premium, if any) and interest on the Notes held by such Holder, on
or after the respective due dates expressed in the Notes or the redemption dates
or purchase dates provided for therein, or to bring suit for the enforcement of
any such payment on or after such respective dates, shall be absolute and
unconditional and shall not be impaired or affected without the consent of such
Holder.
SECTION 6.08. Trustee May File Proofs of Claim. In case of the pendency
--------------------------------
of any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceedings, or any
voluntary or involuntary case under United States bankruptcy laws, as now or
hereafter constituted, relative to the Company or any other obligor upon the
Notes or the Property and assets of the Company or of such other obligor or
their creditors, the Trustee (irrespective of whether the principal of such
Notes shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
the Company for the payment of overdue principal or interest) shall be entitled
and empowered, by intervention in such proceeding or otherwise, (i) to file and
prove a claim for the whole amount of principal (and premium, if any) and
interest owing and unpaid in respect of the Notes, to file such other papers or
documents and to take such other actions, including participating as a member or
otherwise in any official committee of creditors appointed in the matter, as may
be necessary or advisable in order to have the claims of the Trustee (including
any claim for the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel and all other amounts due to the Trustee
pursuant to Section 7.07 hereof) and of the Holders allowed in such judicial
proceeding, and (ii) to collect and receive any moneys or other Property payable
or deliverable on any such claims and to distribute the same; and any receiver,
assignee, trustee, custodian, liquidator, sequestrator (or other similar
official) in any such proceeding is hereby authorized by each Holder to make
such payments to the Trustee, and in the event that the Trustee shall consent to
the making of such payments
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directly to the Holders, to pay to the Trustee any amount due it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, and any other amounts due the Trustee under Section 7.07
hereof. Nothing contained herein shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
SECTION 6.09. Priorities. Any money collected by the Trustee pursuant to
----------
this Article VI shall be applied in the following order, at the date or dates
fixed by the Trustee and, in case of the distribution of such money on account
of principal (premium, if any) or interest, upon presentation of the Notes and
the notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section
7.07 hereof;
SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Notes, ratably,
without preference or priority of any kind, according to the amounts due
and payable on such Notes for principal (and premium, if any) and interest,
respectively; and
THIRD: To the Company.
The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section 6.09. At least 15 calendar days before such
record date, the Company shall mail to each Holder and the Trustee a notice that
states such record date, the payment date and amount to be paid. The Trustee
may mail such notice in the name and at the expense of the Company.
SECTION 6.10. Undertaking for Costs. All parties to this Indenture agree,
---------------------
and each Holder of any Note by such Holder's acceptance thereof shall be deemed
to have agreed, that any court may in its discretion require, in any suit for
the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken, suffered or omitted by it as Trustee,
the filing by any party litigant in such suit of an undertaking to pay the costs
of such suit and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; but the provisions of this Section shall not apply to any
suit instituted by the Trustee, to any suit instituted by any Holder, or group
of Holders, holding in the aggregate more than 10 percent in principal amount of
the outstanding Notes, or to any suit instituted by any Holder for the
enforcement of the payment of the principal of (or premium, if any) or interest
on any Note on or after its Stated Maturity.
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SECTION 6.11. Waiver of Stay or Extension Laws. The Company (to the
--------------------------------
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
SECTION 6.12. Trustee May Enforce Claims Without Possession of the Notes.
----------------------------------------------------------
All rights of action and claims under this Indenture or the Notes may be
prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name, as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Notes.
SECTION 6.13. Restoration of Rights and Remedies. If the Trustee or any
----------------------------------
Holder of Notes has instituted any proceeding to enforce any right or remedy
under this Indenture and such proceeding has been discontinued or abandoned for
any reason, or has been determined adversely to the Trustee or to such Holder,
then and in every such case the Company, the Trustee and the Holders shall,
subject to any determination in such proceeding, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Trustee and the Holders shall continue as though no such
proceeding had been instituted.
SECTION 6.14. Rights and Remedies Cumulative. Except as otherwise
------------------------------
provided in Section 2.09 hereof, no right or remedy herein conferred upon or
reserved to the Trustee or to the Holders is intended to be exclusive of any
other right or remedy, and every right and remedy shall, to the extent permitted
by law, be cumulative and in addition to every other right and remedy given
hereunder or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other appropriate
right or remedy.
SECTION 6.15. Delay or Omission Not Waiver. No delay or omission of the
----------------------------
Trustee or of any Holder of any Note to exercise any right or remedy accruing
upon any Event of Default shall impair any such right or remedy or constitute a
waiver of any such Event of Default or an acquiescence therein. Every right and
remedy given by this Article VI or by law to the Trustee or to the Holders may
be exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders, as the case may be.
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ARTICLE VII.
TRUSTEE
SECTION 7.01. Duties of Trustee. (a) If an Event of Default has occurred
-----------------
and is continuing, the Trustee shall exercise the rights and powers vested in it
by this Indenture and shall use the same degree of care and skill in their
exercise as a prudent person would exercise or use under the circumstances in
the conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default of which a Trust
Officer has actual knowledge: (i) the Trustee undertakes to perform such duties
and only such duties as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture against the
Trustee; and (ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture; provided that in
the case of any such certificates or opinions that by any provision of this
Indenture are specifically required to be furnished to the Trustee, the Trustee
shall examine such certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct; provided
that: (i) this paragraph (c) shall not limit the effect of paragraph (b) of this
Section 7.01; (ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not
be liable with respect to any action it takes or omits to take in good faith in
accordance with a direction received by it pursuant to Section 6.05 hereof.
(d) Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
(e) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the performance
of any of its duties hereunder, or in the exercise of any of its rights or
powers, if it shall have reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk of liability is not reasonably
assured to it.
(f) Every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Trustee shall be subject to the
provisions of this Article VII and to the provisions of the Trust Indenture Act.
SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on any
-----------------
document believed by it to be genuine and to have been signed or presented by
the proper Person.
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Except as provided in Section 7.01(b) hereof, the Trustee need not investigate
any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable
for any action it takes or omits to take in good faith in reliance on any
Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any such agent; provided that such agent was
appointed with due care by the Trustee.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers; provided that the Trustee's conduct does not constitute willful
misconduct or gross negligence.
(e) The Trustee shall not be charged with knowledge of any Default or
Event of Default under Section 6.01(c), 6.01(d), 6.01(e) or 6.01(f) hereof, of
the identity of any Restricted Subsidiary or of the existence of any Change of
Control or Asset Sale unless either (i) a Trust Officer shall have actual
knowledge thereof, or (ii) the Trustee shall have received notice thereof in
accordance with Section 10.02 hereof from the Company or any Holder of Notes.
(f) The Trustee may consult with counsel and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(g) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture or
other paper or document, but the Trustee, in its discretion may make such
further inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney.
(h) The Trustee shall not be liable for any action it takes or omits to
take in good faith in accordance with the direction of the Holders of a majority
of the aggregate outstanding principal amount of Notes relating to the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred upon the Trustee, under this
Indenture.
SECTION 7.03. Individual Rights of Trustee. The Trustee, any Paying
----------------------------
Agent or Note Registrar, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with the Company or its
Affiliates with the same rights it
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would have if it were not Trustee, Paying Agent or Note Registrar hereunder, as
the case may be; provided that the Trustee must in any event comply with
Sections 7.10 and 7.11 hereof.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be responsible
--------------------
for and makes no representation as to the validity or adequacy of this Indenture
or the Notes, it shall not be accountable for the Company's use of the proceeds
from the Notes, and it shall not be responsible (a) for any statement of the
Company in this Indenture, including the recitals contained herein, or in any
document issued in connection with the sale of the Notes or in the Notes other
than the Trustee's certificate of authentication or (b) for compliance by the
Company with the Registration Agreement.
SECTION 7.05. Notice of Defaults. Within 90 calendar days after the
------------------
occurrence of any Default hereunder known to a Trust Officer with respect to the
Notes, the Trustee shall transmit by mail to all Holders, as their names and
addresses appear in the Note Register, notice of such Default hereunder known to
the Trustee, unless such Default shall have been cured or waived; provided that,
except in the case of a Default in the payment of the principal of (or premium,
if any) or interest on any Note, the Trustee shall be protected in withholding
such notice if and so long as the board of directors, the executive committee or
a trust committee of directors and/or Trust Officers of the Trustee in good
faith determine that the withholding of such notice is in the interest of the
Holders.
SECTION 7.06. Preservation of Information; Reports by Trustee to Holders.
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(a) The Company shall furnish or cause to be furnished to the Trustee:
(i) semiannually, not less than 10 calendar days prior to each
Interest Payment Date, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders as of the Regular Record
Date immediately preceding such Interest Payment Date, and
(ii) at such other times as the Trustee may request in writing, within
30 calendar days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 calendar
days prior to the time such list is furnished;
provided that if and so long as the Trustee shall be the Note Registrar for the
Notes, no such list need be furnished with respect to the Notes.
(b) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 7.06(a) hereof and the
names and addresses of Holders received by the Trustee in its capacity as Note
Registrar, if so acting. The Trustee may destroy any list furnished to it as
provided in Section 7.06(a) hereof upon receipt of a new list so furnished.
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(c) Holders may communicate as provided in Section 312(b) of the Trust
Indenture Act with other Holders with respect to their rights under this
Indenture or under the Notes.
(d) Each Holder of Notes, by receiving and holding the same, agrees with
the Company and the Trustee that neither the Company nor the Trustee shall be
held accountable by reason of the disclosure of any such information as to the
names and addresses of the Holders in accordance with this Section 7.06,
regardless of the source from which such information was derived, and that the
Trustee shall not be held accountable by reason of mailing any material pursuant
to a request made under this Section 7.06.
(e) Within 60 calendar days after April 15 of each year commencing with
the year 1996, the Trustee shall transmit by mail to all Holders of Notes, a
brief report dated as of such April 15 if and to the extent required under
Section 313(a) of the Trust Indenture Act.
(f) The Trustee shall comply with Sections 313(b) and 313(c) of the Trust
Indenture Act.
(g) A copy of each report described in Section 7.06(e) hereof shall, at
the time of its transmission to Holders, be filed by the Trustee with each stock
exchange, if any, upon which the Notes are then listed, with the Commission and
also with the Company. The Company shall promptly notify the Trustee of any
stock exchange upon which the Notes are listed.
SECTION 7.07. Compensation and Indemnity. The Company shall pay to the
--------------------------
Trustee from time to time reasonable compensation for its services. The Company
shall reimburse the Trustee upon request for all reasonable out-of-pocket
expenses incurred or made by it, including costs of collection, in addition to
the compensation for its services. Such expenses shall include the reasonable
compensation and expenses, disbursements and advances of the Trustee's agents
and counsel. The Trustee's compensation shall not be limited by any law on
compensation of a trustee of an express trust.
The Company shall indemnify the Trustee for, and hold it harmless against,
any and all loss, liability or expense (including reasonable attorneys' fees)
arising out of or incurred by it in connection with the acceptance or
administration of the trust created by this Indenture and the performance of its
duties hereunder, except as set forth in the next paragraph. The Trustee shall
notify the Company promptly of any claim for which it may seek indemnity.
Failure by the Trustee to so notify the Company shall not relieve the Company of
its obligations hereunder. The Company shall defend any such claim and the
Trustee shall cooperate in the defense of such claim. The Trustee may have
separate counsel and the Company shall pay the reasonable fees and expenses of
such counsel. The Company need not pay for any settlement made without its
consent, which consent shall not be unreasonably withheld.
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The Company need not reimburse any expense or indemnify against any loss,
liability or expense incurred by the Trustee through the Trustee's own willful
misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a Lien prior to the Notes on all money or property held or
collected by the Trustee other than money or property held in trust to pay
principal of, premium, if any, and interest on, particular Notes.
The Company's payment obligations pursuant to this Section 7.07 shall
survive the resignation or removal of the Trustee and discharge of this
Indenture. Subject to any other rights available to the Trustee under
applicable bankruptcy law, when the Trustee incurs expenses after the occurrence
of a Default specified in Section 6.01(g) or Section 6.01(h) hereof, the
expenses are intended to constitute expenses of administration under bankruptcy
law.
SECTION 7.08. Replacement of Trustee. (a) No resignation or removal of
----------------------
the Trustee and no appointment of a successor Trustee pursuant to this Article
VII shall become effective until the acceptance of appointment by the successor
Trustee under this Section 7.08.
(b) The Trustee may resign at any time by giving written notice thereof to
the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 calendar days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the outstanding Notes, delivered to the Trustee
and to the Company.
(d) If at any time:
(i) the Trustee shall fail to comply with Section 310(b) of the Trust
Indenture Act after written request therefor by the Company or by any
Holder who has been a bona fide Holder of a Note for at least six months,
unless the Trustee's duty to resign is stayed in accordance with the
provisions of Section 310(b) of the Trust Indenture Act; or
(ii) the Trustee shall cease to be eligible under Section 7.10 hereof
and shall fail to resign after written request therefor by the Company or
by any such Holder; or
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(iii) the Trustee shall become incapable of acting or a decree or
order for relief by a court having jurisdiction in the premises shall have
been entered in respect of the Trustee in an involuntary case under the
United States bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal or state bankruptcy, insolvency or similar law; or
a decree or order by a court having jurisdiction in the premises shall have
been entered for the appointment of a receiver, custodian, liquidator,
assignee, trustee, sequestrator (or other similar official) of the Trustee
or of its Property and assets or affairs, or any public officer shall take
charge or control of the Trustee or of its Property and assets or affairs
for the purpose of rehabilitation, conservation, winding up or liquidation;
or
(iv) the Trustee shall commence a voluntary case under the United
States bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal or state bankruptcy, insolvency or similar law or shall
consent to the appointment of or taking possession by a receiver,
custodian, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Trustee or its Property and assets or affairs, or shall
make an assignment for the benefit of creditors, or shall admit in writing
its inability to pay its debts generally as they become due, or shall take
corporate action in furtherance of any such action,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to the Notes, or (ii) subject to Section 6.10 hereof, any
Holder who has been a bona fide Holder of a Note for at least six months may, on
behalf of such Holder and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor Trustee for the Notes.
(e) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, the Company,
by or pursuant to a Board Resolution, shall promptly appoint a successor
Trustee. If, within one year after such resignation, removal or incapability,
or the occurrence of such vacancy, a successor Trustee shall be appointed by the
Holders of a majority in principal amount of the outstanding Notes delivered to
the Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment in accordance with this
Section 7.08, become the successor Trustee and to that extent replace any
successor Trustee appointed by the Company. If no successor Trustee shall have
been so appointed by the Company or the Holders and shall have accepted
appointment in the manner hereinafter provided, any Holder that has been a bona
fide Holder of a Note for at least six months may, subject to Section 6.10
hereof, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal of
the Trustee and each appointment of a successor Trustee by mailing written
notice of such resignation, removal and appointment by first class mail, postage
prepaid, to the Holders as
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their names and addresses appear in the Note Register. Each notice shall include
the name of the successor Trustee with respect to the Notes and the address of
its Corporate Trust Office.
(g) In the event of an appointment hereunder of a successor Trustee, each
such successor Trustee so appointed shall execute, acknowledge and deliver to
the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee but, on request of the Company or the successor
Trustee, such retiring Trustee shall, upon payment of its charges, execute and
deliver an instrument transferring to such successor Trustee all the rights,
powers and trusts of the retiring Trustee, and shall duly assign, transfer and
deliver to such successor Trustee all Property and money held by such former
Trustee hereunder, subject to its Lien, if any, provided for in Section 7.07
hereof.
(h) Upon request of any such successor Trustee, the Company shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all such rights, powers and trusts referred to in
Section 7.08(g) hereof.
(i) No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article VII and under the Trust Indenture Act.
SECTION 7.09. Successor Trustee by Merger. Any corporation into which the
---------------------------
Trustee may be merged or converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Trustee shall be a party, or any corporation succeeding to all or substantially
all of the corporate trust business of the Trustee, shall be the successor of
the Trustee hereunder; provided that such corporation shall be otherwise
qualified and eligible under this Article VII and under the Trust Indenture Act,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Notes shall have been authenticated, but
not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Notes so authenticated with the same effect as if
such successor Trustee had itself authenticated such Notes. In the event that
any Notes shall not have been authenticated by such predecessor Trustee, any
such successor Trustee may authenticate and deliver such Notes, in either its
own name or that of its predecessor Trustee, with the full force and effect
which this Indenture provides for the certificate of authentication of the
Trustee.
SECTION 7.10. Eligibility; Disqualification. There shall at all times be
-----------------------------
a Trustee hereunder which shall be
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(i) a corporation organized and doing business under the laws of the
United States of America, any State or Territory thereof or the District of
Columbia, authorized under such laws to exercise corporate trust powers,
and subject to supervision or examination by Federal, State, Territorial or
District of Columbia authority,
(ii) or a corporation or other Person organized and doing business
under the laws of a foreign government that is permitted to act as Trustee
pursuant to a rule, regulation or order of the Commission, authorized under
such laws to exercise corporate trust powers, and subject to supervision or
examination by authority of such foreign government or a political
subdivision thereof substantially equivalent to supervision or examination
applicable to United States institutional trustees,
in either case having a combined capital and surplus of at least $25,000,000.
If such Person publishes reports of condition at least annually, pursuant
to law or to the requirements of the aforesaid supervising or examining
authority, then for the purposes of this Section 7.10, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published.
Neither the Company nor any Affiliate of the Company shall serve as Trustee
hereunder. If at any time the Trustee shall cease to be eligible to serve as
Trustee hereunder pursuant to the provisions of this Section 7.10, it shall
resign immediately in the manner and with the effect specified in this Article
VII.
If the Trustee has or shall acquire any "conflicting interest" within the
meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the
Company shall in all respects comply with the provisions of Section 310(b) of
the Trust Indenture Act. Nothing herein shall prevent the Trustee from filing
with the Commission the application referred to in the penultimate paragraph of
Section 310(b) of the Trust Indenture Act.
SECTION 7.11. Preferential Collection of Claims Against Company. The
-------------------------------------------------
Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding
any creditor relationship listed in Section 311(b) of the Trust Indenture Act.
A Trustee who has resigned or been removed shall be subject to Section 311(a) of
the Trust Indenture Act to the extent indicated therein.
ARTICLE VIII.
DEFEASANCE
SECTION 8.01. Company's Option to Effect Legal Defeasance or Covenant
-------------------------------------------------------
Defeasance. The Company may elect, at its option, at any time, to have Section
- ----------
8.02 or
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Section 8.03 hereof applied to the outstanding Notes (in whole and not in part)
upon compliance with the conditions set forth below in this Article VIII, such
election shall be evidenced by a Board Resolution delivered to the Trustee.
SECTION 8.02. Legal Defeasance and Discharge. Upon the Company's
------------------------------
exercise of its option to have this Section 8.02 applied to the outstanding
Notes (in whole and not in part), the Company shall be deemed to have been
discharged from its obligations with respect to such Notes as provided in this
Section 8.02 on and after the date the conditions set forth in Section 8.04
hereof are satisfied (hereinafter called "Defeasance"). For this purpose, such
Defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented by such Notes and to have satisfied all its
other obligations under such Notes and this Indenture insofar as such Notes are
concerned (and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging the same), subject to the following which shall
survive until otherwise terminated or discharged hereunder:
(a) the rights of Holders of such Notes to receive, solely from the trust
fund described in Section 8.04 hereof and as more fully set forth in such
Section 8.04, payments in respect of the principal of and any premium and
interest on such Notes when payments are due,
(b) the Company's obligations with respect to such Notes under Sections
2.09, 2.10, 2.12, 4.02 and 4.03 hereof,
(c) the rights, powers, trusts, duties and immunities of the Trustee under
this Indenture,
(d) Article III hereof, and
(e) this Article VIII.
Subject to compliance with this Article VIII, the Company may exercise its
option to have this Section 8.02 applied to the outstanding Notes (in whole and
not in part) notwithstanding the prior exercise of its option to have Section
8.03 hereof applied to such Notes.
SECTION 8.03. Covenant Defeasance. Upon the Company's exercise of its
-------------------
option to have this Section 8.03 applied to the outstanding Notes (in whole and
not in part), (i) the Company shall be released from its obligations under
Section 5.01(c) and (d), Sections 4.05 through 4.18, inclusive, and any covenant
added to this Indenture subsequent to the Issue Date pursuant to Section 9.01
hereof, (ii) the occurrence of any event specified in Section 6.01(c) or Section
6.01(d) hereof, with respect to any of Section 5.01(c) and (d), Sections 4.05
through 4.18, inclusive, and any covenant added to this Indenture subsequent to
the
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Issue Date pursuant to Section 9.01 hereof, shall be deemed not to be or result
in an Event of Default, in each case with respect to such Notes as provided in
this Section 8.03 on and after the date the conditions set forth in Section 8.04
hereof are satisfied (hereinafter called "Covenant Defeasance"). For this
purpose, such Covenant Defeasance means that, with respect to such Notes, the
Company may omit to comply with and shall have no liability in respect of any
term, condition or limitation set forth in any such specified Section (to the
extent so specified in the case of Sections 6.01(c) and 6.01(d) hereof), whether
directly or indirectly by reason of any reference elsewhere herein to any such
Section or by reason of any reference in any such Section to any other provision
herein or in any other document; but the remainder of this Indenture and such
Notes shall be unaffected thereby.
SECTION 8.04. Conditions to Defeasance or Covenant Defeasance. The
-----------------------------------------------
following shall be the conditions to the application of Section 8.02 or Section
8.03 hereof to the outstanding Notes:
(a) The Company shall irrevocably have deposited or caused to be deposited
with the Trustee as trust funds in trust for the purpose of making the following
payments, specifically pledged as security for, and dedicated solely to the
benefits of the Holders of such Notes, (i) money in an amount, or (ii) U.S.
Government Obligations which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will provide, not
later than one day before the due date of any payment, money in an amount, or
(iii) a combination thereof, in each case sufficient, in the opinion of a
nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay and discharge,
and which shall be applied by the Trustee (or any such other qualifying trustee)
to pay and discharge, the principal of and any installment of interest on such
Notes on the respective Stated Maturities thereof, in accordance with the terms
of this Indenture and such Notes.
(b) In the event of an election to have Section 8.02 hereof apply to the
outstanding Notes, the Company shall have delivered to the Trustee an Opinion of
Counsel stating that (i) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (ii) since the date of
this Indenture, there has been a change in the applicable Federal income tax
law, in either case (i) or (ii) to the effect that, and based thereon such
opinion shall confirm that, the Holders of such Notes will not recognize gain or
loss for Federal income tax purposes as a result of the deposit, Defeasance and
discharge to be effected with respect to such Notes and will be subject to
Federal income tax on the same amount, in the same manner and at the same times
as would be the case if such deposit, Defeasance and discharge were not to
occur.
(c) In the event of an election to have Section 8.03 hereof apply to the
outstanding Notes, the Company shall have delivered to the Trustee an Opinion of
Counsel reasonably acceptable to the Trustee to the effect that the Holders of
such Notes will not recognize gain or loss for Federal income tax purposes as a
result of the deposit and Covenant Defeasance
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to be effected with respect to such Notes and will be subject to Federal income
tax on the same amount, in the same manner and at the same times as would be the
case if such deposit and Covenant Defeasance were not to occur.
(d) No Default or Event of Default with respect to the outstanding Notes
shall have occurred and be continuing at the time of such deposit after giving
effect thereto or at any time on or prior to the 91st calendar day after the
date of such deposit (it being understood that this condition shall not be
deemed satisfied until after such 91st calendar day).
(e) Such Defeasance or Covenant Defeasance shall not cause the Trustee to
have a conflicting interest within the meaning of the Trust Indenture Act
(assuming for the purpose of this clause (e) that all Notes are in default
within the meaning of such Act).
(f) Such Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which the Company is a party or by which it is bound.
(g) Such Defeasance or Covenant Defeasance shall not result in the trust
arising from such deposit constituting an investment company within the meaning
of the Investment Company Act of 1940, as amended, unless such trust shall be
registered under such Act or exempt from registration thereunder.
(h) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent with respect to such Defeasance or Covenant Defeasance have been
complied with.
SECTION 8.05. Deposited Money and U.S. Government Obligations to be Held
----------------------------------------------------------
in Trust; Miscellaneous Provisions. All money and U.S. Government Obligations
- ----------------------------------
(including the proceeds thereof) deposited with the Trustee pursuant to Section
8.04 hereof in respect of the outstanding Notes shall be held in trust and
applied by the Trustee, in accordance with the provisions of such Notes and this
Indenture, to the payment, either directly or through any such Paying Agent as
the Trustee may determine, to the Holders of such Notes, of all sums due and to
become due thereon in respect of principal and any premium and interest, but
money so held in trust need not be segregated from other funds except to the
extent required by law. The Company shall pay and indemnify the Trustee against
any tax, fee or other charge imposed on or assessed against the U.S. Government
Obligations deposited pursuant to Section 8.04 hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of outstanding Notes.
Anything in this Article VIII to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company from time to time upon Company Order any
money or U.S.
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Government Obligations held by it as provided in Section 8.04 hereof which, in
the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, are in
excess of the amount thereof that would then be required to be deposited to
effect the Defeasance or Covenant Defeasance, as the case may be, with respect
to the outstanding Notes.
The Trustee and the Paying Agent shall pay to the Company upon written
request any money held by them for the payment of principal, premium, if any, or
interest that remains unclaimed for two years; provided that the Trustee or such
--------
Paying Agent before being required to make any payment may cause to be published
at the expense of the Company once in a newspaper of general circulation in the
City of New York or mail to each Holder entitled to such money at such Holder's
address (as set forth in the Note Register) notice that such money remains
unclaimed and that after a date specified therein (which shall be at least 30
days from the date of such publication or mailing) any unclaimed balance of such
money then remaining will be repaid to the Company. After payment to the
Company, Holders entitled to such money must look to the Company for payment as
general creditors unless an applicable law designates another Person, and all
liability of the Trustee and such Paying Agent with respect to such money shall
cease.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable to
-------------
apply any money in accordance with this Article VIII with respect to any Notes
by reason of any order or judgement of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application then the
obligations under this Indenture and such Notes from which the Company has been
discharged or released pursuant to Sections 8.02 or 8.03 hereof shall be revived
and reinstated as though no deposit had occurred pursuant to this Article VIII
with respect to such Notes, until such time as the Trustee or Paying Agent is
permitted to apply all money held in trust pursuant to Section 8.05 hereof with
respect to such Notes in accordance with this Article VIII; provided that if the
Company makes any payment of principal of or any premium or interest on any such
Note following such reinstatement of its obligations, the Company shall be
subrogated to the rights (if any) of the Holders of such Notes to receive such
payment from the money so held in trust.
ARTICLE IX.
AMENDMENTS
SECTION 9.01. Without Consent of Holders. The Company and the Trustee
--------------------------
may, at any time, and from time to time, without notice to or consent of any
Holder of Notes, enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
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(a) to evidence the succession of another Person to the Company and
the assumption by such successor of the covenants of the Company herein and
contained in the Notes; or
(b) to add to the covenants of the Company, for the benefit of the
Holders of all of the Notes, or to surrender any right or power herein
conferred upon the Company; or
(c) to add any additional Events of Default; or
(d) to provide for uncertificated Notes in addition to or in place of
Certificated Notes; or
(e) to evidence and provide for the acceptance of appointment
hereunder of a successor Trustee; or
(f) to secure the Notes; or
(g) to cure any ambiguity herein, or to correct or supplement any
provision hereof which may be inconsistent with any other provision hereof
or to add any other provisions with respect to matters or questions arising
under this Indenture; provided that such actions shall not adversely affect
--------
the interests of the Holders of Notes in any material respect; or
(h) to comply with the requirements of the Commission in order to
effect or maintain the qualification of this Indenture under the Trust
Indenture Act.
SECTION 9.02. With Consent of Holders. With the consent of the Holders of
-----------------------
not less than a majority in principal amount of the outstanding Notes, by Act of
said Holders delivered to the Company and the Trustee, the Company and the
Trustee may enter into one or more indentures supplemental hereto for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Indenture or of modifying in any manner the rights of
the Holders; provided that no such supplemental indenture shall, without the
consent of the Holder of each outstanding Note,
(a) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, or alter the redemption provisions
thereof, or reduce the principal amount thereof (or any premium, if any),
or the interest thereon, that would be due and payable upon Maturity
thereof, or change the place of payment where, or the coin or currency in
which, any Note or any premium or interest thereon is payable, or impair
the right to institute suit for the enforcement of any such payment on or
after the Maturity thereof; or
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(b) reduce the percentage in principal amount of the outstanding
Notes, the consent of whose Holders is required for any such supplemental
indenture; or
(c) modify any of the provisions of Section 6.04 hereof, except to
increase any percentage set forth therein or to provide that certain other
provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each outstanding Note affected thereby; or
(d) subordinate in right of payment, or otherwise subordinate, the
Notes to any other Indebtedness; or
(e) modify any provision of this Indenture relating to the
calculation of Accreted Value; or
(f) modify any of the provisions of this Section 9.02, except to
increase any percentage set forth herein or to provide that certain other
provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each outstanding Note affected thereby.
It shall not be necessary for any Act of Holders under this Section 9.02 to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 9.03. Effect of Supplemental Indentures. Upon the execution of
---------------------------------
any supplemental indenture under this Article IX, this Indenture shall be
modified in accordance therewith, and such supplemental indenture shall form a
part of this Indenture for all purposes; and every Holder of Notes theretofore
or thereafter authenticated and delivered hereunder shall be bound thereby.
SECTION 9.04. Compliance with Trust Indenture Act. Every amendment or
-----------------------------------
supplement to this Indenture or the Notes shall comply with the Trust Indenture
Act as then in effect.
SECTION 9.05. Revocation and Effect of Consents and Waivers. A consent to
---------------------------------------------
an amendment, supplement or a waiver by a Holder of a Note shall bind the Holder
and every subsequent Holder of such Note or portion of such Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
or waiver is not made on such Note; provided that any such Holder or subsequent
--------
Holder may revoke the consent or waiver as to such Holder's Note or portion of
such Note if the Trustee receives the notice of revocation at least one day
prior to the date the amendment, supplement or waiver becomes effective. After
an amendment, supplement or waiver becomes effective pursuant to this Article
IX, it shall bind every Holder.
98
<PAGE>
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the Holders entitled to give their consent or take any
other action described above or required or permitted to be taken pursuant to
this Indenture. If a record date is fixed, then notwithstanding the immediately
preceding paragraph, those Persons who were Holders at such record date (or
their duly designated proxies), and only those Persons, shall be entitled to
give such consent or to revoke any consent previously given or to take any such
action, whether or not such Persons continue to be Holders after such record
date. No such consent shall be valid or effective for more than 120 calendar
days after such record date.
SECTION 9.06. Notation on or Exchange of Notes. If a supplemental
--------------------------------
indenture changes the terms of a Note, the Trustee may require the Holder
thereof to deliver such Note to the Trustee. The Trustee may place an
appropriate notation on such Note regarding the changed terms and return it to
the Holder. Alternatively, if the Company or the Trustee so determines, the
Company in exchange for such Note shall issue and the Trustee shall authenticate
a new Note that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Note shall not affect the validity of such amendment
or supplement.
SECTION 9.07. Trustee to Execute Supplemental Indentures. The Trustee
------------------------------------------
shall execute any supplemental indenture authorized pursuant to this Article IX
if such supplemental indenture does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does, the Trustee may, but shall
not be required to, execute such supplemental indenture. In executing any
supplemental indenture, the Trustee shall be (subject to Section 7.01 hereof)
fully protected in relying upon an Officers' Certificate and an Opinion of
Counsel, which shall not be at the expense of the Trustee, stating that the
execution of such supplemental indenture is authorized or permitted by this
Indenture.
ARTICLE X.
MISCELLANEOUS
SECTION 10.01. Trust Indenture Act Controls. If and to the extent that
----------------------------
any provision of this Indenture limits, qualifies or conflicts with the duties
imposed by, or with another provision (an "incorporated provision") included in
this Indenture by operation of, Sections 310 to 318, inclusive, of the Trust
Indenture Act, such imposed duties or incorporated provision shall control.
SECTION 10.02. Notices. Any notice or communication shall be in writing
-------
and delivered in person or mailed by first class mail, postage prepaid,
addressed as follows: if to the Company: McLeod, Inc., 221 Third Avenue S.E.,
Suite 500, Cedar Rapids, Iowa
99
<PAGE>
52401, Attention: Clark E. McLeod; if to the Trustee: United States Trust
Company of New York, 114 West 47th Street, New York, New York 10031, Attention:
James E. Logan.
The Company or the Trustee, by notice to the other, may designate
additional or different addresses for subsequent notices or communications. Any
notice or communication mailed to a Holder shall be sent to the Holder by first
class mail, postage prepaid, at the Holder's address as it appears in the Note
Register and shall be duly given if so sent within the time prescribed. Failure
to mail a notice or communication to a Holder or any defect in it shall not
affect its sufficiency with respect to other Holders. If a notice or
communication is mailed to the Company, the Trustee or a Holder in the manner
provided above, it is duly given, whether or not the addressee receives it. In
case by reason of the suspension of regular mail service or by reason of any
other cause it shall be impracticable to give notice by mail to Holders, then
such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
SECTION 10.03. Certificate and Opinion as to Conditions Precedent. Upon
--------------------------------------------------
any request or application by the Company to the Trustee to take or refrain from
taking any action under this Indenture, the Company shall furnish to the
Trustee: (a) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and (b) an Opinion of
Counsel stating that, in the opinion of such counsel, all such conditions
precedent have been complied with.
SECTION 10.04. Statements Required in Certificate or Opinion. Each
---------------------------------------------
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture (other than pursuant to Section 4.19 hereof)
shall include: (a) a statement that the individual making such certificate or
opinion has read such covenant or condition; (b) a brief statement as to the
nature and scope of the examination or investigation upon which the statements
or opinions contained in such certificate or opinion are based; (c) a statement
that, in the opinion of such individual, such person has made such examination
or investigation as is necessary to enable such person to express an informed
opinion as to whether or not such covenant or condition has been complied with;
and (d) a statement as to whether or not, in the opinion of such individual,
such covenant or condition has been complied with; provided that, with respect
to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate
or certificates of public officials.
SECTION 10.05. Rules by Trustee, Paying Agent and Note Registrar. The
-------------------------------------------------
Trustee may make reasonable rules for action by or a meeting of Holders, and any
Note Registrar and Paying Agent may make reasonable rules for their functions;
provided that no such rule shall conflict with terms of this Indenture or the
Trust Indenture Act.
SECTION 10.06. Payments on Business Days. If a payment hereunder is
-------------------------
scheduled to be made on a date that is not a Business Day, payment shall be made
on the next
100
<PAGE>
succeeding day that is a Business Day, and no interest shall accrue with respect
to that payment during the intervening period. If a regular record date is a
date that is not a Business Day, such record date shall not be affected.
SECTION 10.07. Governing Law. THIS INDENTURE AND THE NOTES SHALL BE
-------------
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
SECTION 10.08. No Recourse Against Others. No controlling Person,
--------------------------
director, officer, employee, incorporator or stockholder of the Company, as
such, shall have any liability for any obligations of the Company under the
Notes or this Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation, solely by reason of its past, present or
future status as a controlling Person, director, officer, employee, incorporator
or stockholder of the Company. By accepting a Note, each Holder waives and
releases all such liability (but only such liability) as part of the
consideration for issuance of such Note to such Holder.
SECTION 10.09. Successors. All agreements of the Company in this
----------
Indenture and the Notes shall bind its successors and assigns whether so
expressed or not. All agreements of the Trustee in this Indenture shall bind
its successors and assigns whether so expressed or not.
SECTION 10.10. Counterparts. This Indenture may be executed in any number
------------
of counterparts and by the parties thereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
SECTION 10.11. Table of Contents; Headings. The table of contents, cross-
---------------------------
reference table and headings of the Articles and Sections of this Indenture have
been inserted for convenience of reference only, are not intended to be
considered a part hereof and shall not modify or restrict any of the terms or
provisions hereof.
SECTION 10.12. Severability. In case any provision in this Indenture or
------------
in the Notes shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
SECTION 10.13. Further Instruments and Acts. Upon request of the Trustee,
----------------------------
the Company will execute and deliver such further instruments and do such
further acts as may be reasonably necessary or proper to carry out more
effectively the purposes of this Indenture.
101
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed all as of the day and year first above written.
MCLEOD, INC.
By /s/ Casey P. Mahon
-----------------------------------
Name: Casey P. Mahon
Title: Senior Vice President
Attest:
/s/ Stephen C. Gray
- ---------------------------
United States Trust Company of New York.
----------------------------------------
as Trustee
By /s/ James J. McGinley
----------------------------------------
Name: James J. McGinley
Title: Vice President
Attest:
/s/
- ------------------------------
102
<PAGE>
STATE OF NEW YORK )
) SS.:
DISTRICT OF COLUMBIA)
On the 4th day of March, 1997, before me personally came Casey P.
Mahon, to me known, who, being by me duly sworn, did depose and say that she is
Senior Vice President of McLeod, Inc., one of the corporations described in and
which executed the foregoing instrument and that she signed her name thereto by
authority of the Board of Directors of said corporation.
/s/ Carol L. Hedgpeth
-------------------------------------
Notary Public
CAROL L. HEDGPETH
NOTARY PUBLIC DISTRICT OF COLUMBIA
My commission expires December 14, 2001
[Seal]
<PAGE>
STATE OF NEW YORK )
) SS.:
DISTRICT OF COLUMBIA)
On the 4th day of March, 1997, before me personally came James J.
McGinley, to me known, who, being by me duly sworn, did depose and say that he
is Vice President of United States Trut Company of New York, one of the
corporations described in and which executed the foregoing instrument and that
he signed his name thereto by authority of the Board of Directors of said
corporation.
/s/ CAROL L. HEDGPETH
----------------------------------------
Notary Public
CAROL L. HEDGPETH
NOTARY PUBLIC DISTRICT OF COLUMBIA
My commission expires December 14, 2001
[Seal]
<PAGE>
ANNEX A -- Form of
Regulation S Certificate
REGULATION S CERTIFICATE
(For transfers pursuant to (S) 2.08(b)(i), (iii) and (v)
of the Indenture)
United States Trust Company of New York,
as Trustee
114 West 47th Street
New York, New York 10036
Attention:
Re: 10-1/2% Senior Discount Notes due March 1,
2007 of McLeod, Inc. (the "Notes")
------------------------------------------
Reference is made to the Indenture, dated as of March 4, 1997 (the
"Indenture"), between McLeod, Inc. (the "Company") and United States Trust
Company of New York, as Trustee. Terms used herein and defined in the Indenture
or in Regulation S or Rule 144 under the U.S. Securities Act of 1933, as amended
(the "Securities Act") are used herein as so defined.
This certificate relates to U.S. $________ principal amount of Notes, which
are evidenced by the following certificate(s) (the "Specified Notes"):
CUSIP No(s). _________________________________
CERTIFICATE No(s). ___________________________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Notes or (ii) it is acting on behalf of all the beneficial owners of
the Specified Notes and is duly authorized by them to do so. Such beneficial
owner or owners are referred to herein collectively as the "Owner". If the
Specified Notes are represented by a Global Note, they are held through the
Depositary or an Agent Member in the name of the Undersigned, as or on behalf of
the Owner. If the Specified Notes are not represented by a Global Note, they
are registered in the name of the Undersigned, as or on behalf of the Owner.
<PAGE>
The Owner has requested that the Specified Notes be transferred to a person
(the "Transferee") who will take delivery in the form of a Regulation S Note.
In connection with such transfer, the Owner hereby certifies that, unless such
transfer is being effected pursuant to an effective registration statement under
the Securities Act, it is being effected in accordance with Rule 904 or Rule 144
under the Securities Act and with all applicable securities laws of the states
of the United States and other jurisdictions. Accordingly, the Owner hereby
further certifies as follows:
(1) Rule 904 Transfers. If the transfer is being effected in
------------------
accordance with Rule 904:
(A) the Owner is not a distributor of the Notes, an affiliate of
the Company or any such distributor or a person acting on behalf of
any of the foregoing;
(B) the offer of the Specified Notes was not made to a person in
the United States;
(C) either:
(i) at the time the buy order was originated, the Transferee
was outside the United States or the Owner and any person acting
on its behalf reasonably believed that the Transferee was outside
the United States, or
(ii) the transaction is being executed in, on or through
the facilities of the Eurobond market, as regulated by the
Association of International Bond Dealers, or another designated
offshore securities market and neither the Owner nor any person
acting on its behalf knows that the transaction has been
prearranged with a buyer in the United States;
(D) no directed selling efforts have been made in the United
States by or on behalf of the Owner or any affiliate thereof;
(E) if the Owner is a dealer in securities or has received a
selling concession, fee or other remuneration in respect of the
Specified Notes, and the transfer is to occur during the Restricted
Period, then the requirements of Rule 904(c)(1) have been satisfied;
and
(F) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
<PAGE>
(2) Rule 144 Transfers. If the transfer is being effected pursuant
------------------
to Rule 144:
(A) the transfer is occurring after a holding period of at least
two years (computed in accordance with paragraph (d) of Rule 144) has
elapsed since the Specified Notes were last acquired from the Company
or from an affiliate of the Company, whichever is later, and is being
effected in accordance with the applicable amount, manner of sale and
notice requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
three years has elapsed since the Specified Notes were last acquired
from the Company or from an affiliate of the Company, whichever is
later, and the Owner is not, and during the preceding three months has
not been, an affiliate of the Company.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Purchasers.
Dated: ____________________________________
(Print the name of the Undersigned, as such
term is defined in the second paragraph of this
certificate.)
By:____________________________
Name:
Title:
(If the Undersigned is a corporation, partnership or
fiduciary, the title of the person signing on behalf of the
Undersigned must be stated.)
<PAGE>
ANNEX B -- Form of Restricted
Notes Certificate
RESTRICTED NOTES CERTIFICATE
(For transfers pursuant to (S) 2.08(b)(ii), (iii), (iv) and (v)
of the Indenture)
United States Trust Company of New York,
as Trustee
114 West 47th Street
New York, New York 10036
Attention:
Re: 10-1/2% Senior Discount Notes due March 1,
2007 of McLeod, Inc. (the "Notes")
-----------------------------------------
Reference is made to the Indenture, dated as of March 4, 1997 (the
"Indenture"), between McLeod, Inc. (the "Company") and United States Trust
Company of New York, as Trustee. Terms used herein and defined in the Indenture
or in Regulation S or Rule 144 under the U.S. Securities Act of 1933, as amended
(the "Securities Act") are used herein as so defined.
This certificate relates to U.S. $__________ principal amount of Notes,
which are evidenced by the following certificate(s) (the "Specified Notes"):
CUSIP No(s). _____________________________
CERTIFICATE No(s). _______________________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Notes or (ii) it is acting on behalf of all the beneficial owners of
the Specified Notes and is duly authorized by them to do so. Such beneficial
owner or owners are referred to herein collectively as the "Owner". If the
Specified Notes are represented by a Global Note, they are held through the
Depositary or an Agent Member in the name of the Undersigned, as or on behalf of
the Owner. If the Specified Notes are not represented by a Global Note, they
are registered in the name of the Undersigned, as or on behalf of the Owner.
<PAGE>
The Owner has requested that the Specified Notes be transferred to a person
(the "Transferee") who will take delivery in the form of a Restricted Note. In
connection with such transfer, the Owner hereby certifies that, unless such
transfer is being effected pursuant to an effective registration statement under
the Securities Act, it is being effected in accordance with Rule 144A, Rule 144
or to an Institutional Accredited Investor under Rule 501(a)(1), (2), (3) or (7)
under the Securities Act and in compliance with all applicable securities laws
of the states of the United States and other jurisdictions. Accordingly, the
Owner hereby further certifies as follows:
(1) Rule 144A Transfers. If the transfer is being effected in
-------------------
accordance with Rule 144A:
(A) the Specified Notes are being transferred to a person that
the Owner and any person acting on its behalf reasonably believe is a
"qualified institutional buyer" within the meaning of Rule 144A,
acquiring for its own account or for the account of a qualified
institutional buyer; and
(B) the Owner and any person acting on its behalf have taken
reasonable steps to ensure that the Transferee is aware that the Owner
may be relying on Rule 144A in connection with the transfer; and
(2) Rule 144 Transfers. If the transfer is being effected pursuant
------------------
to Rule 144:
(A) the transfer is occurring after a holding period of at least
two years (computed in accordance with paragraph (d) of Rule 144) has
elapsed since the Specified Notes were last acquired from the Company
or from an affiliate of the Company, whichever is later, and is being
effected in accordance with the applicable amount, manner of sale and
notice requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
three years has elapsed since the Specified Notes were last acquired
from the Company or from an affiliate of the Company, whichever is
later, and the Owner is not, and during the preceding three months has
not been, an affiliate of the Company.
(3) Institutional Accredited Investor Transfers. If the transfer is
-------------------------------------------
being effected to an Institutional Accredited Investor as defined under
Rule 501(a)(1), (2), (3) or (7), the Specified Notes are being transferred
to such an Institutional Accredited Investor as therein so defined who is
purchasing for investment purposes and not for distribution.
<PAGE>
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Purchasers.
Dated: ___________________________________________
(Print the name of the Undersigned, as such
term is defined in the second paragraph of this
certificate.)
By:_______________
Name:
Title:
(If the Undersigned ia a corporation,
partnership or fiduciary, the title of the
person signing on behalf of the Undersigned
must be stated.)
<PAGE>
ANNEX C - Form of Unrestricted
Notes Certificate
UNRESTRICTED NOTES CERTIFICATE
(For removal of Securities Act Legends pursuant to (S) 2.08c)
of the Indenture)
United States Trust Company of New York,
as Trustee
114 West 47th Street
New York, New York 10036
Attention:
Re: 10-1/2% Senior Discount Notes due March 1,
2007 of McLeod, Inc. ("the Notes")
-----------------------------------------
Reference is made to the Indenture, dated as of March 4, 1997 (the
"Indenture"), between McLeod, Inc. (the "Company") and United States Trust
Company of New York, as Trustee. Terms used herein and defined in the Indenture
or in Regulation S or Rule 144 under the U.S. Securities Act of 1933, as amended
(the "Securities Act") are used herein as so defined.
This certificate relates to U.S. $___________ principal amount of Notes,
which are evidenced by the following certificate(s) (the "Specified Notes"):
CUSIP No(s).__________________________
CERTIFICATE No(s).____________________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Notes or (ii) it is acting on behalf of all the beneficial owners of
the Specified Notes and is duly authorized by them to do so. Such beneficial
owner or owners are referred to herein collectively as the "Owner". If the
Specified Notes are represented by a Global Note, they are held through the
Depositary or an Agent Member in the name of the Undersigned, as or on behalf of
the
<PAGE>
Owner. If the Specified Notes are not represented by a Global Note, they are
registered in the name of the Undersigned, as or on behalf of the Owner.
The Owner has requested that the Specified Notes be exchanged for Notes
bearing no Securities Act Legend pursuant to Section 2.08(c) of the Indenture.
In connection with such exchange, the Owner hereby certifies that the exchange
is occurring after a holding period of at least three years (computed in
accordance with paragraph (d) of Rule 144) has elapsed since the Specified Notes
were last acquired from the Company or from an affiliate of the Company,
whichever is later, and the Owner is not, and during the preceding three months
has not been, an affiliate of the Company. The Owner also acknowledges that any
future transfers of the Specified Notes must comply with all applicable
securities laws of the states of the United States and other jurisdictions.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Purchasers.
Dated: ___________________________________________
(Print the name of the Undersigned, as such
term is defined in the second paragraph of this
certificate.)
By:_______________
Name:
Title:
(If the Undersigned is a corporation,
partnership or fiduciary, the title of the
person signing on behalf of the Undersigned
must be stated.)
<PAGE>
EXHIBIT 4.3
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER
REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF.
THIS NOTE MAY NOT BE EXCHANGEABLE IN WHOLE OR IN PART FOR A NOTE REGISTERED, AND
NO TRANSFER OF THIS NOTE IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF
ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE
LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES FOR
THE BENEFIT OF THE COMPANY AND THE INITIAL PURCHASERS OF THIS NOTE THAT THIS
NOTE MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE THIRD
ANNIVERSARY OF THE ISSUANCE HEREOF (OR A PREDECESSOR NOTE HERETO) OR (Y) BY ANY
HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS
PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE
COMPANY, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A
UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY
BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" WITHIN THE MEANING OF RULE 144A
PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL
BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING
MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR
ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS NOTE), AND, IF SUCH TRANSFER IS BEING EFFECTED BY CERTAIN
TRANSFERORS SPECIFIED IN THE INDENTURE (AS DEFINED BELOW) PRIOR TO THE
EXPIRATION OF THE "40-DAY RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE
903(C)(3) OF REGULATION S UNDER THE SECURITIES ACT), A CERTIFICATE WHICH MAY BE
OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE
COMPANY AND THE TRUSTEE, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR"
AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS NOTE) THAT IS ACQUIRING THIS NOTE FOR INVESTMENT PURPOSES
AND NOT FOR DISTRIBUTION, AND A CERTIFICATE IN THE FORM ATTACHED TO THIS NOTE IS
DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE (PROVIDED THAT
CERTAIN HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS NOTE PURSUANT
TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "40-DAY RESTRICTED PERIOD"
(WITHIN THE MEANING OF RULE 903(C)(3) OF REGULATION S UNDER THE SECURITIES
ACT)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6) PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS NOTE AGREES IT WILL
FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION
AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS NOTE
COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS
NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS (1) A
"QUALIFIED INSTITUTIONAL BUYER" WITHIN THE MEANING OF RULE 144A OR (2) AN
INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2),
(3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS NOTE FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE
THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE
REQUIREMENTS OF PARAGRAPH (O)(2) OF RULE 902 UNDER) REGULATION S UNDER THE
SECURITIES ACT.
THIS NOTE WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT. FOR PURPOSES OF SECTIONS
1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS
AMENDED, THE ISSUE PRICE OF THIS NOTE IS 60.00% OF ITS PRINCIPAL AMOUNT, THE
AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $400 PER $1,000 OF STATED FACE AMOUNT, THE
ISSUE DATE IS MARCH 4, 1997 AND THE YIELD TO MATURITY IS 10.50%.
10.50% SENIOR DISCOUNT NOTES DUE MARCH 1, 2007
CUSIP NO. 582266AA0
No. R-1 $494,625,000
McLeod, Inc., a corporation duly organized and existing under the laws of
Delaware (herein called the "Company", which term includes any successor Person
under the Indenture hereinafter referred to), for value received, hereby
promises to pay to CEDE & CO, or registered assigns, the principal sum of FOUR
HUNDRED NINETY FOUR MILLION, SIX HUNDRED TWENTY FIVE THOUSAND Dollars
($494,625,000) (which principal amount may from time to time be increased or
decreased to such other principal amounts (which, taken together with the
principal amounts of all other outstanding Notes, shall not exceed FIVE HUNDRED
MILLION Dollars ($500,000,000) in the aggregate at any time) by adjustments made
on the records of the Trustee hereinafter referred to in accordance with the
Indenture) on March 1, 2007, and to pay interest thereon from March 1, 2002 or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, semi-annually on March 1 and September 1 in each year,
commencing September 1, 2002 at the rate of 10.50% per annum,
<PAGE>
until the principal hereof is paid or made available for payment; provided,
however, that if (i) the Company has not filed a registration statement (the
"Exchange Offer Registration Statement") under the Securities Act of 1933, as
amended (the "Act"), registering a security substantially identical to this Note
(except that such Note will not contain terms with respect to the Special
Interest payments described below or transfer restrictions) pursuant to an
exchange offer (the "Registered Exchange Offer") (or, in lieu thereof, a
registration statement registering this Note for resale (a "Shelf Registration
Statement")) by June 2, 1997, or (ii) the Exchange Offer Registration Statement
relating to the Registered Exchange Offer has not become or been declared
effective by August 1, 1997, or (iii) neither the Registered Exchange Offer has
been consummated nor the Shelf Registration Statement has been declared
effective prior to September 1, 1997, or (iv) either the Exchange Offer
Registration Statement or, if applicable, the Shelf Registration Statement is
filed and declared effective (except as specifically permitted therein) but
shall thereafter cease to be effective without being succeeded promptly by an
additional registration statement filed and declared effective, in each case (i)
through (iv) upon the terms and conditions set forth in the Registration
Agreement (each such event referred to in clauses (i) through (iv), a
"Registration Default"), then interest will accrue (in addition to the original
issue discount and any stated interest on the Notes) (the "Step-Up") at a rate
of 0.5% per annum, determined daily, on the Accreted Value of the Notes, during
the 90-day period from and including the date on which any such Registration
Default shall occur to but excluding the date on which all Registration Defaults
have been cured and shall increase by 0.25% per annum at the end of each
subsequent 90-day period, but in no event shall such rate exceed 2.00% per
annum, in the aggregate, regardless of the number of Registration Defaults.
Interest accruing as a result of the Step-Up is referred to herein as "Special
Interest." Accrued Special Interest, if any, shall be paid semi-annually on
March 1 and September 1 in each year; and the amount of accrued Special Interest
shall be determined on the basis of the number of days actually elapsed. Any
accrued and unpaid interest (including Special Interest) on this Note upon the
issuance of an Exchange Note (as defined in the Indenture) in exchange for this
Note shall cease to be payable to the Holder hereof but such accrued and unpaid
interest (including Special Interest) shall be payable on the next Interest
Payment Date for such Exchange Note to the Holder thereof on the related Regular
Record Date. The interest so payable, and punctually paid or duly provided for,
on any Interest Payment Date will, as provided in such Indenture, be paid to the
Person in whose name this Note (or one or more Predecessor Notes) is registered
at the close of business on the Regular Record Date for such interest, which
shall be February 15 or August 15 (whether or not a Business Day), as the case
may be, immediately preceding such Interest Payment Date. Any such interest not
so punctually paid or duly provided for will forthwith cease to be payable to
the Holder on such Regular Record Date and may either be paid to the Person in
whose name this Note (or one or more Predecessor Notes) is registered at the
close of business on a Special Record Date for the payment of such Defaulted
Interest to be fixed by the Trustee, notice whereof shall be given to Holders of
Notes not more than 15 calendar days and not less than 10 calendar days prior to
such Special Record Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the Notes
may be listed, and upon such notice as may be required by such exchange, all as
more fully provided in said Indenture.
The principal of this Note shall not accrue interest (other than Special
Interest, if any) until March 1, 2002, except in the case of a default in
payment of principal and premium, if any, upon acceleration or redemption, in
which case interest shall be payable pursuant to the preceding paragraph on such
overdue principal (and premium, if any), such interest shall be payable on
demand and, if not so paid on demand, such interest shall itself bear interest
at the
<PAGE>
rate of 11.50% per annum (to the extent that the payment of such interest shall
be legally enforceable), and shall accrue from the date of such demand for
payment to the date payment of such interest has been made or duly provided for,
and such interest on unpaid interest shall also be payable on demand.
Payment of the principal of (and premium, if any) and interest on this Note
will be made at the corporate trust office of the Trustee and at the office or
agency of the Company maintained for that purpose in the Borough of Manhattan,
The City of New York, New York, and at any other office or agency maintained by
the Company for such purpose, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company payment of
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Note Register.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Note shall
not be entitled to any benefit under the Indenture or be valid or obligatory for
any purpose.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated:
MCLEOD, INC.
By /s/ Clark E. McLeod
----------------------------
Clark E. McLeod
Attest:
/s/ Casey D. Mahon
- ------------------------------
Secretary
This is one of the Notes referred to in the within-mentioned Indenture.
Dated:
UNITED STATES TRUST COMPANY
OF NEW YORK,
as Trustee
By /s/ James J. McGinley
-----------------------------
Authorized Signatory
<PAGE>
This Note is one of a duly authorized issue of Notes of the Company
designated as its 10.50% Senior Discount Notes due March 1, 2007 (the "Notes")
issued under an Indenture, dated as of March 4, 1997 (herein called the
"Indenture"), between the Company and United States Trust Company of New York,
as trustee (herein called the "Trustee", which term includes any successor
trustee under the Indenture). The Notes are limited in aggregate principal
amount at maturity to $500,000,000. Reference is hereby made to the Indenture
and all indentures supplemental thereto for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee and the Holders of the Notes and of the terms upon which the Notes
are, and are to be, authenticated and delivered.
The Notes are subject to redemption upon not less than 30 nor more than 60
days' notice by mail to each Holder of Notes to be redeemed at such Holder's
address appearing in the Note Register, in amounts of $1,000 or an integral
multiple of $1,000, at any time on or after March 1, 2002 and prior to maturity,
as a whole or in part, at the election of the Company, at the following
Redemption Prices (expressed as percentages of the principal amount) plus
accrued interest to but excluding the Redemption Date (subject to the right of
Holder on the relevant Regular Record Date to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date), if redeemed
during the 12-month period beginning March 1, of each of the years indicated
below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- --------
<S> <C>
2002 105.250%
2003 103.500%
2004 101.750%
</TABLE>
and thereafter at a Redemption Price equal to 100% of the principal amount,
together in the case of any such redemption with accrued interest to but
excluding the Redemption Date, but interest installments whose Stated Maturity
is on or prior to such Redemption Date will be payable to the Holders of such
Notes, or one or more Predecessor Notes, of record at the close of business on
the relevant Regular Record Dates referred to on the face hereof, all as
provided in the Indenture.
The Notes are further subject to redemption prior to March 1, 2000 only in
the event that the Company receives net proceeds from any sale of its Common
Stock in a Strategic Equity Investment on or before March 1, 2000, in which case
the Company may, at its option, use all or a portion of any such net proceeds to
redeem Notes in a principal amount of up to an aggregate amount equal to 33 1/3%
of the original principal amount of the Notes, provided, however, that Notes in
an amount equal to at least 66 2/3% of the original principal amount of the
Notes remain outstanding after such redemption. Such redemption must occur on a
Redemption Date within 90 days of any such sale and upon not less than 30 nor
more than 60 days' notice by mail to each Holder of Notes to be redeemed at such
Holder's address appearing in the Note Register, in amounts of $1,000 or an
integral multiple of $1,000 at a Redemption Price of 110.5% of the Accreted
Value of the Notes to but excluding the Redemption Date.
The Notes do not have the benefit of any sinking fund obligations.
<PAGE>
The Indenture provides that, subject to certain conditions, if (i) a Change
of Control (as defined in the Indenture) occurs or (ii) certain Excess Proceeds
are available to the Company as a result of any Asset Sale, the Company shall be
required to make a Change of Control Offer or an Asset Sale Offer, as the case
may be, for all or a specified portion of the Notes.
In the event of a deposit or withdrawal of an interest in this Note
(including upon an exchange, transfer, redemption or repurchase of this Note in
part only) effected in accordance with the Applicable Procedures, the Note
Registrar, upon receipt of notice of such event from the Depositary's custodian
for this Note, shall make an adjustment on its records to reflect an increase or
decrease of the outstanding principal amount of this Note resulting from such
deposit or withdrawal, as the case may be.
If an Event of Default shall occur and be continuing, the principal of all
the Notes may be declared due and payable in the manner and with the effect
provided in the Indenture.
The Indenture contains provisions for defeasance at any time of (i) the
entire indebtedness of this Note, or (ii) certain restrictive covenants and
Events of Default with respect to this Note, in each case upon compliance with
certain conditions set forth therein.
Unless the context otherwise requires, the Original Notes (as defined in
the Indenture) and the Exchange Notes (as defined in the Indenture) shall
constitute one series for all purposes under the Indenture, including without
limitation, amendments, waivers, redemptions, Change of Control Offers and Asset
Sale Offers.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Notes under the Indenture at any
time by the Company and the Trustee with the consent of the Holders of a
majority in aggregate principal amount of the Notes at the time outstanding.
The Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Notes at the time outstanding,
on behalf of the Holders of all the Notes, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Note at the times, place and rate, and in the coin or currency,
herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Note is registrable in the Note Register, upon
surrender of this Note for registration of transfer at the office or agency of
the Company in the Borough of Manhattan, The City of New York, New York, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Note Registrar duly executed by, the Holder
hereof or his attorney duly authorized in writing, and thereupon one or more new
Notes, of
<PAGE>
authorized denominations and like tenor and for the same aggregate principal
amount, will be issued to the designated transferee or transferees.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Notes are
exchangeable for a like tenor and aggregate principal amount of Notes of a
different authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
Interest on this Note shall be computed on the basis of a 360-day year of
twelve 30-day months; provided, however, that Special Interest shall be computed
on the basis of a 365- or 366-day year, as the case may be, and the number of
days actually elapsed.
THE INDENTURE AND THE NOTES, INCLUDING THIS NOTE, SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
All terms used in this Note which are defined in the Indenture shall have
the meanings assigned to them in the Indenture.
<PAGE>
CERTIFICATE OF TRANSFER
The transferor hereof (the "Transferor") hereby certifies in connection
with the transfer of this Note as follows:
(Please check one)
[_] The Transferor has requested that this Note be transferred to a person
(the "Transferee") who will take delivery in the form of a Regulation S Note.
In connection with such transfer, the Transferor hereby certifies that, unless
such transfer is being effected pursuant to an effective registration statement
under the Securities Act, it is being effected in accordance with Rule 904 or
Rule 144 under the Securities Act and with all applicable securities laws of the
states of the United States and other jurisdictions. Accordingly, the
Transferor hereby further certifies as follows:
(1) Rule 904 Transfers. If the transfer is being effected in
------------------
accordance with Rule 904:
(A) the Transferor is not a distributor of the Notes, an
affiliate of the Company or any such distributor or a person acting on
behalf of any of the foregoing;
(B) the offer of this Note was not made to a person in the
United States;
(C) either:
(i) at the time the buy order was originated, the
Transferee was outside the United States or the Transferor and
any person acting on its behalf reasonably believed that the
Transferee was outside the United States, or
(ii) the transaction is being executed in, on or through
the facilities of the Eurobond market, as regulated by the
Association of International Bond Dealers, or another designated
offshore securities market and neither the Owner nor any person
acting on its behalf knows that the transaction has been
prearranged with a buyer in the United States;
(D) no directed selling efforts have been made in the United
States by or on behalf of the Transferor or any affiliate thereof;
(E) if the Transferor is a dealer in securities or has received a
selling concession, fee or other remuneration in respect of this Note,
and the transfer is to occur during the Restricted Period, then the
requirements of Rule 904(c)(1) have been satisfied; and
(F) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
<PAGE>
(2) Rule 144 Transfers. If the transfer is being effected pursuant
------------------
to Rule 144:
(A) the transfer is occurring after a holding period of at least
two years (computed in accordance with paragraph (d) of Rule 144) has
elapsed since this Note was last acquired from the Company or from an
affiliate of the Company, whichever is later, and is being effected in
accordance with the applicable amount, manner of sale and notice
requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
three years has elapsed since this Note was last acquired from the
Company or from an affiliate of the Company, whichever is later, and
the Transferor is not, and during the preceding three months has not
been, an affiliate of the Company.
[_] The Transferor has requested that this Note be transferred to the
Transferee who will take delivery in the form of a Restricted Note. In
connection with such transfer, the Transferor hereby certifies that, unless such
transfer is being effected pursuant to an effective registration statement under
the Securities Act, it is being effected in accordance with Rule 144A, Rule 144
or to an Institutional Accredited Investor under Rule 501(a)(1), (2), (3) or (7)
under the Securities Act and in compliance with all applicable securities laws
of the states of the United States and other jurisdictions. Accordingly, the
Transferor hereby further certifies as follows:
(1) Rule 144A Transfers. If the transfer is being effected in
-------------------
accordance with Rule 144A:
(A) this Note is being transferred to a person that the
Transferor and any person acting on its behalf reasonably believe is a
"qualified institutional buyer" within the meaning of Rule 144A,
acquiring for its own account or for the account of a qualified
institutional buyer; and
(B) the Transferor and any person acting on its behalf have
taken reasonable steps to ensure that the Transferee is aware that the
Transferor may be relying on Rule 144A in connection with the
transfer; and
(2) Rule 144 Transfers. If the transfer is being effected pursuant
------------------
to Rule 144:
(A) the transfer is occurring after a holding period of at least
two years (computed in accordance with paragraph (d) of Rule 144) has
elapsed since this Note was last acquired from the Company or from an
affiliate of the Company, whichever is later, and is being effected in
accordance with the applicable amount, manner of sale and notice
requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
three years has elapsed since this Note was last acquired from the
Company or from an affiliate of the Company, whichever is later, and
the Transferor is not, and during the preceding three months has not
been, an affiliate of the Company.
(3) Institutional Accredited Investor Transfers. If the transfer is
-------------------------------------------
being effected to an Institutional Accredited Investor as defined under
Rule 501(a)(1), (2), (3) or (7), this
<PAGE>
Note is being transferred to such an Institutional Accredited Investor as
therein so defined who is purchasing for investment purposes and not for
distribution.
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company pursuant to
Section 4.07 or 4.08 of the Indenture, check the box:
[_]
If you want to elect to have only a part of this Note purchased by the
Company pursuant to Section 4.07 or 4.08 of the Indenture, state the amount:
$_________________
Dated:____________________ Your Signature:______________________
(Sign exactly as name appears
on the other side of this Note)
Signature Guarantee:____________________________________________________________
Notice: Signature(s) must be guaranteed by an "eligible guarantor
institution" meeting the requirements of the Note Registrar which
requirements will include membership or participation in STAMP or such
other "signature guarantee program" as may be determined by the
Trustee in addition to, or in substitution for STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.
<PAGE>
EXHIBIT 4.4
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES FOR
THE BENEFIT OF THE COMPANY AND THE INITIAL PURCHASERS OF THIS NOTE THAT THIS
NOTE MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE THIRD
ANNIVERSARY OF THE ISSUANCE HEREOF (OR A PREDECESSOR NOTE HERETO) OR (Y) BY ANY
HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS
PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE
COMPANY, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A
UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY
BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" WITHIN THE MEANING OF RULE 144A
PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL
BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING
MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR
ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS NOTE), AND, IF SUCH TRANSFER IS BEING EFFECTED BY CERTAIN
TRANSFERORS SPECIFIED IN THE INDENTURE (AS DEFINED BELOW) PRIOR TO THE
EXPIRATION OF THE "40-DAY RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE
903(C)(3) OF REGULATION S UNDER THE SECURITIES ACT), A CERTIFICATE WHICH MAY BE
OBTAINED FROM THE COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE
COMPANY AND THE TRUSTEE, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR"
AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS NOTE) THAT IS ACQUIRING THIS NOTE FOR INVESTMENT PURPOSES
AND NOT FOR DISTRIBUTION, AND A CERTIFICATE IN THE FORM ATTACHED TO THIS NOTE IS
DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE (PROVIDED THAT
CERTAIN HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS NOTE PURSUANT
TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "40-DAY RESTRICTED PERIOD"
(WITHIN THE MEANING OF RULE 903(C)(3) OF REGULATION S UNDER THE SECURITIES
ACT)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6) PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS NOTE AGREES IT WILL
FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION
AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS NOTE
COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS
NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS (1) A
"QUALIFIED INSTITUTIONAL BUYER" WITHIN THE MEANING OF RULE 144A OR (2) AN
INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(A)(1), (2),
(3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS NOTE FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE
THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE
REQUIREMENTS OF PARAGRAPH (O)(2) OF RULE 902 UNDER) REGULATION S UNDER THE
SECURITIES ACT.
THIS NOTE WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT. FOR PURPOSES OF SECTIONS
1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS
AMENDED, THE ISSUE PRICE OF THIS NOTE IS 60.00% OF ITS PRINCIPAL AMOUNT, THE
AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $400 PER $1,000 OF STATED FACE AMOUNT, THE
ISSUE DATE IS MARCH 4, 1997 AND THE YIELD TO MATURITY IS 10.50%.
10.50% SENIOR DISCOUNT NOTES DUE MARCH 1, 2007
CUSIP NO. 582266AB8
No. ________ $___________
McLeod, Inc., a corporation duly organized and existing under the laws of
Delaware (herein called the "Company", which term includes any successor Person
under the Indenture hereinafter referred to), for value received, hereby
promises to pay to ____________________, or registered assigns, the principal
sum of ____________________ Dollars ($__________) on March 1, 2007, and to pay
interest thereon from March 1, 2002 or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, semi-annually on
March 1 and September 1 in each year, commencing September 1, 2002 at the rate
of 10.50% per annum, until the principal hereof is paid or made available for
payment; provided, however, that if (i) the Company has not filed a registration
statement (the "Exchange Offer Registration Statement") under the Securities Act
of 1933, as amended (the "Act"), registering a security substantially identical
to this Note (except that such Note will not contain terms with respect to the
Special Interest payments described below or transfer restrictions) pursuant to
an exchange offer (the "Registered Exchange Offer") (or, in lieu thereof, a
registration statement registering this Note for resale (a "Shelf Registration
Statement")) by June 2, 1997, or (ii) the Exchange Offer Registration Statement
relating to the Registered Exchange Offer has not become or been declared
effective by August 1, 1997, or (iii) neither the Registered Exchange Offer has
been consummated nor the Shelf Registration Statement has been declared
effective prior to September 1, 1997, or (iv) either the Exchange Offer
Registration Statement or, if applicable, the Shelf Registration Statement is
filed and declared effective (except as specifically permitted therein) but
shall thereafter cease to be effective without being succeeded promptly by an
additional
<PAGE>
registration statement filed and declared effective, in each case (i) through
(iv) upon the terms and conditions set forth in the Registration Agreement (each
such event referred to in clauses (i) through (iv), a "Registration Default"),
then interest will accrue (in addition to the original issue discount and any
stated interest on the Notes) (the "Step-Up") at a rate of 0.5% per annum,
determined daily, on the Accreted Value of the Notes, during the 90-day period
from and including the date on which any such Registration Default shall occur
to but excluding the date on which all Registration Defaults have been cured and
shall increase by 0.25% per annum at the end of each subsequent 90-day period,
but in no event shall such rate exceed 2.00% per annum, in the aggregate,
regardless of the number of Registration Defaults. Interest accruing as a result
of the Step-Up is referred to herein as "Special Interest." Accrued Special
Interest, if any, shall be paid semi-annually on March 1 and September 1 in each
year; and the amount of accrued Special Interest shall be determined on the
basis of the number of days actually elapsed. Any accrued and unpaid interest
(including Special Interest) on this Note upon the issuance of an Exchange Note
(as defined in the Indenture) in exchange for this Note shall cease to be
payable to the Holder hereof but such accrued and unpaid interest (including
Special Interest) shall be payable on the next Interest Payment Date for such
Exchange Note to the Holder thereof on the related Regular Record Date. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, as provided in such Indenture, be paid to the Person in whose
name this Note (or one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest, which shall be February
15 or August 15 (whether or not a Business Day), as the case may be, immediately
preceding such Interest Payment Date. Any such interest not so punctually paid
or duly provided for will forthwith cease to be payable to the Holder on such
Regular Record Date and may either be paid to the Person in whose name this Note
(or one or more Predecessor Notes) is registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest to be fixed by
the Trustee, notice whereof shall be given to Holders of Notes not more than 15
calendar days and not less than 10 calendar days prior to such Special Record
Date, or be paid at any time in any other lawful manner not inconsistent with
the requirements of any securities exchange on which the Notes may be listed,
and upon such notice as may be required by such exchange, all as more fully
provided in said Indenture.
The principal of this Note shall not accrue interest (other than Special
Interest, if any) until March 1, 2002, except in the case of a default in
payment of principal and premium, if any, upon acceleration or redemption, in
which case interest shall be payable pursuant to the preceding paragraph on such
overdue principal (and premium, if any), such interest shall be payable on
demand and, if not so paid on demand, such interest shall itself bear interest
at the rate of 11.50% per annum (to the extent that the payment of such interest
shall be legally enforceable), and shall accrue from the date of such demand for
payment to the date payment of such interest has been made or duly provided for,
and such interest on unpaid interest shall also be payable on demand.
Payment of the principal of (and premium, if any) and interest on this Note
will be made at the corporate trust office of the Trustee and at the office or
agency of the Company maintained for that purpose in the Borough of Manhattan,
The City of New York, New York, and at any other office or agency maintained by
the Company for such purpose, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company payment of
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Note Register.
<PAGE>
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Note shall
not be entitled to any benefit under the Indenture or be valid or obligatory for
any purpose.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated:
MCLEOD, INC.
By____________________________
Attest:
______________________________
This is one of the Notes referred to in the within-mentioned Indenture.
Dated:
UNITED STATES TRUST COMPANY
OF NEW YORK,
as Trustee
By_________________________
Authorized Signatory.
<PAGE>
This Note is one of a duly authorized issue of Notes of the Company
designated as its 10.50% Senior Discount Notes due March 1, 2007 (the "Notes")
issued under an Indenture, dated as of March 4, 1997 (herein called the
"Indenture"), between the Company and United States Trust Company of New York,
as trustee (herein called the "Trustee", which term includes any successor
trustee under the Indenture). The Notes are limited in aggregate principal
amount at maturity to $500,000,000. Reference is hereby made to the Indenture
and all indentures supplemental thereto for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee and the Holders of the Notes and of the terms upon which the Notes
are, and are to be, authenticated and delivered.
The Notes are subject to redemption upon not less than 30 nor more than 60
days' notice by mail to each Holder of Notes to be redeemed at such Holder's
address appearing in the Note Register, in amounts of $1,000 or an integral
multiple of $1,000, at any time on or after March 1, 2002 and prior to maturity,
as a whole or in part, at the election of the Company, at the following
Redemption Prices (expressed as percentages of the principal amount) plus
accrued interest to but excluding the Redemption Date (subject to the right of
Holder on the relevant Regular Record Date to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date), if redeemed
during the 12-month period beginning March 1, of each of the years indicated
below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- --------
<S> <C>
2002 105.250%
2003 103.500%
2004 101.750%
</TABLE>
and thereafter at a Redemption Price equal to 100% of the principal amount,
together in the case of any such redemption with accrued interest to but
excluding the Redemption Date, but interest installments whose Stated Maturity
is on or prior to such Redemption Date will be payable to the Holders of such
Notes, or one or more Predecessor Notes, of record at the close of business on
the relevant Regular Record Dates referred to on the face hereof, all as
provided in the Indenture.
The Notes are further subject to redemption prior to March 1, 2000 only in
the event that the Company receives net proceeds from any sale of its Common
Stock in a Strategic Equity Investment on or before March 1, 2000, in which case
the Company may, at its option, use all or a portion of any such net proceeds to
redeem Notes in a principal amount of up to an aggregate amount equal to 33 1/3%
of the original principal amount of the Notes, provided, however, that Notes in
an amount equal to at least 66 2/3% of the original principal amount of the
Notes remain outstanding after such redemption. Such redemption must occur on a
Redemption Date within 90 days of any such sale and upon not less than 30 nor
more than 60 days' notice by mail to each Holder of Notes to be redeemed at such
Holder's address appearing in the Note Register, in amounts of $1,000 or an
integral multiple of $1,000 at a Redemption Price of 110.5% of the Accreted
Value of the Notes to but excluding the Redemption Date.
The Notes do not have the benefit of any sinking fund obligations.
<PAGE>
The Indenture provides that, subject to certain conditions, if (i) a Change
of Control (as defined in the Indenture) occurs or (ii) certain Excess Proceeds
are available to the Company as a result of any Asset Sale, the Company shall be
required to make a Change of Control Offer or an Asset Sale Offer, as the case
may be, for all or a specified portion of the Notes.
In the event of redemption or purchase pursuant to an Asset Sale Offer of
this Note in part only, a new Note or Notes of like tenor for the unredeemed or
unpurchased portion hereof will be issued in the name of the Holder hereof upon
the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal of all
the Notes may be declared due and payable in the manner and with the effect
provided in the Indenture.
The Indenture contains provisions for defeasance at any time of (i) the
entire indebtedness of this Note, or (ii) certain restrictive covenants and
Events of Default with respect to this Note, in each case upon compliance with
certain conditions set forth therein.
Unless the context otherwise requires, the Original Notes (as defined in
the Indenture) and the Exchange Notes (as defined in the Indenture) shall
constitute one series for all purposes under the Indenture, including without
limitation, amendments, waivers, redemptions, Change of Control Offers and Asset
Sale Offers.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Notes under the Indenture at any
time by the Company and the Trustee with the consent of the Holders of a
majority in aggregate principal amount of the Notes at the time outstanding.
The Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Notes at the time outstanding,
on behalf of the Holders of all the Notes, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Note at the times, place and rate, and in the coin or currency,
herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Note is registrable in the Note Register, upon
surrender of this Note for registration of transfer at the office or agency of
the Company in the Borough of Manhattan, The City of New York, New York, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Note Registrar duly executed by, the Holder
hereof or his attorney duly authorized in writing, and thereupon one or more new
Notes, of authorized denominations and like tenor and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
<PAGE>
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Notes are
exchangeable for a like tenor and aggregate principal amount of Notes of a
different authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
Interest on this Note shall be computed on the basis of a 360-day year of
twelve 30-day months; provided, however, that Special Interest shall be computed
on the basis of a 365- or 366-day year, as the case may be, and the number of
days actually elapsed.
THE INDENTURE AND THE NOTES, INCLUDING THIS NOTE, SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
All terms used in this Note which are defined in the Indenture shall have
the meanings assigned to them in the Indenture.
<PAGE>
CERTIFICATE OF TRANSFER
The transferor hereof (the "Transferor") hereby certifies in connection
with the transfer of this Note as follows:
(Please check one)
[_] The Transferor has requested that this Note be transferred to a person
(the "Transferee") who will take delivery in the form of a Regulation S Note.
In connection with such transfer, the Transferor hereby certifies that, unless
such transfer is being effected pursuant to an effective registration statement
under the Securities Act, it is being effected in accordance with Rule 904 or
Rule 144 under the Securities Act and with all applicable securities laws of the
states of the United States and other jurisdictions. Accordingly, the
Transferor hereby further certifies as follows:
(1) Rule 904 Transfers. If the transfer is being effected in
------------------
accordance with Rule 904:
(A) the Transferor is not a distributor of the Notes, an
affiliate of the Company or any such distributor or a person acting on
behalf of any of the foregoing;
(B) the offer of this Note was not made to a person in the
United States;
(C) either:
(i) at the time the buy order was originated, the
Transferee was outside the United States or the Transferor and
any person acting on its behalf reasonably believed that the
Transferee was outside the United States, or
(ii) the transaction is being executed in, on or through
the facilities of the Eurobond market, as regulated by the
Association of International Bond Dealers, or another designated
offshore securities market and neither the Owner nor any person
acting on its behalf knows that the transaction has been
prearranged with a buyer in the United States;
(D) no directed selling efforts have been made in the United
States by or on behalf of the Transferor or any affiliate thereof;
(E) if the Transferor is a dealer in securities or has received
a selling concession, fee or other remuneration in respect of this
Note, and the transfer is to occur during the Restricted Period, then
the requirements of Rule 904(c)(1) have been satisfied; and
(F) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
<PAGE>
(2) Rule 144 Transfers. If the transfer is being effected pursuant
------------------
to Rule 144:
(A) the transfer is occurring after a holding period of at least
two years (computed in accordance with paragraph (d) of Rule 144) has
elapsed since this Note was last acquired from the Company or from an
affiliate of the Company, whichever is later, and is being effected in
accordance with the applicable amount, manner of sale and notice
requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
three years has elapsed since this Note was last acquired from the
Company or from an affiliate of the Company, whichever is later, and
the Transferor is not, and during the preceding three months has not
been, an affiliate of the Company.
[_] The Transferor has requested that this Note be transferred to the
Transferee who will take delivery in the form of a Restricted Note. In
connection with such transfer, the Transferor hereby certifies that, unless such
transfer is being effected pursuant to an effective registration statement under
the Securities Act, it is being effected in accordance with Rule 144A, Rule 144
or to an Institutional Accredited Investor under Rule 501(a)(1), (2), (3) or (7)
under the Securities Act and in compliance with all applicable securities laws
of the states of the United States and other jurisdictions. Accordingly, the
Transferor hereby further certifies as follows:
(1) Rule 144A Transfers. If the transfer is being effected in
-------------------
accordance with Rule 144A:
(A) this Note is being transferred to a person that the
Transferor and any person acting on its behalf reasonably believe is a
"qualified institutional buyer" within the meaning of Rule 144A,
acquiring for its own account or for the account of a qualified
institutional buyer; and
(B) the Transferor and any person acting on its behalf have
taken reasonable steps to ensure that the Transferee is aware that the
Transferor may be relying on Rule 144A in connection with the
transfer; and
(2) Rule 144 Transfers. If the transfer is being effected pursuant
------------------
to Rule 144:
(A) the transfer is occurring after a holding period of at least
two years (computed in accordance with paragraph (d) of Rule 144) has
elapsed since this Note was last acquired from the Company or from an
affiliate of the Company, whichever is later, and is being effected in
accordance with the applicable amount, manner of sale and notice
requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
three years has elapsed since this Note was last acquired from the
Company or from an affiliate of the Company, whichever is later, and
the Transferor is not, and during the preceding three months has not
been, an affiliate of the Company.
(3) Institutional Accredited Investor Transfers. If the transfer is
-------------------------------------------
being effected to an Institutional Accredited Investor as defined under
Rule 501(a)(1), (2), (3) or (7), this
<PAGE>
Note is being transferred to such an Institutional Accredited Investor as
therein so defined who is purchasing for investment purposes and not for
distribution.
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company pursuant to
Section 4.07 or 4.08 of the Indenture, check the box:
[_]
If you want to elect to have only a part of this Note purchased by the
Company pursuant to Section 4.07 or 4.08 of the Indenture, state the amount:
$_________________
Dated:____________________ Your Signature:______________________
(Sign exactly as name appears
on the other side of this Note)
Signature Guarantee:____________________________________________________________
Notice: Signature(s) must be guaranteed by an "eligible guarantor
institution" meeting the requirements of the Note Registrar which
requirements will include membership or participation in STAMP or such
other "signature guarantee program" as may be determined by the
Trustee in addition to, or in substitution for STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.
<PAGE>
EXHIBIT 4.5
MCLEOD, INC.
Senior Subordinated Notes Due
REGISTRATION AGREEMENT
New York, New York
March 4, 1997
Salomon Brothers Inc
Morgan Stanley & Co. Incorporated
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Dear Sirs:
McLeod, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to certain purchasers (the "Purchasers"), upon the terms set
forth in a purchase agreement of even date herewith (the "Purchase Agreement"),
its 10.5% Senior Discount Notes due 2007 (the "Securities") (the "Initial
Placement"). As an inducement to the Purchasers to enter into the Purchase
Agreement and in satisfaction of a condition to your obligations thereunder, the
Company agrees with you, (i) for your benefit and (ii) for the benefit of the
holders from time to time of the Securities (including you and the other
Purchasers) (each of the foregoing a "Holder" and together the "Holders"), as
follows:
1. Definitions. Capitalized terms used herein without definition
-----------
shall have their respective meanings set forth in the Purchase Agreement. As
used in this Agreement, the following capitalized defined terms shall have the
following meanings:
"Act" means the Securities Act of 1933, as amended, and the rules and
---
regulations of the Commission promulgated thereunder.
"Affiliate" of any specified person means any other person which,
---------
directly or indirectly, is in control of, is controlled by, or is under common
control with, such specified person. For purposes of this definition, control
of a person means the power, direct or indirect, to direct or cause the
direction of the management and policies of such person whether by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
<PAGE>
2
"Closing Date" has the meaning set forth in the Purchase Agreement.
------------
"Commission" means the Securities and Exchange Commission.
----------
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations of the Commission promulgated thereunder.
"Exchange Offer Registration Period" means the 1 year period following
----------------------------------
the consummation of the Registered Exchange Offer, exclusive of any period
during which any stop order shall be in effect suspending the effectiveness of
the Exchange Offer Registration Statement.
"Exchange Offer Registration Statement" means a registration statement
-------------------------------------
of the Company on an appropriate form under the Act with respect to the
Registered Exchange Offer, all amendments and supplements to such registration
statement, including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material incorporated
by reference therein.
"Exchanging Dealer" means any Holder (which may include the
-----------------
Purchasers) which is a broker-dealer, electing to exchange Securities acquired
for its own account as a result of market-making activities or other trading
activities, for New Securities.
"Final Memorandum" has the meaning set forth in the Purchase
----------------
Agreement.
"Holder" has the meaning set forth in the preamble hereto.
------
"Indenture" means the Indenture relating to the Securities dated as of
---------
March 4, 1997, between the Company and United States Trust Company of New York
as trustee, as the same may be amended from time to time in accordance with the
terms thereof.
"Initial Placement" has the meaning set forth in the preamble hereto.
-----------------
"Majority Holders" means the Holders of a majority of the aggregate
----------------
principal amount of securities registered under a Registration Statement.
<PAGE>
3
"Managing Underwriters" means the investment banker or investment
---------------------
bankers and manager or managers that shall administer an underwritten offering.
"New Securities" means debt securities of the Company identical in all
--------------
material respects to the Securities (except that the cash interest and interest
rate step-up provisions and the transfer restrictions will be modified or
eliminated, as appropriate), to be issued under the Indenture or the New
Securities Indenture.
"New Securities Indenture" means an indenture between the Company and
------------------------
the New Securities Trustee, identical in all material respects with the
Indenture (except that the interest rate step-up provisions will be modified or
eliminated, as appropriate).
"New Securities Trustee" means a bank or trust company reasonably
----------------------
satisfactory to the Purchaser, as trustee with respect to the New Securities
under the New Securities Indenture.
"Prospectus" means the prospectus included in any Registration
----------
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Securities or the New Securities, covered by such
Registration Statement, and all amendments and supplements to the Prospectus,
including post-effective amendments.
"Registered Exchange Offer" means the proposed offer to the Holders to
-------------------------
issue and deliver to such Holders, in exchange for the Securities, a like
principal amount of the New Securities.
"Registration Statement" means any Exchange Offer Registration
----------------------
Statement or Shelf Registration Statement that covers any of the Securities or
the New Securities pursuant to the provisions of this Agreement, amendments and
supplements to such registration statement, including post-effective amendments,
in each case including the Prospectus contained therein, all exhibits thereto
and all material incorporated by reference therein.
"Securities" has the meaning set forth in the preamble hereto.
----------
<PAGE>
4
"Shelf Registration" means a registration effected pursuant to Section
------------------
3 hereof.
"Shelf Registration Period" has the meaning set forth in Section 3(b)
-------------------------
hereof.
"Shelf Registration Statement" means a "shelf" registration statement
----------------------------
of the Company pursuant to the provisions of Section 3 hereof which covers some
or all of the Securities or New Securities, as applicable, on an appropriate
form under Rule 415 under the Act, or any similar rule that may be adopted by
the Commission, amendments and supplements to such registration statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
"Trustee" means the trustee with respect to the Securities under the
-------
Indenture.
"Underwriter" means any underwriter of Securities in connection with
-----------
an offering thereof under a Shelf Registration Statement.
2. Registered Exchange Offer; Resales of New Securities by Exchanging
------------------------------------------------------------------
Dealers; Private Exchange. (a) Except as set forth in Section 3(i) below, the
- -------------------------
Company shall prepare and, not later than 90 days following the Closing Date,
shall file with the Commission the Exchange Offer Registration Statement with
respect to the Registered Exchange Offer. The Company shall use its best
efforts to cause the Exchange Offer Registration Statement to become effective
under the Act within 150 days of the Closing Date.
(b) Upon the effectiveness of the Exchange Offer Registration
Statement, the Company shall promptly commence the Registered Exchange Offer, it
being the objective of such Registered Exchange Offer to enable each Holder
electing to exchange Securities for New Securities (assuming that such Holder is
not an affiliate of the Company within the meaning of the Act, acquires the New
Securities in the ordinary course of such Holder's business and has no
arrangements with any person to participate in the distribution of the New
Securities) to trade such New Securities from and after their receipt without
any limitations or restrictions under the Act and without material restrictions
under the securities laws of a substantial proportion of the several states of
the United States.
(c) In connection with the Registered Exchange Offer, the Company
shall:
<PAGE>
5
(i) mail to each Holder a copy of the Prospectus forming part of the
Exchange Offer Registration Statement, together with an appropriate letter
of transmittal and related documents;
(ii) keep the Registered Exchange Offer open for not less than 30
days and not more than 45 days after the date notice thereof is mailed to
the Holders (or longer if required by applicable law);
(iii) utilize the services of a depositary for the Registered Exchange
Offer with an address in the Borough of Manhattan, The City of New York;
and
(iv) comply in all material respects with all applicable laws.
(d) As soon as practicable after the close of the
Registered Exchange Offer, the Company shall:
(i) accept for exchange all Securities tendered and not validly
withdrawn pursuant to the Registered Exchange Offer;
(ii) deliver to the Trustee for cancellation all securities so
accepted for exchange; and
(iii) cause the Trustee or the New Securities Trustee, as the case may
be, promptly to authenticate and deliver to each Holder of Securities New
Securities equal in principal amount to the Securities of such Holder so
accepted for exchange.
(e) The Purchasers and the Company acknowledge that, pursuant to
interpretations by the Commission's staff of Section 5 of the Act, and in the
absence of an applicable exemption therefrom, each Exchanging Dealer is required
to deliver a Prospectus in connection with a sale of any New Securities received
by such Exchanging Dealer pursuant to the Registered Exchange Offer in exchange
for Securities acquired for its own account as a result of market-making
activities or other trading activities. Accordingly, the Company shall:
(i) include the information set forth in Annex A hereto on the cover
of the Exchange Offer Registration Statement, in Annex B hereto in the
forepart of the Exchange Offer Registration Statement in a section setting
forth details of the Exchange Offer, and in Annex C hereto in the
underwriting or plan of distribution section of the
<PAGE>
6
Prospectus forming a part of the Exchange Offer Registration Statement, and
include the information set forth in Annex D hereto in the Letter of
Transmittal delivered pursuant to the Registered Exchange Offer; and
(ii) use its best efforts to keep the Exchange Offer Registration
Statement continuously effective under the Act during the Exchange Offer
Registration Period for delivery by Exchanging Dealers in connection with
sales of New Securities received pursuant to the Registered Exchange Offer,
as contemplated by Section 4(h) below.
(f) In the event that any Purchaser determines that it is not
eligible to participate in the Registered Exchange Offer with respect to the
exchange of Securities constituting any portion of an unsold allotment, at the
request of such Purchaser, the Company shall issue and deliver to such Purchaser
or the party purchasing New Securities registered under a Shelf Registration
Statement as contemplated by Section 3 hereof from such Purchaser, in exchange
for such Securities, a like principal amount of New Securities. The Company
shall seek to cause the CUSIP Service Bureau to issue the same CUSIP number for
such New Securities as for New Securities issued pursuant to the Registered
Exchange Offer.
3. Shelf Registration. If, (i) because of any change in law or
------------------
applicable interpretations thereof by the Commission's staff, the Company
determines upon advice of its outside counsel that it is not permitted to effect
the Registered Exchange Offer as contemplated by Section 2 hereof, or (ii) for
any other reason the Exchange Offer Registration Statement has not been filed
with the Commission within 90 days of the Closing Date, or (iii) for any other
reason the Registered Exchange Offer is not consummated within 180 days of the
Closing Date, or (iv) any Purchaser so requests with respect to Securities held
by it following consummation of the Registered Exchange Offer, or (v) in the
case of any Purchaser that participates in the Registered Exchange Offer or
acquires New Securities pursuant to Section 2(f) hereof, such Purchaser does not
receive freely tradeable New Securities in exchange for Securities constituting
any portion of an unsold allotment (it being understood that, for purposes of
this Section 3, (x) the requirement that a Purchaser deliver a Prospectus
containing the information required by Items 507 and/or 508 of Regulation S-K
under the Act in connection with sales of New Securities acquired in exchange
for such Securities shall result in such New Securities being not "freely
tradeable" but (y) the requirement that an Exchanging Dealer deliver a
Prospectus in connection with sales of New Securities acquired in the Registered
Exchange Offer in exchange for Securities acquired
<PAGE>
7
as a result of market-making activities or other trading activities shall not
result in such New Securities being not "freely tradeable"), the following
provisions shall apply:
(a) The Company shall as promptly as practicable (but in no event more
than 30 days after so required or requested pursuant to this Section 3), file
with the Commission and thereafter shall use its best efforts to cause to be
declared effective under the Act a Shelf Registration Statement relating to the
offer and sale of the Securities or the New Securities, as applicable, by the
Holders from time to time in accordance with the methods of distribution elected
by such Holders and set forth in such Shelf Registration Statement; provided,
--------
that with respect to New Securities received by a Purchaser in exchange for
Securities constituting any portion of an unsold allotment, the Company may, if
permitted by current interpretations by the Commission's staff, file a post-
effective amendment to the Exchange Offer Registration Statement containing the
information required by Regulation S-K Items 507 and/or 508, as applicable, in
satisfaction of its obligations under this paragraph (a) with respect thereto,
and any such Exchange Offer Registration Statement, as so amended, shall be
referred to herein as, and governed by the provisions herein applicable to, a
Shelf Registration Statement.
(b) The Company shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the Prospectus
forming part thereof to be usable by Holders for a period of three years (or
such shorter period provided for in Rule 144(k)) from the date the Shelf
Registration Statement is declared effective by the Commission or such shorter
period that will terminate when all the Securities or New Securities, as
applicable, covered by the Shelf Registration Statement have been sold pursuant
to the Shelf Registration Statement (in any such case, such period being called
the "Shelf Registration Period"). The Company shall be deemed not to have used
its best efforts to keep the Shelf Registration Statement effective during the
requisite period if it voluntarily takes any action that would result in Holders
of securities covered thereby not being able to offer and sell such securities
during that period, unless (i) such action is required by applicable law, or
(ii) such action is taken by the Company in good faith and for valid business
reasons (not including avoidance of the Company's obligations hereunder),
including the acquisition or divestiture of assets, so long as the Company
promptly thereafter complies with the requirements of Section 4(k) hereof, if
applicable.
(c) No Holder of Securities may include any of its Securities in any
Shelf Registration Statement pursuant to this
<PAGE>
8
Agreement unless such Holder furnishes to the Company in writing, within 10 days
after receipt of a request therefor, such information as the Company may
reasonably request for use in connection with any Shelf Registration Statement
or Prospectus or preliminary Prospectus included therein, and each such Holder
agrees to furnish promptly to the Company all information required to be
disclosed in order to make the information previously furnished to the Company
by such Holder not materially misleading.
4. Registration Procedures. In connection with any Shelf
-----------------------
Registration Statement and, to the extent applicable, any Exchange Offer
Registration Statement, the following provisions shall apply:
(a) The Company shall furnish to you, prior to the filing thereof with
the Commission, a copy of any Shelf Registration Statement and any Exchange
Offer Registration Statement, and each amendment thereof and each amendment
or supplement, if any, to the Prospectus included therein and shall use its
best efforts to reflect in each such document, when so filed with the
Commission, such comments as you and your counsel reasonably may propose.
(b) The Company shall ensure that (i) any Registration Statement and
any amendment thereto and any Prospectus forming part thereof and any
amendment or supplement thereto complies in all material respects with the
Act and the rules and regulations thereunder, (ii) any Registration
Statement and any amendment thereto does not, when it becomes effective,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading and (iii) any Prospectus forming part of any
Registration Statement, and any amendment or supplement to such Prospectus,
does not include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements, in the light of
the circumstances under which they were made, not misleading.
(c) (1) The Company shall advise you and, in the case of a Shelf
Registration Statement, the Holders of securities covered thereby, and, if
requested by you or any such Holder, confirm such advice in writing:
(i) when a Registration Statement and any amendment thereto has
been filed with the Commission and when the Registration Statement or
any post-effective amendment thereto has become effective; and
<PAGE>
9
(ii) of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus included
therein or for additional information.
(2) The Company shall advise you and, in the case of a Shelf
Registration Statement, the Holders of securities covered thereby, and, in
the case of an Exchange Offer Registration Statement, any Exchanging Dealer
which has provided in writing to the Company a telephone or facsimile
number and address for notices, and, if requested by you or any such Holder
or Exchanging Dealer, confirm such advice in writing:
(i) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose;
(ii) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the securities
included therein for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and
(iii) of the happening of any event that requires the making of
any changes in the Registration Statement or the Prospectus so that,
as of such date, the statements therein are not misleading and do not
omit to state a material fact required to be stated therein or
necessary to make the statements therein (in the case of the
Prospectus, in light of the circumstances under which they were made)
not misleading (which advice shall be accompanied by an instruction to
suspend the use of the Prospectus until the requisite changes have
been made).
(d) The Company shall use its best efforts to obtain the withdrawal
of any order suspending the effectiveness of any Registration Statement at
the earliest possible time.
(e) The Company shall furnish to each Holder of securities included
within the coverage of any Shelf Registration Statement, without charge, at
least one copy of such Shelf Registration Statement and any post-effective
amendment thereto, including financial statements and schedules, and, if
the Holder so requests in writing, all exhibits (including those
incorporated by reference).
<PAGE>
10
(f) The Company shall, during the Shelf Registration Period, deliver
to each Holder of securities included within the coverage of any Shelf
Registration Statement, without charge, as many copies of the Prospectus
(including each preliminary Prospectus) included in such Shelf Registration
Statement and any amendment or supplement thereto as such Holder may
reasonably request; and the Company consents to the use of the Prospectus
or any amendment or supplement thereto by each of the selling Holders of
securities in connection with the offering and sale of the securities
covered by the Prospectus or any amendment or supplement thereto.
(g) The Company shall furnish to each Exchanging Dealer which so
requests, without charge, at least one copy of the Exchange Offer
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, any documents incorporated by reference
therein, and, if the Exchanging Dealer so requests in writing, all exhibits
(including those incorporated by reference).
(h) The Company shall, during the Exchange Offer Registration Period,
promptly deliver to each Exchanging Dealer, without charge, as many copies
of the Prospectus included in such Exchange Offer Registration Statement
and any amendment or supplement thereto as such Exchanging Dealer may
reasonably request for delivery by such Exchanging Dealer in connection
with a sale of New Securities received by it pursuant to the Registered
Exchange Offer; and the Company consents to the use of the Prospectus or
any amendment or supplement thereto by any such Exchanging Dealer, as
aforesaid.
(i) Prior to the Registered Exchange Offer or any other offering of
securities pursuant to any Registration Statement, the Company shall
register or qualify or cooperate with the Holders of securities included
therein and their respective counsel in connection with the registration or
qualification of such securities for offer and sale under the securities or
blue sky laws of such jurisdictions as any such Holders reasonably request
in writing and do any and all other acts or things necessary or advisable
to enable the offer and sale in such jurisdictions of the securities
covered by such Registration Statement; provided, however, that the Company
-------- -------
will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action which
would subject it to general service of process or to
<PAGE>
11
taxation in any such jurisdiction where it is not then so subject.
(j) The Company shall cooperate with the Holders of Securities to
facilitate the timely preparation and delivery of certificates representing
Securities to be sold pursuant to any Registration Statement free of any
restrictive legends and in such denominations and registered in such names
as Holders may request prior to sales of securities pursuant to such
Registration Statement.
(k) Upon the occurrence of any event contemplated by paragraph
(c)(2)(iii) above, the Company shall promptly prepare a post-effective
amendment to any Registration Statement or an amendment or supplement to
the related Prospectus or file any other required document so that, as
thereafter delivered to purchasers of the securities included therein, the
Prospectus will not include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(l) Not later than the effective date of any such Registration
Statement hereunder, the Company shall provide a CUSIP number for the
Securities or New Securities, as the case may be, registered under such
Registration Statement, and provide the applicable trustee with printed
certificates for such Securities or New Securities, in a form eligible for
deposit with The Depository Trust Company.
(m) The Company shall use its best efforts to comply with all
applicable rules and regulations of the Commission and shall make generally
available to its security holders as soon as practicable after the
effective date of the applicable Registration Statement an earnings
statement satisfying the provisions of Section 11(a) of the Act.
(n) The Company shall cause the Indenture or the New Securities
Indenture, as the case may be, to be qualified under the Trust Indenture
Act in a timely manner.
(o) The Company may require each Holder of securities to be sold
pursuant to any Shelf Registration Statement to furnish to the Company such
information regarding the holder and the distribution of such securities as
the Company may from time to time reasonably require for inclusion in such
Registration Statement.
<PAGE>
12
(p) The Company shall, if requested, promptly incorporate in a
Prospectus supplement or post-effective amendment to a Shelf Registration
Statement, such information as the Managing Underwriters and Majority
Holders reasonably agree should be included therein and shall make all
required filings of such Prospectus supplement or post-effective amendment
as soon as notified of the matters to be incorporated in such Prospectus
supplement or post-effective amendment.
(q) In the case of any Shelf Registration Statement, the Company shall
enter into such agreements (including underwriting agreements) and take all
other appropriate actions in order to expedite or facilitate the
registration or the disposition of the Securities, and in connection
therewith, if an underwriting agreement is entered into, cause the same to
contain indemnification provisions and procedures no less favorable than
those set forth in Section 6 (or such other provisions and procedures
acceptable to the Majority Holders and the Managing Underwriters, if any,
with respect to all parties to be indemnified pursuant to Section 6 from
Holders of Securities to the Company.
(r) In the case of any Shelf Registration Statement, the Company shall
(i) make reasonably available for inspection by the Holders of securities
to be registered thereunder, any underwriter participating in any
disposition pursuant to such Registration Statement, and any attorney,
accountant or other agent retained by the Holders or any such underwriter
such financial and other books and records of the Company as shall be
necessary to conduct a reasonable investigation; (ii) cause the Company's
officers, directors and employees to supply all relevant information
reasonably requested by the Holders or any such underwriter, attorney,
accountant or agent in connection with any such Registration Statement as
is customary for similar due diligence examinations; provided, however,
-------- -------
that any information that is designated in writing by the Company, in good
faith, as confidential at the time of delivery of such information shall be
kept confidential by the Holders or any such underwriter, attorney,
accountant or agent, unless such disclosure is made in connection with a
court proceeding or required by law, or such information becomes available
to the public generally or through a third party without an accompanying
obligation of confidentiality; (iii) make such representations and
warranties to the Holders of securities registered thereunder and the
underwriters, if any, in form, substance and scope as are customarily made
by issuers to
<PAGE>
13
underwriters in primary underwritten offerings and covering matters
including, but not limited to, those set forth in the Purchase Agreement;
(iv) obtain opinions of counsel to the Company and updates thereof (which
counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the Managing Underwriters, if any) addressed to each
selling Holder and the underwriters, if any, covering such matters as are
customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such Holders and
underwriters; (v) obtain "cold comfort" letters and updates thereof from
the independent certified public accountants of the Company (and, if
necessary, any other independent certified public accountants of any
subsidiary of the Company or of any business acquired by the Company for
which financial statements and financial data are, or are required to be,
included in the Registration Statement), addressed to each selling Holder
of securities registered thereunder and the underwriters, if any, in
customary form and covering matters of the type customarily covered in
"cold comfort" letters in connection with primary underwritten offerings;
and (vi) deliver such documents and certificates as may be reasonably
requested by the Majority Holders and the Managing Underwriters, if any,
including those to evidence compliance with Section 4(k) and with any
customary conditions contained in the underwriting agreement or other
agreement entered into by the Company. The foregoing actions set forth in
clauses (iii), (iv), (v) and (vi) of this Section 4(r) shall be performed
at (A) the effectiveness of such Registration Statement and each post-
effective amendment thereto and (B) each closing under any underwriting or
similar agreement as and to the extent required thereunder.
(s) In the case of any Exchange Offer Registration Statement, the
Company shall (i) make reasonably available for inspection by such
Purchaser, and any attorney, accountant or other agent retained by such
Purchaser, such financial and other information and books and records of
the Company as shall be necessary to conduct a reasonable investigation;
(ii) cause the Company's officers, directors and employees to supply all
relevant information reasonably requested by such Purchaser or any such
attorney, accountant or agent in connection with any such Registration
Statement as is customary for similar due diligence examinations; provided,
--------
however, that any information that is designated in writing by the Company,
-------
in good faith, as confidential at the time of delivery of such information
shall be kept confidential by such Purchaser or any such attorney,
<PAGE>
14
accountant or agent, unless such disclosure is made in connection with a
court proceeding or required by law, or such information becomes available
to the public generally or through a third party without an accompanying
obligation of confidentiality; (iii) make such representations and
warranties to such Purchaser, in form, substance and scope as are
customarily made by issuers to underwriters in primary underwritten
offerings and covering matters including, but not limited to, those set
forth in the Purchase Agreement; (iv) obtain opinions of counsel to the
Company and updates thereof (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to such Purchaser and its
counsel, addressed to such Purchaser, covering such matters as are
customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such Purchaser or its
counsel; (v) obtain "cold comfort" letters and updates thereof from the
independent certified public accountants of the Company (and, if necessary,
any other independent certified public accountants of any subsidiary of the
Company or of any business acquired by the Company for which financial
statements and financial data are, or are required to be, included in the
Registration Statement), addressed to such Purchaser, in customary form and
covering matters of the type customarily covered in "cold comfort" letters
in connection with primary underwritten offerings, or if requested by such
Purchaser or its counsel in lieu of a "cold comfort" letter, an agreed-upon
procedures letter under Statement on Auditing Standards No. 35, covering
matters requested by such Purchaser or its counsel; and (vi) deliver such
documents and certificates as may be reasonably requested by such Purchaser
or its counsel, including those to evidence compliance with Section 4(k)
and with conditions customarily contained in underwriting agreements. The
foregoing actions set forth in clauses (iii), (iv), (v), and (vi) of this
Section 4(s) shall be performed at the close of the Registered Exchange
Offer and the effective date of any post-effective amendment to the
Exchange Offer Registration Statement.
5. Registration Expenses. The Company shall bear all expenses
---------------------
incurred in connection with the performance of its obligations under Sections 2,
3 and 4 hereof and, in the event of any Shelf Registration Statement, will
reimburse the Holders for the reasonable fees and disbursements of one firm or
counsel designated by the Majority Holders to act as counsel for the Holders in
connection therewith, and, in the case of any Exchange Offer Registration
Statement, will reimburse the Purchasers for the reasonable fees and
disbursements of counsel acting in
<PAGE>
15
connection therewith. Notwithstanding the foregoing, the Holders of any
Securities or New Securities being registered on the Shelf Registration
Statement shall pay all agency or brokerage fees and commissions and
underwriting discounts and commissions attributable to the sale of such
Securities or New Securities and the fees and disbursements of any counsel
retained by such Holders other that counsel referred to above.
6. Indemnification and Contribution. (a) In connection with any
--------------------------------
Registration Statement, the Company agrees to indemnify and hold harmless each
Holder of securities covered thereby (including each Purchaser and, with respect
to any Prospectus delivery as contemplated in Section 4(h) hereof, each
Exchanging Dealer), the directors, officers, employees and agents of each such
Holder and each person who controls any such Holder within the meaning of either
the Act or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement as originally filed or in any amendment thereof, or
in any preliminary Prospectus or Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
-------- -------
Company will not be liable in any case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any such Holder specifically for inclusion therein.
This indemnity agreement will be in addition to any liability which the Company
may otherwise have.
The Company also agrees to indemnify or contribute to Losses of, as
provided in Section 6(d), any underwriters of Securities registered under a
Shelf Registration Statement, their officers and directors and each person who
controls such underwriters on substantially the same basis as that of the
indemnification of the Purchaser and the selling Holders provided in this
Section 6(a) and shall, if requested by any Holder, enter
<PAGE>
16
into an underwriting agreement reflecting such agreement, as provided in Section
4(q) hereof.
(b) Each Holder of securities covered by a Registration Statement
(including each Purchaser and, with respect to any Prospectus delivery as
contemplated in Section 4(h) hereof, each Exchanging Dealer) severally
agrees to indemnify and hold harmless (i) the Company, (ii) each of its
directors, (iii) each of its officers who signs such Registration Statement
and (iv) each person who controls the Company within the meaning of either
the Act or the Exchange Act to the same extent as the foregoing indemnity
from the Company to each such Holder, but only with reference to written
information relating to such Holder furnished to the Company by or on
behalf of such Holder specifically for inclusion in the documents referred
to in the foregoing indemnity. This indemnity agreement will be in
addition to any liability which any such Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
6 or notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 6, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will not relieve it from liability under paragraph (a) or (b) above
unless and to the extent it did not otherwise learn of such action and such
failure results in the forfeiture by the indemnifying party of substantial
rights and defenses and (ii) will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than
the indemnification obligation provided in paragraph (a) or (b) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in
which case the indemnifying party shall not thereafter be responsible for
the fees and expenses of any separate counsel retained by the indemnified
party or parties except as set forth below); provided, however, that such
-------- -------
counsel shall be satisfactory to the indemnified party. Notwithstanding
the indemnifying party's election to appoint counsel to represent the
indemnified party in an action, the indemnified party shall have the right
to employ separate counsel (including local counsel), and the indemnifying
party shall bear the reasonable fees, costs and expenses of such separate
counsel (and local counsel) if (i) the use of counsel chosen by the
<PAGE>
17
indemnifying party to represent the indemnified party would present such
counsel with a conflict of interest, (ii) the actual or potential
defendants in, or targets of, any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, (iii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
the institution of such action or (iv) the indemnifying party shall
authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or
action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 6 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, then each applicable indemnifying party,
in lieu of indemnifying such indemnified party, shall have a joint and
several obligation to contribute to the aggregate losses, claims, damages
and liabilities (including legal or other expenses reasonably incurred in
connection with investigating or defending same) (collectively "Losses") to
which such indemnified party may be subject in such proportion as is
appropriate to reflect the relative benefits received by such indemnifying
party, on the one hand, and such indemnified party, on the other hand, from
the Initial Placement and the Registration Statement which resulted in such
Losses; provided, however, that in no case shall any Purchaser or any
-------- -------
subsequent Holder of any Security or New Security be responsible, in the
aggregate, for any amount in excess of the purchase discount or commission
applicable to such Security, or in the case of a New Security, applicable
to the Security which was exchangeable into such New Security, as set forth
on the cover page of the Final Memorandum, nor shall any underwriter be
responsible for any amount in excess of the underwriting
<PAGE>
18
discount or commission applicable to the securities purchased by such
underwriter under the Registration Statement which resulted in such Losses.
If the allocation provided by the immediately preceding sentence is
unavailable for any reason, the indemnifying party and the indemnified
party shall contribute in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of such
indemnifying party, on the one hand, and such indemnified party, on the
other hand, in connection with the statements or omissions which resulted
in such Losses as well as any other relevant equitable considerations.
Benefits received by the Company shall be deemed to be equal to the sum of
(x) the total net proceeds from the Initial Placement (before deducting
expenses) as set forth on the cover page of the Final Memorandum and (y)
the total amount of additional interest which the Company was not required
to pay as a result of registering the securities covered by the
Registration Statement which resulted in such Losses. Benefits received by
the Purchasers shall be deemed to be equal to the total purchase discounts
and commissions as set forth on the cover page of the Final Memorandum, and
benefits received by any other Holders shall be deemed to be equal to the
value of receiving Securities or New Securities, as applicable, registered
under the Act. Benefits received by any underwriter shall be deemed to be
equal to the total underwriting discounts and commissions, as set forth on
the cover page of the Prospectus forming a part of the Registration
Statement which resulted in such Losses. Relative fault shall be
determined by reference to whether any alleged untrue statement or omission
relates to information provided by the indemnifying party, on the one hand,
or by the indemnified party, on the other hand. The parties agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of
the equitable considerations referred to above. Notwithstanding the
provisions of this paragraph (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 6, each person
who controls a Holder within the meaning of either the Act or the Exchange
Act and each director, officer, employee and agent of such Holder shall
have the same rights to contribution as such Holder, and each person who
controls the Company within the meaning of either the Act or the Exchange
Act, each officer of the Company who shall have signed the Registration
Statement and each
<PAGE>
19
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of
this paragraph (d).
(e) The provisions of this Section 6 will remain in full force and
effect, regardless of any investigation made by or on behalf of any Holder
or the Company or any of the officers, directors or controlling persons
referred to in Section 6 hereof, and will survive the sale by a Holder of
securities covered by a Registration Statement.
7. Underwritten Offerings. No Holder may participate in any
----------------------
underwritten Shelf Registration Statement hereunder unless such Holder (i)
agrees to sell such Holder's Securities on the basis provided in any
underwriting arrangements entered into in connection therewith and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
8. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company has not, as of the date
--------------------------
hereof, entered into, nor shall it, on or after the date hereof, enter
into, any agreement with respect to its securities that is inconsistent
with the rights granted to the Holders herein or otherwise conflicts with
the provisions hereof.
(b) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, qualified,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the Company has obtained the
written consent of the Holders of at least a majority of the then
outstanding aggregate principal amount of Securities (or, after the
consummation of any Exchange Offer in accordance with Section 2 hereof, of
New Securities); provided that, with respect to any matter that directly or
--------
indirectly affects the rights of any Purchaser hereunder, the Company shall
obtain the written consent of each such Purchaser against which such
amendment, qualification, supplement, waiver or consent is to be effective.
Notwithstanding the foregoing (except the foregoing proviso), a waiver or
consent to departure from the provisions hereof with respect to a matter
that relates exclusively to the rights of Holders whose securities are
being sold pursuant to a Registration Statement and that does not directly
or indirectly affect the rights of other
<PAGE>
20
Holders may be given by the Majority Holders, determined on the basis of
securities being sold rather than registered under such Registration
Statement.
(c) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, first-class
mail, telex, telecopier, or air courier guaranteeing overnight delivery:
(1) if to a Holder, at the most current address given by such
holder to the Company in accordance with the provisions of this
Section 7(c), which address initially is, with respect to each Holder,
the address of such Holder maintained by the Registrar under the
Indenture, with a copy in like manner to Salomon Brothers Inc;
(2) if to you, initially at the respective addresses set forth
in the Purchase Agreement; and
(3) if to the Company, initially at its address set forth in the
Purchase Agreement.
All such notices and communications shall be deemed to have been duly
given at the time delivered by hand, if personally delivered, five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on
the next business day, if timely delivered to an air courier guaranteeing
overnight delivery.
The Purchasers or the Company by notice to the other may designate
additional or different addresses for subsequent notices or communications.
(d) Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns of each of the
parties, including, without the need for an express assignment or any
consent by the Company thereto, subsequent Holders of Securities and/or New
Securities. The Company hereby agrees to extend the benefits of this
Agreement to any Holder of Securities and/or New Securities and any such
Holder may specifically enforce the provisions of this Agreement as if an
original party hereto.
(e) Counterparts. This agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall
<PAGE>
21
be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
(f) Headings. The headings in this agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. This agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York applicable to
agreements made and to be performed in said State.
(h) Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any
circumstances, is held invalid, illegal or unenforceable in any respect for
any reason, the validity, legality and enforceability of any such provision
in every other respect and of the remaining provisions hereof shall not be
in any way impaired or affected thereby, it being intended that all of the
rights and privileges of the parties shall be enforceable to the fullest
extent permitted by law.
(i) Securities Held by the Company, etc. Whenever the consent or
-----------------------------------
approval of Holders of a specified percentage of principal amount of
Securities or New Securities is required hereunder, Securities or New
Securities, as applicable, held by the Company or its Affiliates (other
than subsequent Holders of Securities or New Securities if such subsequent
Holders are deemed to be Affiliates solely by reason of their holdings of
such Securities or New Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
<PAGE>
22
Please confirm that the foregoing correctly sets forth the agreement
between the Company and you.
Very truly yours,
MCLEOD, INC.
By:/s/ Casey D. Mahon
--------------------------------
Name: Casey D. Mahon
Title: Senior Vice President,
General Counsel and
Secretary
Accepted in New York, New York
March 4, 1997
SALOMON BROTHERS INC
By: SALOMON BROTHERS INC
By:/s/ Tim Davies
------------------------------------
Name: Tim Davies
Title: Vice President
MORGAN STANLEY & CO. INCORPORATED
By:/s/ Robert M. Shepardson
------------------------------------
Name: Robert M. Shepardson
Title: Vice President
<PAGE>
[FORM OF OFFERING MEMORANDUM DESCRIPTION OF
REGISTRATION AGREEMENT]
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company and the Initial Purchasers will enter into the
Registration Agreement on or prior to the Closing Date. The Company has agreed
pursuant to a Registration Agreement with the Initial Purchasers, for the
benefit of the holders, that the Company will, at its cost, (i) no later than 90
days after the Closing Date file the Exchange Offer Registration Statement with
the Commission relating to the Registered Exchange Offer to exchange the Notes
for Exchange Notes having terms substantially identical in all material respects
to the Notes (except that the Exchange Notes will not contain terms with respect
to transfer restrictions) and (ii) use its best efforts to cause the Exchange
Offer Registration Statement to be declared effective under the Securities Act
not later than 150 days after the Closing Date. Upon the effectiveness of the
Exchange Offer Registration Statement, the Company will offer the Exchange Notes
in exchange for surrender of the Notes. The Company will keep the Registered
Exchange Offer open for not less than 30 days and not more than 45 days (or
longer if required by applicable law) after the date notice of the Registered
Exchange Offer is mailed to the Holders. For each Note surrendered to the
Company pursuant to the Registered Exchange Offer, the holder of such Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Note. Under existing Commission interpretations, the Exchange Notes
would be freely transferable by holders other than affiliates of the Company
after the Registered Exchange Offer without further registration under the
Securities Act if the holder of the Exchange Notes represents that it is
acquiring the Exchange Notes in the ordinary course of its business, that it has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes and that it is not an affiliate of the
Company, as such terms are interpreted by the Commission; provided that broker-
dealers ("Participating Broker-Dealers") receiving Exchange Notes in the
Registered Exchange Offer will have a prospectus delivery requirement with
respect to resales of such Exchange Notes. The Commission has taken the
position that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to Exchange Notes (other than a resale of an unsold
allotment from the
<PAGE>
2
original sale of the Notes) with the prospectus contained in the Exchange Offer
Registration Statement. Under the Registration Agreement, the Company is
required to allow Participating Broker-Dealers and other persons, if any, with
similar prospectus delivery requirements to use the prospectus contained in the
Exchange Offer Registration Statement in connection with the resale of such
Exchange Notes.
A holder of Notes (other than certain specified holders) who wishes to
exchange such Notes for Exchange Notes in the Registered Exchange Offer will be
required to represent that any Exchange Notes to be received by it will be
acquired in the ordinary course of its business and that at the time of the
commencement of the Registered Exchange Offer it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and that it is not an
"affiliate" of the Company, as defined in Rule 405 of the Securities Act, or if
it is an affiliate, that it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
In the event that applicable interpretations of the staff of the
Commission do not permit the Company to effect such a Registered Exchange Offer,
or if for any other reason the Registered Exchange Offer is not consummated
within 180 days after the Closing Date, or if the Initial Purchasers so request
with respect to Notes not eligible to be exchanged for Exchange Notes in the
Registered Exchange Offer, or if any holder of Notes does not receive freely
tradeable Exchange Notes in the Registered Exchange Offer, the Company will, at
its cost, (a) as promptly as practicable, file a Shelf Registration Statement
covering resales of the Notes or the Exchange Notes, as the case may be, (b) use
its best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act and (c) keep the Shelf Registration Statement
effective until three years (or any shorter period under Rule 144(k) under the
Act) after its effective date or such shorter period ending when all resales of
Notes or Exchange Notes covered by such Shelf Registration Statement have been
made. The Company will, in the event a Shelf Registration Statement is filed,
among other things, provide to each holder for whom such Shelf Registration
Statement was filed copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resales of the Notes or the Exchange Notes, as the case may
be. A holder selling such Notes or Exchange Notes pursuant to the Shelf
Registration Statement generally would be required to be
<PAGE>
3
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Agreement which are applicable to
such holder (including certain indemnification obligations).
If (i) within 90 days after the Closing Date, neither the Exchange
Offer Registration Statement nor the Shelf Registration Statement has been filed
with the Commission; (ii) within 150 days after the Closing Date the Exchange
Offer Registration Statement has not been declared effective; (iii) within 180
days after the Closing Date, neither the Registered Exchange Offer has been
consummated nor the Shelf Registration Statement has been declared effective; or
(iv) after either the Exchange Offer Registration Statement or the Shelf
Registration Statement has been declared effective, such Registration Statement
thereafter ceases to be effective or usable (subject to certain exceptions) in
connection with resales of Notes or Exchange Notes in accordance with and during
the periods specified in the Registration Agreement, (each such event referred
to in clauses (i) through (iv), a "Registration Default"), additional interest
("Special Interest") will accrue on the Notes and the Exchange Notes (in
addition to the stated interest on the Notes and the Exchange Notes) from and
including the date on which any such Registration Default shall occur to but
excluding the date on which all Registration Defaults have been cured. Special
Interest will accrue at a rate of 0.50% per annum during the 90-day period
immediately following the occurrence of any Registration Default and shall
increase by 0.25% per annum at the end of each subsequent 90-day period, but in
no event shall such rate exceed 2.00% per annum in the aggregate regardless of
the number of Registration Defaults.
The summary herein of certain provisions of the Registration Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Registration Agreement, a
copy of which is available upon request to the Company.
<PAGE>
ANNEX A
Each broker-dealer that receives New Securities for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Securities. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Securities received in exchange for Securities where such New Securities were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration
Date (as defined herein) and ending on the close of business on the first
anniversary of the Expiration Date, it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
<PAGE>
ANNEX B
Each broker-dealer that receives New Securities for its own account in exchange
for Securities, where such Securities were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Securities. See "Plan of Distribution."
<PAGE>
ANNEX C
PLAN OF DISTRIBUTION
--------------------
Each broker-dealer that receives New Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Securities received in
exchange for Securities where such Securities were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that, starting on the Expiration Date and ending on the close of business on the
first anniversary of the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale.
The Company will not receive any proceeds from any sale of New
Securities by broker-dealers. New Securities received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Securities or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Securities. Any broker-dealer that resells New Securities that were received by
it for its own account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such New Securities may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit of any
such resale of New Securities and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 1 year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
<PAGE>
holders of the Securities) other than commissions or concessions of any brokers
or dealers and will indemnify the holders of the Securities (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
[If applicable, add information required by Regulation S-K Items 507
and/or 508.]
<PAGE>
ANNEX D
Rider A
-------
CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO.
Name:________________________________
Address:_____________________________
_____________________________
Rider B
-------
If the undersigned is not a broker-dealer, the undersigned represents that it is
not engaged in, and does not intend to engage in, a distribution of New
Securities. If the undersigned is a broker-dealer that will receive New
Securities for its own account in exchange for Securities, it represents that
the Securities to be exchanged for New Securities were acquired by it as a
result of market-making activities or other trading activities and acknowledges
that it will deliver a prospectus in connection with any resale of such New
Securities; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
<PAGE>
EXHIBIT 10.56
McLEOD, INC.
EMPLOYEE STOCK PURCHASE PLAN
----------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. SHARES SUBJECT TO THE PLAN.................................1
2. ADMINISTRATION.............................................1
3. INTERPRETATION.............................................1
4. ELIGIBLE EMPLOYEES.........................................1
5. PARTICIPATION IN THE PLAN..................................2
6. PAYROLL DEDUCTIONS.........................................2
7. PAYROLL DEDUCTION PERIODS..................................2
8. RIGHTS TO PURCHASE CLASS A
COMMON STOCK; PURCHASE PRICE.............................2
9. TIMING OF PURCHASE; PURCHASE LIMITATION....................3
10. ISSUANCE OF STOCK CERTIFICATES............................4
11. WITHHOLDING OF TAXES......................................4
12. ACCOUNT STATEMENTS........................................4
13. PARTICIPATION ADJUSTMENT..................................4
14. CHANGES IN ELECTIONS TO PURCHASE..........................5
15. VOLUNTARY TERMINATION OF EMPLOYMENT OR DISCHARGE..........5
16. RETIREMENT OR SEVERANCE...................................6
17. LAY-OFF, AUTHORIZED LEAVE OR ABSENCE OR DISABILITY........6
18. DEATH.....................................................7
19. FAILURE TO MAKE PERIODIC CASH PAYMENTS....................8
20. TERMINATION OF PARTICIPATION..............................8
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
21. ASSIGNMENT................................................8
22. APPLICATION OF FUNDS......................................8
23. NO RIGHT TO CONTINUED EMPLOYMENT..........................8
24. AMENDMENT OF PLAN.........................................9
25. EFFECTIVE DATE; TERM AND TERMINATION OF THE PLAN..........9
26. EFFECT OF CHANGES IN CAPITALIZATION.......................9
(a) Changes in Stock.......................................9
(b) Reorganization in Which the Company Is the Surviving
Corporation...........................................10
(c) Reorganization in Which the Company Is Not the
Surviving Corporation or Sale of Assets or Stock......10
(d) Adjustments...........................................11
(e) No Limitations on Company.............................11
27. GOVERNMENTAL REGULATION..................................11
28. STOCKHOLDER RIGHTS.......................................11
29. RULE 16B-3...............................................11
30. PAYMENT OF PLAN EXPENSES.................................12
</TABLE>
-ii-
<PAGE>
McLEOD, INC.
EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors of McLeod, Inc. (the "Company") has adopted this
Employee Stock Purchase Plan (the "Plan") to enable eligible employees of the
Company and its participating Affiliates (as defined below), through payroll
deductions, to purchase shares of the Company's Class A common stock, par value
$0.01 per share (the "Class A Common Stock"). The Plan is for the benefit of
the employees of McLeod, Inc. and any participating Affiliates. The Plan is
intended to benefit the Company by increasing the employees' interest in the
Company's growth and success and encouraging employees to remain in the employ
of the Company or its participating Affiliates. The provisions of the Plan are
set forth below:
1. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 26 below, the aggregate number
of shares of Class A Common Stock that may be made available for purchase by
participating employees under the Plan is 1,000,000. The shares issuable under
the Plan may, in the discretion of the Board of Directors of the Company (the
"Board"), be either authorized but unissued shares or treasury shares.
2. ADMINISTRATION.
The Plan shall be administered under the direction of the Compensation
Committee of the Board (the "Committee"). No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan.
3. INTERPRETATION.
It is intended that the Plan will meet the requirements for an "employee
stock purchase plan" under Section 423 of the Internal Revenue Code of 1986 (the
"Code"), and it is to be so applied and interpreted. Subject to the express
provisions of the Plan, the Committee shall have authority to interpret the
Plan, to prescribe, amend and rescind rules relating to it, and to make all
other determinations necessary or advisable in administering the Plan, all of
which determinations will be final and binding upon all persons.
4. ELIGIBLE EMPLOYEES.
Any employee of the Company or any of its participating Affiliates may
participate in the Plan, except the following, who are ineligible to
participate: (a) an employee who has been employed by the Company or any of its
participating Affiliates for less than six months as of the beginning of a
Payroll Deduction Period (as defined in Section 7 below); (b) an employee whose
customary employment is for
<PAGE>
less than five months in any calendar year; (c) an employee whose customary
employment is 20 hours or less per week; and (d) an employee who, after
exercising his or her rights to purchase shares under the Plan, would own shares
of Class A Common Stock (including shares that may be acquired under any
outstanding options) representing five percent or more of the total combined
voting power of all classes of stock of the Company. The term "participating
Affiliate" means any company or other trade or business that is a subsidiary of
the Company (determined in accordance with the principles of Sections 424(e) and
(f) of the Code and the regulations thereunder). The Board may at any time in
its sole discretion, if it deems it advisable to do so, terminate the
participation of the employees of a particular participating Affiliate.
5. PARTICIPATION IN THE PLAN.
An eligible employee may become a participating employee in the Plan by
completing an election to participate in the Plan on a form provided by the
Company and submitting that form to the Payroll Department of the Company. The
form will authorize payroll deductions (as provided in Section 6 below) and
authorize the purchase of shares of Class A Common Stock for the employee's
account in accordance with the terms of the Plan. Enrollment will become
effective upon the first day of the first Payroll Deduction Period.
6. PAYROLL DEDUCTIONS.
At the time an eligible employee submits his or her election to participate
in the Plan (as provided in Section 5 above), the employee shall elect to have
deductions made from his or her pay, on each pay day following his or her
enrollment in the Plan, and for as long as he or she shall participate in the
Plan. The deductions will be credited to the participating employee's account
under the Plan. An employee may not during any Payroll Deduction Period change
his or her percentage of payroll deduction for that Payroll Deduction Period,
nor may an employee withdraw any contributed funds, other than in accordance
with Sections 14 through 20 below.
7. PAYROLL DEDUCTION PERIODS.
The Payroll Deduction Periods shall be determined by the Committee. The
first Payroll Deduction Period under the Plan shall commence on the date
determined by the Committee.
8. RIGHTS TO PURCHASE CLASS A COMMON STOCK; PURCHASE PRICE.
Rights to purchase shares of Class A Common Stock will be deemed granted to
participating employees as of the first trading day of each Payroll Deduction
Period. The purchase price of each share of Class A Common Stock (the "Purchase
-2-
<PAGE>
Price") shall be determined by the Committee; provided, however, the Purchase
-----------------
Price shall not be less than the lesser of 85 percent of the fair market value
of the Class A Common Stock (i) on the first trading day of the Payroll
Deduction Period or (ii) on the last trading day of such Payroll Deduction
Period; provided, further, that in no event shall the Purchase Price be less
-----------------
than the par value of the Class A Common Stock. For purposes of the Plan, "fair
market value" means the value of each share of Class A Common Stock subject to
the Plan on a given date determined as follows: if on such date the shares of
Class A Common Stock are listed on an established national or regional stock
exchange, are admitted to quotation on The Nasdaq Stock Market, or are publicly
traded on an established securities market, the fair market value of the shares
of Class A Common Stock shall be the closing price of the shares of Class A
Common Stock on such exchange or in such market (the highest such closing price
if there is more than one such exchange or market) on such date or, if such date
is not a trading day, on the trading day immediately preceding such date (or if
there is no such reported closing price, the fair market value shall be the mean
between the highest bid and lowest asked prices or between the high and low sale
prices on such trading day) or, if no sale of the shares of Class A Common Stock
is reported for such trading day, on the next preceding day on which any sale
shall have been reported. If the shares of Class A Common Stock are not listed
on such an exchange, quoted on such System or traded on such a market, fair
market value shall be determined by the Board in good faith.
9. TIMING OF PURCHASE; PURCHASE LIMITATION.
Unless a participating employee has given prior written notice terminating
such employee's participation in the Plan, or the employee's participation in
the Plan has otherwise been terminated as provided in Sections 15 through 20
below, such employee will be deemed to have exercised automatically his or her
right to purchase Class A Common Stock on the last trading day of the Payroll
Deduction Period (except as provided in Section 14 below) for the number of
shares of Class A Common Stock which the accumulated funds in the employee's
account at that time will purchase at the Purchase Price, subject to the
participation adjustment provided for in Section 13 below and subject to
adjustment under Section 26 below. Notwithstanding any other provision of the
Plan, no employee may purchase in any one calendar year under the Plan and all
other "employee stock purchase plans" of the Company and its participating
Affiliates shares of Class A Common Stock having an aggregate fair market value
in excess of $25,000, determined as of the first trading date of the Payroll
Deduction Period as to shares purchased during such period. Effective upon the
last trading day of the Payroll Deduction Period, a participating employee will
become a stockholder with respect to the shares purchased during such period,
and will thereupon have all dividend, voting and other ownership rights incident
thereto. Notwithstanding the foregoing, no shares shall be sold pursuant to the
Plan unless the Plan is approved by the Company's stockholders in accordance
with Section 25 below.
-3-
<PAGE>
10. ISSUANCE OF STOCK CERTIFICATES.
On the last trading day of the Payroll Deduction Period, a participating
employee will be credited with the number of shares of Class A Common Stock
purchased for his or her account under the Plan during such Payroll Deduction
Period. Shares purchased under the Plan will be held in the custody of an agent
(the "Agent") appointed by the Board of Directors. The Agent may hold the
shares purchased under the Plan in stock certificates in nominee names and may
commingle shares held in its custody in a single account or stock certificate
without identification as to individual participating employees. A
participating employee may, at any time following his or her purchase of shares
under the Plan, by written notice instruct the Agent to have all or part of such
shares reissued in the participating employee's own name and have the stock
certificate delivered to the employee.
11. WITHHOLDING OF TAXES.
To the extent that a participating employee realizes ordinary income in
connection with a sale or other transfer of any shares of Class A Common Stock
purchased under the Plan, the Company may withhold amounts needed to cover such
taxes from any payments otherwise due and owing to the participating employee or
from shares that would otherwise be issued to the participating employee
hereunder. Any participating employee who sells or otherwise transfers shares
purchased under the Plan within two years after the beginning of the Payroll
Deduction Period in which the shares were purchased must within 30 days of such
transfer notify the Payroll Department of the Company in writing of such
transfer.
12. ACCOUNT STATEMENTS.
The Company will cause the Agent to deliver to each participating employee
a statement for each Payroll Deduction Period during which the employee
purchases Class A Common Stock under the Plan, reflecting the amount of payroll
deductions during the Payroll Deduction Period, the number of shares purchased
for the employee's account, the price per share of the shares purchased for the
employee's account and the number of shares held for the employee's account at
the end of the Payroll Deduction Period.
13. PARTICIPATION ADJUSTMENT.
If in any Payroll Deduction Period the number of unsold shares that may be
made available for purchase under the Plan pursuant to Section 1 above is
insufficient to permit exercise of all rights deemed exercised by all
participating employees pursuant to Section 9 above, a participation adjustment
will be made, and the number of shares purchasable by all participating
employees will be
-4-
<PAGE>
reduced proportionately. Any funds then remaining in a participating employee's
account after such exercise will be refunded to the employee.
14. CHANGES IN ELECTIONS TO PURCHASE.
(a) A participating employee (other than a participating employee who is
an executive officer of the Company who is subject to Section 16(b) under the
Securities Exchange Act of 1934, as amended, (the "Exchange Act")) may, at any
time prior to the last trading day of the Payroll Deduction Period, by written
notice to the Company, direct the Company to cease payroll deductions (or, if
the payment for shares is being made through periodic cash payments, notify the
Company that such payments will be terminated), in accordance with the following
alternatives:
(i) The employee's option to purchase shall be reduced to the number
of shares which may be purchased, as of the last day of the Payroll Deduction
Period, with the amount then credited to the employee's account; or
(ii) Withdraw the amount in such employee's account and
terminate such employee's option to purchase.
(b) Any participating employee may increase or decrease his or her payroll
deduction or periodic cash payments, to take effect on the first day of the next
Payroll Deduction Period, by delivering to the Company a new form regarding
election to participate in the Plan under Section 5 above.
15. VOLUNTARY TERMINATION OF EMPLOYMENT OR DISCHARGE.
In the event a participating employee (other than a participating employee
who is an executive officer of the Company who is subject to Section 16(b) under
the Exchange Act) voluntarily leaves the employ of the Company or a
participating Affiliate, otherwise than by retirement under a plan of the
Company or a participating Affiliate, or is discharged for cause prior to the
last day of the Payroll Deduction Period, the amount in the employee's account
will be distributed and the employee's option to purchase will terminate. In
the event a participating employee who is subject to Section 16(b) under the
Exchange Act voluntarily leaves the employ of the Company or a participating
Affiliate, otherwise than by retirement under a plan of the Company or a
participating Affiliate, or is discharged for cause prior to the last day of the
Payroll Deduction Period, the employee's option to purchase shall be reduced to
the number of shares which may be purchased, as of the last day of the Payroll
Deduction Period, with the amount then credited to the employee's account.
-5-
<PAGE>
16. RETIREMENT OR SEVERANCE.
In the event a participating employee (other than a participating employee
who is an officer of the Company who is subject to Section 16(b) under the
Exchange Act) who has an option to purchase shares leaves the employ of the
Company or a participating Affiliate because of retirement under a plan of the
Company or a participating Affiliate, or because of termination of the
employee's employment by the Company or a participating Affiliate for any reason
except discharge for cause, the participating employee may elect, within 10 days
after the date of such retirement or termination, one of the following
alternatives:
(a) The employee's option to purchase shall be reduced to the number of
shares which may be purchased, as of the last day of the Payroll Deduction
Period, with the amount then credited to the employee's account; or
(b) Withdraw the amount in such employee's account and terminate such
employee's option to purchase.
In the event the participating employee does not make an election within
the aforesaid 10-day period, he or she will be deemed to have elected subsection
16(b) above; provided, however, that a participating employee who is an officer
-----------------
of the Company who is subject to Section 16(b) under the Exchange Act will
receive shares of Class A Common Stock pursuant to subsection 16(a).
17. LAY-OFF, AUTHORIZED LEAVE OR ABSENCE OR DISABILITY.
Payroll deductions for shares for which a participating employee has an
option to purchase may be suspended during any period of absence of the employee
from work due to lay-off, authorized leave of absence or disability or, if the
employee so elects, periodic payments for such shares may continue to be made in
cash provided, however, that if such employee is an officer of the Company who
-----------------
is subject to Section 16(b) under the Exchange Act, such periodic payments must
be continued in cash.
If such employee returns to active service prior to the last day of the
Payroll Deduction Period, the employee's payroll deductions will be resumed and
if said employee did not make periodic cash payments during the employee's
period of absence, the employee shall, by written notice to the Company's
Payroll Department within 10 days after the employee's return to active service,
but not later than the last day of the Payroll Deduction Period, elect:
(a) To make up any deficiency in the employee's account resulting from a
suspension of payroll deductions by an immediate cash payment;
(b) Not to make up such deficiency, in which event the number of shares to
be purchased by the employee shall be reduced to the number of whole shares
-6-
<PAGE>
which may be purchased with the amount, if any, then credited to the employee's
account plus the aggregate amount, if any, of all payroll deductions to be made
thereafter; or
(c) Withdraw the amount in the employee's account and terminate the
employee's option to purchase.
A participating employee on lay-off, authorized leave of absence or
disability on the last day of the Payroll Deduction Period shall deliver written
notice to his or her employer on or before the last day of the Payroll Deduction
Period, electing one of the alternatives provided in the foregoing clauses (a),
(b) and (c) of this Section 17. If any employee fails to deliver such written
notice within 10 days after the employee's return to active service or by the
last day of the Payroll Deduction Period, whichever is earlier, the employee
shall be deemed to have elected subsection 17(c) above.
If the period of a participating employee's lay-off, authorized leave of
absence or disability shall terminate on or before the last day of the Payroll
Deduction Period, and the employee shall not resume active employment with the
Company or a participating Affiliate, the employee shall receive a distribution
in accordance with the provisions of Section 16 of this Plan.
18. DEATH.
In the event of the death of a participating employee while the employee's
option to purchase shares is in effect, the legal representatives of such
employee may, within three months after the employee's death (but no later than
the last day of the Payroll Deduction Period) by written notice to the Company
or participating Affiliate, elect one of the following alternatives:
(a) The employee's option to purchase shall be reduced to the number of
shares which may be purchased, as of the last day of the Payroll Deduction
Period, with the amount then credited to the employee's account; or
(b) Withdraw the amount in such employee's account and terminate such
employee's option to purchase.
In the event the legal representatives of such employee fail to deliver
such written notice to the Company or participating Affiliate within the
prescribed period, the election to purchase shares shall terminate and the
amount, then credited to the employee's account shall be paid to such legal
representatives; provided, however, that the estate of a participating employee
-----------------
who is an officer of the Company who is subject to Section 16(b) under the
Exchange Act will receive shares of Class A Common Stock pursuant to subsection
18(a).
-7-
<PAGE>
19. FAILURE TO MAKE PERIODIC CASH PAYMENTS.
Under any of the circumstances contemplated by this Plan, where the
purchase of shares is to be made through periodic cash payments in lieu of
payroll deductions, the failure to make any such payments shall reduce, to the
extent of the deficiency in such payments, the number of shares purchasable
under this Plan.
20. TERMINATION OF PARTICIPATION.
A participating employee will be refunded all moneys in his or her account,
and his or her participation in the Plan will be terminated if either (a) the
Board elects to terminate the Plan as provided in Section 25 below, or (b) the
employee ceases to be eligible to participate in the Plan under Section 4 above.
As soon as practicable following termination of an employee's participation in
the Plan, the Company will deliver to the employee a check representing the
amount in the employee's account and a stock certificate representing the number
of whole shares held in the employee's account. Once terminated, participation
may not be reinstated for the then current Payroll Deduction Period, but, if
otherwise eligible, the employee may elect to participate in any subsequent
Payroll Deduction Period.
21. ASSIGNMENT.
No participating employee may assign his or her rights to purchase shares
of Class A Common Stock under the Plan, whether voluntarily, by operation of law
or otherwise. Any payment of cash or issuance of shares of Class A Common Stock
under the Plan may be made only to the participating employee (or, in the event
of the employee's death, to the employee's estate). Once a stock certificate
has been issued to the employee or for his or her account, such certificate may
be assigned the same as any other stock certificate.
22. APPLICATION OF FUNDS.
All funds received or held by the Company under the Plan may be used for
any corporate purpose until applied to the purchase of Class A Common Stock
and/or refunded to participating employees. Participating employees' accounts
will not be segregated.
23. NO RIGHT TO CONTINUED EMPLOYMENT.
Neither the Plan nor any right to purchase Class A Common Stock under the
Plan confers upon any employee any right to continued employment with the
Company or any of its participating Affiliates, nor will an employee's
participation in the Plan restrict or interfere in any way with the right of the
Company or any of its participating Affiliates to terminate the employee's
employment at any time.
-8-
<PAGE>
24. AMENDMENT OF PLAN.
The Board may, at any time, amend the Plan in any respect (including an
increase in the percentage specified in Section 8 above used in calculating the
Purchase Price); provided, however, that without approval of the stockholders of
-----------------
the Company no amendment shall be made (a) increasing the number of shares
specified in Section 1 above that may be made available for purchase under the
Plan (except as provided in Section 26 below), (b) changing the eligibility
requirements for participating in the Plan, or (c) impairing the vested rights
of participating employees.
25. EFFECTIVE DATE; TERM AND TERMINATION OF THE PLAN.
The Plan shall be effective as of the date of adoption by the Board, which
date is set forth below, subject to approval of the Plan by a majority of the
votes present and entitled to vote at a duly held meeting of the shareholders of
the Company at which a quorum representing a majority of all outstanding voting
stock is present, either in person or by proxy; provided, however, that upon
-----------------
approval of the Plan by the shareholders of the Company as set forth above, all
rights to purchase shares granted under the Plan on or after the effective date
shall be fully effective as if the shareholders of the Company had approved the
Plan on the effective date. If the shareholders fail to approve the Plan on or
before one year after the effective date, the Plan shall terminate, any rights
to purchase shares granted hereunder shall be null and void and of no effect,
and all contributed funds shall be refunded to participating employees. The
Board may terminate the Plan at any time and for any reason or for no reason,
provided that such termination shall not impair any rights of participating
employees that have vested at the time of termination. In any event, the Plan
shall, without further action of the Board, terminate ten (10) years after the
date of adoption of the Plan by the Board or, if earlier, at such time as all
shares of Class A Common Stock that may be made available for purchase under the
Plan pursuant to Section 1 above have been issued.
26. EFFECT OF CHANGES IN CAPITALIZATION.
(a) Changes in Stock.
If the number of outstanding shares of Class A Common Stock is increased or
decreased or the shares of Class A Common Stock are changed into or exchanged
for a different number or kind of shares or other securities of the Company by
reason of any recapitalization, reclassification, stock split, reverse split,
combination of shares, exchange of shares, stock dividend, or other distribution
payable in capital stock, or other increase or decrease in such shares effected
without receipt of consideration by the Company occurring after the effective
date of the Plan, the number and kinds of shares that may be purchased under the
Plan shall be adjusted proportionately and accordingly by the Company. In
addition, the number
-9-
<PAGE>
and kind of shares for which rights are outstanding shall be similarly adjusted
so that the proportionate interest of a participating employee immediately
following such event shall, to the extent practicable, be the same as
immediately prior to such event. Any such adjustment in outstanding rights shall
not change the aggregate Purchase Price payable by a participating employee with
respect to shares subject to such rights, but shall include a corresponding
proportionate adjustment in the Purchase Price per share.
(b) Reorganization in Which the Company Is the Surviving Corporation.
Subject to Subsection (c) of this Section 26, if the Company shall be the
surviving corporation in any reorganization, merger or consolidation of the
Company with one or more other corporations, all outstanding rights under the
Plan shall pertain to and apply to the securities to which a holder of the
number of shares of Class A Common Stock subject to such rights would have been
entitled immediately following such reorganization, merger or consolidation,
with a corresponding proportionate adjustment of the Purchase Price per share so
that the aggregate Purchase Price thereafter shall be the same as the aggregate
Purchase Price of the shares subject to such rights immediately prior to such
reorganization, merger or consolidation.
(c) Reorganization in Which the Company Is Not the Surviving Corporation
or Sale of Assets or Stock.
Upon any dissolution or liquidation of the Company, or upon a merger,
consolidation or reorganization of the Company with one or more other
corporations in which the Company is not the surviving corporation, or upon a
sale of all or substantially all of the assets of the Company to another
corporation, or upon any transaction (including, without limitation, a merger or
reorganization in which the Company is the surviving corporation) approved by
the Board that results in any person or entity owning more than 80 percent of
the combined voting power of all classes of stock of the Company, the Plan and
all rights outstanding hereunder shall terminate, except to the extent provision
is made in writing in connection with such transaction for the continuation of
the Plan and/or the assumption of the rights theretofore granted, or for the
substitution for such rights of new rights covering the stock of a successor
corporation, or a parent or subsidiary thereof, with appropriate adjustments as
to the number and kinds of shares and exercise prices, in which event the Plan
and rights theretofore granted shall continue in the manner and under the terms
so provided. In the event of any such termination of the Plan, the Payroll
Deduction Period shall be deemed to have ended on the last trading day prior to
such termination, and in accordance with Section 10 above the rights of each
participating employee then outstanding shall be deemed to be automatically
exercised on such last trading day. The Board shall send written
-10-
<PAGE>
notice of an event that will result in such a termination to all participating
employees not later than the time at which the Company gives notice thereof to
its stockholders.
(d) Adjustments.
Adjustments under this Section 26 related to stock or securities of the
Company shall be made by the Committee, whose determination in that respect
shall be final, binding, and conclusive.
(e) No Limitations on Company.
The grant of a right pursuant to the Plan shall not affect or limit in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge,
consolidate, dissolve or liquidate, or to sell or transfer all or any part of
its business or assets.
27. GOVERNMENTAL REGULATION.
The Company's obligation to issue, sell and deliver shares of Class A
Common Stock pursuant to the Plan is subject to such approval of any
governmental authority and any national securities exchange or other market
quotation system as may be required in connection with the authorization,
issuance or sale of such shares.
28. STOCKHOLDER RIGHTS.
Any dividends paid on shares held by the Company for a participating
employee's account will be transmitted to the employee. The Company will
deliver to each participating employee who purchases shares of Class A Common
Stock under the Plan, as promptly as practicable by mail or otherwise, all
notices of meetings, proxy statements, proxies and other materials distributed
by the Company to its stockholders. Any shares of Class A Common Stock held by
the Agent for an employee's account will be voted in accordance with the
employee's duly delivered and signed proxy instructions. There will be no
charge to participating employees in connection with such notices, proxies and
other materials.
29. RULE 16b-3.
Transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or any successor provision under the Exchange Act. If
any provision of the Plan or action by the Board fails to so comply, it shall be
deemed null and void to the extent permitted by law and deemed advisable by the
Board. Moreover, in the event the Plan does not include a provision required by
Rule 16b-3
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<PAGE>
to be stated herein, such provision (other than one relating to
eligibility requirements, or the price and amount of awards) shall be deemed
automatically to be incorporated by reference into the Plan.
30. PAYMENT OF PLAN EXPENSES.
The Company will bear all costs of administering and carrying out the Plan.
* * *
This Plan was duly adopted and approved by the Board of Directors of the
Company by resolution at a meeting held on the 28th of March, 1996.
----------------------------------
Casey D. Mahon, Esq.
Secretary of the Company
This Plan was duly approved by the stockholders of the Company at a meeting
of the stockholders held on the 30th of April, 1996.
----------------------------------
Casey D. Mahon, Esq.
Secretary of the Company
This Plan was duly amended by the Board of Directors of the Company by
resolution at a meeting held on the 5th of December, 1996.
----------------------------------
Casey D. Mahon, Esq.
Secretary of the Company
-12-
<PAGE>
EXHIBIT 10.90
SALE AND PURCHASE AGREEMENT
---------------------------
This Agreement is made this 27th day of January, 1997, by and between McLeodUSA
Publishing Company, formerly known as Telecom*USA Publishing Company, an Iowa
corporation ("McLeod"), Fronteer Financial Holdings, Ltd., a Colorado
corporation ("Fronteer"), Classified Directories, Inc., a North Dakota
corporation ("Classified"), Larry A. Scott ("Scott"), James Greff ("Greff"),
Randall L. Gowin ("Gowin"), Edwin Dressler ("Dressler") and certain directors,
officers and shareholders of Fronteer.
McLeod and Fronteer entered into a Sale and Purchase Agreement dated April 27,
1995 ("the Idaho Sale Agreement"), also executed by Scott, Greff, Dressler and
Gowin. McLeod and Fronteer entered into an Option Agreement dated April 27, 1995
("the Option Agreement"). Scott, Greff, Dressler and Gowin are the principal and
only shareholders, directors and officers of Classified. McLeod and Scott
entered into a Covenant not to Compete and Confidentiality Agreement dated May
5, 1995, pursuant to terms of the Idaho Sale Agreement and agreed to enter into
a separate Covenant not to Compete and Confidentiality Agreement pursuant to
terms of the Option Agreement. McLeod and Greff entered into a Covenant not to
Compete and Confidentiality Agreement dated May 2, 1995, pursuant to terms of
the Idaho Sale Agreement. McLeod and Dressler entered into a Covenant not to
Compete and Confidentiality Agreement dated May 5, 1995, pursuant to terms of
the Idaho Sale Agreement and agreed to enter into a separate Covenant not to
Compete and Confidentiality Agreement pursuant to terms of the Option Agreement.
McLeod and Gowin entered into a Covenant not to Compete and Confidentiality
Agreement dated April 28, 1995, pursuant to terms of the Idaho Sale Agreement
and agreed to enter into a separate Covenant not to Compete and Confidentiality
Agreement pursuant to terms of the Option Agreement.
The parties desire to modify the various agreements described or mentioned above
(referred to collectively as "the Various Agreements"). The parties have agreed
to modify certain rights, obligations, terms and conditions of the Various
Agreements pursuant to this Agreement and as set out in this Agreement.
McLeod and Classified desire to purchase certain telephone directory business of
Fronteer. Fronteer desires to sell certain of its telephone directory business
to McLeod and Classified under the terms and conditions set out below. The
parties desire to fully resolve all rights and duties regarding Fronteer's
telephone directories listed on Exhibit "A" attached hereto and incorporated
herein (collectively referred to as the "Directories").
In consideration of the representations set out above and the following
covenants, promises and representations, the parties agree as follows:
1. VARIOUS AGREEMENTS
------------------
This Agreement modifies, replaces and supplements certain rights and
obligations of the parties as set out in the Various Agreements and to the
extent any of the terms of this Agreement conflict with any of the terms of
the Various Agreements this Agreement controls. In the event
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<PAGE>
this Agreement is declared null and void pursuant to any provision of this
Agreement, all rights, obligations, terms and conditions of the Various
Agreements shall remain in full force and effect without any modifications,
replacements or supplements.
2. DIRECTORIES TO BE PURCHASED BY McLEOD
-------------------------------------
Fronteer hereby sells and McLeod hereby purchases Fronteer's telephone
directories designated on Exhibit "A" as being purchased by McLeod, and, in
the event McLeod is required to pay the consideration due from Classified
pursuant to Section 5 below, the Durum Triangle directory listed on Exhibit
"A," (referred to as the "McLeod Purchase Directories"), including all
product designs and drawings (subject to the rights of advertising
subscribers or third parties in such literary property), catalogs, data,
files, records, price lists, and other documents relating to suppliers of
Fronteer, and all customer lists and contracts, catalogs and marketing
materials, and contract lead systems used by Fronteer in connection with
the McLeod Purchase Directories. This transaction includes all patents,
trademarks, licenses, copyrights, brand names, and trade names (whether
registered or subject to being registered), including specifically and not
by way of limitation, the name "Fronteer Directory Company" all proprietary
information and all trade secrets used or owned by Fronteer, except (1) the
licenses, copyrights and directory names used in connection with the "Durum
Triangle," "Souris River," and "Southeast North Dakota" directories, and
(2) the following corporate names: Fronteer Financial Holdings, Fronteer
Personnel Service and Fronteer Marketing Group.
The purchase specifically includes Fronteer's audiotex and similar
equipment associated with or used in connection with the McLeod Purchase
Directories or audiotex services identified in the McLeod Purchase
Directories, such equipment being listed on Exhibit "B" attached hereto and
incorporated herein, which Fronteer warrants is not presently in need of
and on Closing (as described below) will not be in need of maintenance or
service work. Such equipment shall be delivered by Bill of Sale in the form
attached as Exhibit "C." After Closing, Fronteer will use such audiotex
equipment is accordance with the provisions of Section 8 of this Agreement,
but McLeod will perform all maintenance and service work on such audiotex
equipment.
The above-described items relating to the McLeod Purchase Directories
published by Fronteer prior to Closing shall be delivered to McLeod on or
before Closing. The above-described items relating to the McLeod Purchase
Directories to be published by Fronteer after Closing shall be delivered to
McLeod on the date each of the McLeod Purchase Directories is delivered to
a printer for printing. Fronteer shall deliver to McLeod fifty (50) copies
of the Fargo directory at Closing and fifty (50) copies of each of the
other Directories within ten (10) days after each such Directory is
published.
This transaction does not include any receivables of Fronteer, and McLeod
is not assuming any liabilities of Fronteer. Fronteer is entitled to all
---
receivables in connection with the Directories from the editions listed on
Exhibit "A" and prior editions of the Directories sold, published and
delivered by Fronteer. McLeod is entitled to all receivables generated from
all future editions of the McLeod Purchase Directories.
page 2
<PAGE>
3. DIRECTORIES TO BE PURCHASED BY CLASSIFIED
-----------------------------------------
Fronteer hereby sells and Classified hereby purchases Fronteer's Durum
Triangle directory, designated on Exhibit "A" as being purchased by
Classified, including all product designs and drawings (subject to the
rights of advertising subscribers or third parties in such literary
property), catalogs, data, files, records, price lists, and other documents
relating to suppliers of Fronteer for the Durum Triangle directory, and all
customer lists and contracts, catalogs and marketing materials, and
contract lead systems used by Fronteer in connection with the Durum
Triangle directory. This transaction includes any licenses, copyrights and
the directory name used by Fronteer in connection with the Durum Triangle
directory, but specifically does not include any right to use in any manner
the name "Fronteer" or "Fronteer Directory Company."
The above described items relating to the Durum Triangle directory shall be
delivered to the purchaser of the Durum Triangle directory on the date of
payment of consideration for the Durum Triangle directory. Fronteer shall
deliver to the purchaser of the Durum Triangle directory fifty (50) copies
of the Durum Triangle directory within ten (10) days after the Durum
Triangle directory is published.
McLeod hereby assigns to Classified its right, title and interest in or to
the Souris River and Southeast North Dakota directories and, in the event
Classified pays the cash consideration for the Durum Triangle directory, in
and to the Durum Triangle directory.
This transaction does not include any receivables of Fronteer, and
Classified is not assuming any liabilities of Fronteer. Fronteer is
---
entitled to all receivables in connection with the Directories from the
editions listed on Exhibit "A" and prior editions of the Directories sold,
published and delivered by Fronteer. Classified is entitled to all
receivables generated from all future editions of the directories purchased
by Classified.
4. PAYMENT BY OF CONSIDERATION BY McLEOD
-------------------------------------
The cash consideration from McLeod for this Agreement is estimated to be
$4,000,000.00, which is based upon estimated net cash revenue of
$3,700,000.00 from the first six directories listed on Exhibit "A", plus
$300,000.00 over and above said estimated net cash revenue, and is subject
to the adjustment requirements of Section 6 below. $1,000,000.00 of the
consideration from McLeod will be allocated and paid to the
officers/shareholder/directors of Fronteer in exchange for the Covenant not
to Compete and Confidentiality Agreements described and required below, and
the remaining consideration will be allocated and paid to Fronteer. The
consideration from McLeod will be paid, subject to the conditions set out
in Sections 10, 13, 14 & 21 below, as follows:
(1) $1,000,000.00 to Fronteer on March 1, 1997, to be paid in the
form of $500,000.00 in cash and $500,000.00 by payoff of the full amount of
the promissory note given to McLeod by Fronteer pursuant to the Option
Agreement, which will then be marked by McLeod as paid on March 1, 1997,
(2) $1,000,000.00 to officers/shareholders/directors, in the
percentage amounts shown on Exhibit "D," within five (5) business days
after the later of [a] the date when Fronteer certifies to
page 3
<PAGE>
McLeod that Fronteer has completed publication and distribution of the
Fargo and Badlands (Dickinson) directories listed on Exhibit "A," or [b]
March 1, 1997,
(3) $900,000.00 to Fronteer within five (5) business days after
Fronteer certifies to McLeod that Fronteer has completed publication and
distribution of the fifth directory listed on Exhibit "A," and,
(4) all remaining unpaid consideration to Fronteer within five (5)
business days after [a] Fronteer certifies that all McLeod Purchase
Directories have been published and distributed, and, [b] the total net
cash revenue for the McLeod Purchase Directories has been determined
pursuant to Section 6 below, with the final payment adjusted pursuant to
the provisions of Section 6 below.
5. PAYMENT OF CONSIDERATION BY CLASSIFIED
--------------------------------------
The cash consideration from Classified for this Agreement is equal to the
net cash revenue from the April, 1997 edition of the Durum Triangle
directory listed on Exhibit "A." Twenty-five percent (25%) of the
consideration from Classified will be allocated and paid to the
officers/shareholder/directors of Fronteer listed, and in the percentage
amounts shown, on Exhibit "D" in exchange for the Covenant not to Compete
and Confidentiality Agreements described and required below, and the
remaining consideration will be allocated and paid to Fronteer. The
consideration from Classified will be paid to Fronteer within fourteen (14)
days after Fronteer certifies that publication and distribution of the
Durum Triangle directory has been completed and the total net cash revenue
for the Durum Triangle directory has been determined pursuant to Section 6
below, adjusted pursuant to the provisions of Section 6 below.
In the event Classified fails to timely pay consideration to Fronteer in
accordance with this section, Fronteer will notify McLeod of such fact and
McLeod will pay to Fronteer the consideration due from Classified within
fourteen (14) days of said notice. Upon payment by McLeod, (1) Fronteer
will convey to McLeod all right, title and interest in the Durum Triangle
directory, (2) the Durum Triangle directory will thereafter be treated as
though it were one of the McLeod Purchase Directories and McLeod will have
the same rights with respect to the Durum Triangle directory as Classified
had to the Durum Triangle directory and as it has in and to the McLeod
Purchase Directories, and, (3) all rights of Classified in and to the Durum
Triangle directory will be terminated and Classified will have no further
right, title or interest in or to the Durum Triangle directory.
6. NET CASH REVENUE REQUIREMENT
----------------------------
Fronteer represents and warrants that the net cash revenue of the editions
of each of the Directories listed on Exhibit "A" was, or will, be as shown
on Exhibit "A." Net cash revenue shall include all contracted for gross
revenue in the form of cash paid or accounts receivable (reduced by any
commissions or share paid to any telephone company), including national
revenue, but shall exclude cancellations, promotional discounts, payment
plan/cash discounts, and any revenue traded for value other than cash or
accounts receivables for each directory. If the net cash revenue from any
directory listed on Exhibit "A" is more or less than as shown on Exhibit
"A," the consideration paid, as set out in Section 4 or 5 above, as
applicable, shall be increased or reduced
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<PAGE>
accordingly by one dollar for each dollar the net cash revenue for such
directory is above or below that shown on Exhibit "A". McLeod and Fronteer
shall determine the net cash revenue for each of the McLeod Purchase
Directories upon certification of completion of each such directory by
Fronteer as described in Section 8 below and such determination shall be
acceptable to McLeod, in its sole discretion. Fronteer and the purchaser of
the Durum Triangle directory shall determine the net cash revenue for the
Durum Triangle directory upon certificate of completion of such directory
by Fronteer as described in Section 8 below.
7. CLOSING
-------
Closing shall take place at Fronteer's offices at 216 North 23 Street,
Bismarck, North Dakota, at 2:00 p.m., c.s.t., on January 27, 1997, or at
such other time, date, and place as may be agreed by the parties
("Closing").
8. CONDUCT OF FRONTEER
-------------------
All sales, production and distribution of the Directories set out on
Exhibit "A" shall be (1) continued and completed by Fronteer, (2) completed
no later than the last day of the month immediately following the month of
publication set out on Exhibit "A," and (3) continued and completed in the
---
same manner as the last published editions of such Directories, including
but not limited to, the number of Directories printed and distributed (as
set out on Exhibit "A" or, where no number is set out, the number will be
the same number of directories as printed and distributed during the
immediately preceding calendar year), the distribution area, the pricing,
the credit terms, the quality and size of print and paper, and the general
production standards. Fronteer shall promptly pay all sales and production
expenses for said editions of the Directories and for all prior editions of
the Directories.
Fronteer shall, at its cost, continue to provide all information, updates,
data and telephone lines for audiotex service described in, related to or
associated with any of the Directories for one year after the date each of
the Directories is published, in the same manner as provided in the prior
edition of each such directory. Fronteer will have the right to continue to
use the audiotex equipment sold and transferred pursuant to this Agreement
at no charge.
If McLeod determines, in its sole discretion, that Fronteer has failed to
complete all sales, production and distribution of the Directories and
provision of all elements of audiotex service, as set out above, McLeod
shall have, in addition to any other right it may have, the right to
terminate this Agreement, declare this Agreement null and void and receive
a full refund of any and all of the purchase price previously paid.
Beginning on the date hereof, McLeod shall have the right to conduct an
investigation of Fronteer and its telephone directory business as McLeod
deems necessary. Fronteer shall cooperate fully with McLeod in such
investigation.
9. PRE-SALES
---------
Fronteer may have made sales for editions of the McLeod Purchase
Directories to be published by McLeod ("Pre-Sales"), but will make no more
Pre-Sales after Closing. McLeod will have the right
Page 5
<PAGE>
to review and approve any such Pre-Sales, but such approval shall not be
unreasonably withheld. All approved receivables, contracts, cash, trade
agreements, finished copies and any other items held by Fronteer in
connection with such approved Pre-Sales will be delivered on or before
Closing, or as soon thereafter as is commercially possible. McLeod will pay
Fronteer, in addition to the consideration set out in Section 4 above, a
commission equal to 25% of the net cash amount of such approved Pre-Sales
on or before the date of the last payment due under Section 4 above.
10. REPRESENTATIONS AND WARRANTIES OF FRONTEER
------------------------------------------
Fronteer hereby covenants, represents and warrants to the other parties
that:
Due Organization. Fronteer is a corporation duly organized, validly
----------------
existing, and in good standing under the laws of the State of Colorado and
has the power and authority, corporate and otherwise, to own its properties
and conduct the business in which it is presently engaged.
Authorization of Agreement. The execution and delivery of this Agreement
--------------------------
and consummation of the transactions contemplated by this Agreement have
been duly and validly authorized by all necessary corporate action on the
part of Fronteer and this Agreement constitutes a valid and legally binding
obligation of Fronteer enforceable according to its terms. The execution
and delivery of this Agreement, consummation of the transactions
contemplated by this Agreement and compliance by Fronteer with all the
provisions of this Agreement will not (i) violate any provision of the
terms of any applicable law, rule, or regulation of any governmental body
having jurisdiction; (ii)conflict with or result in a breach of any
provision of Fronteer's Articles of Incorporation or Bylaws or constitute a
default under any of the terms, conditions, or provisions of, or result in
the breach of, or accelerate or permit the acceleration of the performance
required by any note, bond, mortgage, indenture, license, agreement, or
other instrument or obligation of any nature whatsoever to which Fronteer
is a party; or (iii) violate any order, writ, injunction, decree, statute,
rule, or regulation applicable to Fronteer or any of its property or
assets.
Payment of Taxes. Fronteer has filed all federal, state, and local tax
----------------
returns required to be filed, and has made timely payment of all taxes
shown by those returns to be due and payable. All filed tax returns are
complete, true and correct in all material respects.
No Adverse Conditions. There are no adverse conditions or circumstances
---------------------
that may interfere with the use and enjoyment of or opportunity to operate
the directory business of Fronteer to be purchased and sold pursuant to
this Agreement.
No Omissions or Misrepresentations. No representation, warranty or
-----------------------------------
statement of Fronteer contains any misrepresentation or misstates any
material fact or omits to state any material fact necessary to make each
representation or warranty or statement in this Agreement, or in any
certificates or other instruments furnished or to be furnished to McLeod,
accurate and not misleading in any material respect.
page 6
<PAGE>
Investigation by McLeod. No investigation conducted by McLeod shall
-----------------------
affect the representations and warranties of Fronteer herein, and each such
representation and warranty shall survive the execution and closing hereof.
Title and liens. Fronteer on the date of delivery will own and deliver
---------------
good and marketable title and all right, title and interest, free and clear
of any and all liens or encumbrances, in and to all assets, rights and
equipment to be sold and delivered pursuant to this Agreement.
Consent of Creditors. Fronteer has obtained, or will obtain no later than
--------------------
February 28, 1997, any and all necessary consents with respect to the
transactions contemplated by this Agreement, including and not limited to
all necessary consents and/or necessary releases from all of Fronteer's
lenders and said lenders have executed prior to Closing, or will execute no
later than February 28, 1997, a release of any and all liens or security
interests covering the Directories and the audiotex equipment being
purchased pursuant to the terms of this Agreement, such consents are
attached hereto as Exhibit "E." In the event the conditions set out in this
section are not satisfied, or are violated in the sole opinion of McLeod,
McLeod may declare this Agreement null and void and shall be entitled to an
immediate return of all amounts paid by it pursuant to this Agreement.
Publication Agreements. Fronteer is a party to agreements with
----------------------
telecommunications carriers listed on Exhibit "F," attached hereto and
incorporated herein, in connection with the McLeod Purchase Directories and
copies of those agreements, or written explanation of the agreements if
oral, are attached to Exhibit "F."
Corporate Actions. Fronteer shall take such action and shall file all
-----------------
documents necessary to comply with all federal, state and local laws and
regulations which may require shareholder or director consent or approval
of this Agreement or the transactions contemplated or required by this
Agreement.
Sales Force. Fronteer presently employs ten individuals in a position
-----------
involving the sale of advertising in the Directories, which includes nine
sales representatives and one sales manager and all individuals employed in
a position involving the sale of advertising in the Directories are listed
on Exhibit "G."
11. REPRESENTATIONS AND WARRANTIES OF McLEOD
----------------------------------------
McLeod covenants, represents and warrants to the other parties:
Due Organization. McLeod is a corporation duly organized, validly existing,
----------------
and in good standing under the laws of the State of Iowa and has the power
and authority, corporate and otherwise, to own its properties and conduct
the business in which it is presently engaged.
Authorization of Agreement. The execution and delivery of this Agreement
--------------------------
and consummation of the transactions contemplated by this Agreement have
been duly and validly authorized by all necessary corporate action on the
part of McLeod and this Agreement constitutes a valid and legally binding
obligation of McLeod enforceable according to its terms. The execution and
page 7
<PAGE>
delivery of this Agreement, consummation of the transactions contemplated
by this Agreement and compliance by McLeod with all the provisions of this
Agreement will not (i) violate any provision of the terms of any applicable
law, rule, or regulation of any governmental body having jurisdiction; (ii)
conflict with or result in a breach of any provision of McLeod's Articles
of Incorporation or Bylaws or constitute a default under any of the terms,
conditions, or provisions of, or result in the breach of, or accelerate or
permit the acceleration of the performance required by any note, bond,
mortgage, indenture, license, agreement, or other instrument or obligation
of any nature whatsoever to which McLeod is a party; or (iii) violate any
order, writ, injunction, decree, statute, rule, or regulation applicable to
McLeod or any of its property or assets.
12. REPRESENTATIONS AND WARRANTIES OF CLASSIFIED
--------------------------------------------
Classified covenants, represents and warrants to the other parties that:
Due Organization. Classified is a corporation duly organized, validly
----------------
existing, and in good standing under the laws of the State of North Dakota
and has the power and authority, corporate and otherwise, to own its
properties and conduct the business in which it is presently engaged.
Authorization of Agreement. The execution and delivery of this Agreement
--------------------------
and consummation of the transactions contemplated by this Agreement have
been duly and validly authorized by all necessary corporate action on the
part of Classified and this Agreement constitutes a valid and legally
binding obligation of Classified enforceable according to its terms. The
execution and delivery of this Agreement, consummation of the transactions
contemplated by this Agreement and compliance by Classified with all the
provisions of this Agreement will not (i) violate any provision of the
terms of any applicable law, rule, or regulation of any governmental body
having jurisdiction; (ii) conflict with or result in a breach of any
provision of Classified's Articles of Incorporation or Bylaws or constitute
a default under any of the terms, conditions, or provisions of, or result
in the breach of, or accelerate or permit the acceleration of the
performance required by any note, bond, mortgage, indenture, license,
agreement, or other instrument or obligation of any nature whatsoever to
which Classified is a party; or (iii) violate any order, writ, injunction,
decree, statute, rule, or regulation applicable to Classified or any of its
property or assets.
Scope of Directories. Classified will not expand the white page coverage,
--------------------
yellow page coverage or distribution area of the Souris River, Southeast
North Dakota or Durum Triangle directories beyond that of the last edition
of the Souris River, Southeast North Dakota or Durum Triangle directories
published by Fronteer, except, if any telecommunications carrier which is a
party to a written, valid, binding and enforceable Publication Agreement
with Classified as of the date of this Agreement purchases additional
exchanges, and a copy of the Publication Agreement with such carrier has
been delivered to McLeod on or before February 28, 1997, then, to the
limited extent of such purchase, the listings associated with the exchanges
so purchases may be added to the white pages and yellow pages of the Souris
River, Southeast North Dakota or Durum Triangle directory and the
subscribers associated with the exchanges so purchased may be added to the
distribution area of the same directory.
page 8
<PAGE>
Employees of other parties. Classified will not hire, interview, solicit,
--------------------------
or attempt to interview or hire any individual employed in any capacity,
now or hereafter, by Fronteer or McLeod.
13. ASSIGNMENT OF AGREEMENT AND RIGHTS
----------------------------------
Fronteer will deliver an assignment to McLeod, in the form attached as
Exhibit "H," of the Publication Agreements with telecommunications carriers
described in Section 10 above and listed on Exhibit "F," accompanied by
fully executed consents to the assignment, in the form attached as Exhibit
"I," executed by no less than five of those seven telecommunications
carriers, including specifically those associated with the Bismarck/Mandan
Metro directory, no later than February 28, 1997. Fronteer will assign any
and all rights and privileges it may have in any non-compete agreements it
now has to the fullest extent such agreements apply to the distribution
area of any directories published by McLeod, including the McLeod Purchase
Directories. Fronteer will assign all its right, title and interest in the
intellectual property, proprietary information and trade secrets described
in Section 2 to McLeod at Closing, and McLeod hereby grants a limited
license to Fronteer to use such property and information to complete the
publication of the Directories in accordance with this Agreement and the
collection of receives generated by such publication. In the event the
conditions set out in this section are not satisfied, or are violated in
the sole opinion of McLeod, McLeod may declare this Agreement null and
void and shall be entitled to an immediate return of all amounts paid by it
pursuant to this Agreement.
14. EMPLOYEES AND INDEPENDENT CONTRACTORS
-------------------------------------
McLeod has the right to interview and hire all of the Fronteer sales force
identified on Exhibit "G" and plans and desires to do so. Fronteer will
assist McLeod in said interviewing and hiring. Payment of any amount under
this Agreement is contingent on McLeod hiring, no later than February 28,
1997, no less than seven of nine sales representatives and the sales
manager listed on Exhibit "G," under arrangements for the same to begin
employment with McLeod no later than seven days after the close of sales by
Fronteer in the Bismarck/Mandan Metro directory. McLeod will not, as a term
or condition of this Agreement, assume any of Fronteer's obligations with
respect to employment contracts or independent contractor contracts, if
any, and is not doing so by this Agreement. Classified will not, as a term
and condition of this Agreement, interview or hire any employees of
Fronteer. In the event the conditions set out in this section are not
satisfied, or are violated in the sole opinion of McLeod, McLeod may
declare this Agreement null and void and shall be entitled to an immediate
return of all amounts paid by it pursuant to this Agreement.
15. PUBLIC ANNOUNCEMENT
-------------------
Except to the extent disclosure, filing, reporting or announcement of this
Agreement is required by law, including any rules or regulations of any
applicable governmental, regulatory or stock exchange agency or authority,
(i) no party shall make any public announcement of this Agreement or the
transactions contemplated hereby prior to March 1, 1997, and (ii) after
that date public announcement may be made only after notification the
content of such announcement has been approved by the other parties hereto,
which approval will not be unreasonably withheld.
page 9
<PAGE>
16. NON-COMPETE AGREEMENTS
----------------------
In favor of McLeod. In consideration of McLeod's purchase of the McLeod
------------------
Purchase Directories, McLeod's payment of cash consideration, McLeod's
assignment of rights in and to the Souris River, Southeast North Dakota and
possibly Durum Triangle directories and McLeod's execution of a Covenant
not to Compete and Confidentiality Agreement as described below, Scott,
Greff, Dressler and Gowin each execute, jointly with execution by
Classified, a Covenant Not to Compete and Confidentiality Agreement at
Closing substantially in the form attached hereto as Exhibit "J," and
Fronteer and all other Directors, Officers and Shareholders listed on
Exhibit "D" will each execute a Covenant Not to Compete and Confidentiality
Agreement substantially in the form attached hereto as Exhibit "K."
Fronteer will assign to McLeod, in the form attached as Exhibit "H," any
and all non-competition agreements or covenants binding upon any of
Fronteer's sales representatives or sales managers to the fullest extent
such non-competition agreements apply to the current distribution areas of
any directories published by McLeod, including the directories purchased by
McLeod pursuant to this Agreement.
In Favor of Classified. In consideration of Classified's possible purchase
----------------------
of the Durum Triangle directory and execution of a Covenant not to Compete
and Confidentiality Agreement, McLeod will execute at Closing a Covenant
not to Compete and Confidentiality Agreement in favor of Classified
substantially in the form attached as Exhibit "L."
17. INDEMNIFICATION OF McLEOD
-------------------------
Fronteer hereby indemnifies and saves McLeod harmless from and against any
and all costs, liability, or expenses, including reasonable attorneys'
fees, arising out of (i) any breach of warranty, covenant, agreement, or
representation made by Fronteer; (ii) any nonfulfillment of any agreement,
conditions or covenants of Fronteer under this Agreement or any
misrepresentation in or omission from this Agreement or from any
certificates or other instrument furnished or to be furnished to McLeod;
and (iii) all actions, suits, proceedings, demands, assessments, judgments,
costs, and expenses incident to any of the foregoing.
Classified, Scott, Greff, Dressler and Gowin, jointly and severally, hereby
indemnify and hold McLeod harmless from and against any and all costs,
liability, or expenses, including reasonable attorneys' fees, arising out
of (i) any breach of warranty, covenant, agreement, or representation made
by any of them; (ii) any nonfulfillment of any condition or covenant under
this Agreement, or any misrepresentation in or omission from this
Agreement, or any certificates or other instrument furnished or to be
furnished to McLeod, by any of them; (iii) any cause of action or expense
directly or indirectly related to Classified's sale, publication or
distribution of directories published by Classified; and (iv) all actions,
suits, proceedings, demands, assessments, judgments, costs, and expenses
incident to any of the foregoing.
18. INDEMNIFICATION OF FRONTEER
---------------------------
McLeod hereby indemnifies and saves Fronteer harmless from and against any
and all costs, liability, or expenses, including reasonable attorneys'
fees, arising out of (i) any breach of warranty, covenant, agreement, or
representation made by McLeod; (ii) any nonfulfillment of any agreement,
condition or covenant of McLeod under this Agreement or any
misrepresentation in or
page 10
<PAGE>
omission from this Agreement or from any certificates or other instrument
furnished or to be furnished to Fronteer; and (iii) all actions, suits,
proceedings, demands, assessments, judgments, costs, and expenses incident
to any of the foregoing.
Classified, Scott, Greff, Dressler and Gowin, jointly and severally, hereby
indemnify and hold Fronteer harmless from and against any and all costs,
liability, or expenses, including reasonable attorneys' fees, arising out
of (i) any breach of warranty, covenant, agreement, or representation made
by any of them; (ii) any nonfulfillment of any condition or covenant under
this Agreement, or any misrepresentation in or omission from this
Agreement, or any certificates or other instrument furnished or to be
furnished to Fronteer, by any of them; (iii) any cause of action or expense
directly or indirectly related to Classified's sale, publication or
distribution of directories published by Classified; and (iv) all actions,
suits, proceedings, demands, assessments, judgments, costs, and expenses
incident to any of the foregoing.
19. INDEMNIFICATION OF CLASSIFIED
-----------------------------
McLeod hereby indemnifies and saves Classified harmless from and against
any and all costs, liability, or expenses, including reasonable attorneys'
fees, arising out of (i) any breach of warranty, covenant, agreement, or
representation made by McLeod; (ii) any nonfulfillment of any agreement,
condition or covenant of McLeod under this Agreement or any
misrepresentation in or omission from this Agreement or from any
certificates or other instrument furnished or to be furnished to
Classified; and (iii) all actions, suits, proceedings, demands,
assessments, judgments, costs, and expenses incident to any of the
foregoing.
20. CONFIDENTIAL INFORMATION
------------------------
Definition. For purposes of this Section, "Confidential Information" means
----------
any information or compilation of information not generally known, which is
proprietary to the business, and includes, without limitation, trade
secrets, inventions, and information pertaining to development, marketing,
sales, accounting, and licensing of the business products and services,
customer information contained in customer records, working papers or
correspondence files, all financial information contained in federal and
state tax returns, and the financial terms of this transaction. Information
shall be treated as Confidential Information irrespective of its source and
all information that is identified by Fronteer, McLeod or Classified as
being "confidential", "trade secret", or is identified or marked with any
similar reference, or any information that Fronteer, McLeod or Classified
should know is being treated by Fronteer, McLeod or Classified as
confidential, shall be presumed to be Confidential Information.
Covenants by Parties. McLeod, Classified, Scott, Greff, Dressler, Gowin and
--------------------
Fronteer agree and covenant with respect to all Confidential Information
received or learned by any of them as follows:
A. that they will treat as confidential all Confidential
Information made available to them or any of their employees, agents or
representatives;
page 11
<PAGE>
B. that they will maintain the same in a secure place and limit
access to the Confidential Information to those employees, agents and
representatives to whom it is necessary to disclose the Confidential
Information in furtherance of the transactions contemplated by this
Agreement;
C. that they and their employees, agents and representatives will not
copy any Confidential Information (unless authorized), disclose any
Confidential Information to any unauthorized party, or use any Confidential
Information for any purpose other than the publication of the directories
purchased pursuant to this Agreement, including competition with the other
party or solicitation of the other party's customers; and
D. that each party will assume liability for any breach of this
paragraph by him or it, or any of its employees, agents or representatives.
21. PRODUCTION SERVICES
-------------------
Following the Closing, McLeod will negotiate with Marlow Lindblom at
Fronteer to finalize an white page production agreement between McLeod and
Fronteer for Fronteer to produce the white page listings of the
telecommunications carriers who have executed consents pursuant to Section
13 for a period of three years. The agreement will include the provisions
that only Dennis W. Olson or Marlow Lindblom will have direct contact with
the telecommunications carriers, that the agreement is non-assignable and
non-delegable without prior written consent of all parties to that
agreement, and that the agreement can be canceled by McLeod in its sole
discretion in the event of a change in control in Fronteer to anyone other
than a group including Dennis W. Olson or Marlow Lindlom. Fronteer may also
provide production services for Classified for production of the Souris
River, Southeast North Dakota and possibly Durum Triangle directories to be
published by Classified, limited as described in Section 12. Except as
provided in this Section 20, Fronteer will no longer publish the
Directories.
22. INVESTIGATION CONDITION
-----------------------
McLeod's obligations hereunder are expressly contingent upon McLeod's
successful completion of its investigation of Fronteer's telephone
directory business, as set out in Section 8 above.
23. MISCELLANEOUS
-------------
Broker or Finder. The parties represent that no person is entitled to any
----------------
brokerage commission, finder's fee, or any other like payment in connection
with any transaction contemplated by this Agreement by reason of the action
of any party to this Agreement.
Severability. If any provision of this Agreement is held for any reason to
------------
be unenforceable by a court of competent jurisdiction, the remainder of
this Agreement shall, nevertheless, remain in full force and effect.
<PAGE>
Applicable Law. This Agreement shall be construed in accordance with the laws of
- --------------
the State of Iowa. Venue for any action to enforce this Agreement shall be in
Iowa or in North Dakota, at the option of the party filing such action.
Notices. Any notices or other communications required or permitted under this
- -------
Agreement shall be sufficiently given if sent by certified mail, return receipt
requested, postage prepaid, addressed as follows:
McLeod: McLeodUSA Publishing Company
P.O. Box 3162
Cedar Rapis, IA 52406-3162
Attn: Arthur L. Christoffersen, President
Fronteer: Fronteer Financial Holdings, Ltd.
P.O. Box 5542
Bismarck, ND 58502
Attn: Dennis W. Olson, President
Classified: Classified Directories, Inc.
1500 East Front Street
Bismarck, ND 58504
Attn: Larry Scott
Scott Larry A. Scott
532 Macom Drive
Bismarck, ND 58504
Greff James Greff
3039 Greenwood Drive
Bismarck, ND 58501
Gowin Randall L. Gowin
1932 Adams Lane
Bismarck, ND 58501
Dressler Edwin Dressler
610 Easy Street
Bismarck, ND 58504
Captions. The captions and Section numbers in this Agreement are for convenience
- --------
of reference only and shall not limit or otherwise affect the meaning hereof
Signatures. The parties hereto expressly consent to the use of facsimile
- ----------
signatures and agree that such facsimile signatures shall be binding as
originals. The parties hereto expressly consent to the
page 13
<PAGE>
use of multiple counterparts each of which shall constitute and original and all
of which together will constitute one and the same instrument.
Survival. Each and every provision, representation and warranty of this
- --------
Agreement shall survive the execution and closing hereof and shall remain
binding on the parties hereto until all performance called for hereunder is
complete.
Binding Effect. This Agreement and all of the provisions hereof shall be binding
- --------------
upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that no party hereto may make any
assignment of this Agreement or any interest herein without the prior written
consent of the other parties hereto. Assignments without such consent shall be
void.
Executed effective the date first written above.
McLeodUSA Publishing Company Fronteer Directory Company, Ltd.
By:/s/ Arthur L. Christoffersen By:/s/ Dennis W. Olson
----------------------------- -----------------------------
Arthur L. Christoffersen, President Denis W. Olson, President
page 14
<PAGE>
Executed the date first above written.
/s/ Dennis W. Olson /s/ Roland Haux
- ---------------------- -------------------
Dennis W. Olson Roland Haux
/s/ Marlow E. Lindblom /s/ James B. Qualls
- ---------------------- -------------------
Marlow E. Lindblom James B. Qualls
/s/ Calvin Helgeson /s/ Lance L. Olson
- ---------------------- -------------------
Calvin Helgeson Lance L. Olson
page 16
<PAGE>
Executed the date first above written.
/s/ Edwin Dressler
---------------------
Classified Directories, Inc. Edwin Dressler
By:/s/ Larry Scott /s/ Larry A Scott
----------------------- --------------------
Larry Scott, President Larry A. Scott
/s/ James Greff /s/ Randall L. Gowin
- -------------------------- --------------------
James Greff Randall L. Gowin
page 16
<PAGE>
EXHIBIT "A"
-----------
<TABLE>
<CAPTION>
MINIMUM NET CASH BEING
DISTRIBUTION NUMBER REVENUE PURCHASED
DIRECTORY DATE DISTRIBUTED (IN 000'S) BY
- --------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C>
1. Fargo December,1996 177,000 1,240 McLeod
2. Badlands (Dickinson) January, 1997 37,000 380 McLeod
3. Jamestown February, 1997 18,000 127 McLeod
4. Valley City March, 1997 11,000 69 McLeod
5. Bismarck/Mandan Metro June, 1997 140,000 1,474 McLeod
6. Williston Basin July, 1997 66,000 410 McLeod
- --------------------------------------------------------------------------------
Durum Triangle April, 1997 34,000 270 Classified
- --------------------------------------------------------------------------------
Souris River October,1996 110,000 N/A N/A
Southeast ND September, 1996 30,000 N/A N/A
</TABLE>
page 17
<PAGE>
EXHIBIT "B"
-----------
AUDIOTEX EQUIPMENT
------------------
<TABLE>
<CAPTION>
Description And Serial Number Directory Current location
----------------------------- --------- ----------------
<S> <C> <C>
1. BVS 2000 Chassis 48 hr/16 Lines Bismarck Metro Bismarck
S#B77489 216 N 23rd ST
Okidata 320 S# 30701023881 Bismarck, ND
1.2 Meter Satellite Dish and
Receiver WY -185 S#0J013600215
2. None.
3. None.
4. None.
5. BVS 2000 Chassis 48 hr/16 Lines Fargo Metro 1323 23 St South
S# Suite E
Okidata 320 S# Fargo, ND
1.2 Meter Satellite Dish and
Receiver
WY - 185 S#
6. None.
- --------------------------------------------------------------------------------
1. None
</TABLE>
page 18
<PAGE>
EXHIBIT "C"
-----------
BILL OF SALE
------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, FRONTEER FINANCIAL
HOLDINGS, LTD., a Colorado corporation ("Fronteer"), for and in consideration of
Ten Dollars ($10.00) and other good and valuable consideration, the receipt of
which is hereby acknowledged, does hereby bargain, sell, grant, convey, assign
and transfer to MCLEODUSA PUBLISHING COMPANY, an Iowa corporation ("McLeod"),
its successors and assigns forever, all of the Fronteer's right, title and
interest in and to the property described on Exhibit "A," printed on the back of
this Bill of Sale and made a part hereof for all purposes.
Fronteer covenants and agrees that it is the lawful owner of the above
described property, free and clear of all liens, claims, charges or other
encumbrances, and that Fronteer will warrant and defend title to said property
against any and every person claiming rights therein.
Fronteer further covenants and agrees that if it shall be necessary or
desirable at any time after the date hereof to do, execute, acknowledge or
deliver any further acts, deeds, assignments, transfers, conveyances, powers of
attorney, or other assurances, to bargain, sell, grant, convey, transfer or
assign to McleodUSA the property transferred hereby, McLeod shall be empowered
as Fronteer's attorney-in-fact to do, execute, acknowledge, and deliver any and
such further acts, deeds, assignments, transfers, conveyances, powers of
attorney, or other assurances for and on behalf of Fronteer. Fronteer
acknowledges that the foregoing power is coupled with an interest and shall be
irrevocable.
Dated: January 27, 1997.
FRONTEER FINANCIAL HOLDINGS, LTD.
By:___________________________________
Dennis W. Olson, President
STATE OF NORTH DAKOTA)
)ss:
COUNTY OF____________)
On this ____th day of January, 1997, before me, the undersigned, a Notary
Public in and for the State of North Dokota, personally appeared Dennis W.
Olson, to me personally known, who being by me duly sworn, did say that he is
the president, of the corporation executing the within and foregoing instrument,
that no seal has been procured by the corporation; that said instrument was
signed on behalf of the corporation by authority of its Board of Directors; and
that Dennis W. Olson as such officer acknowledged the execution of the foregoing
instrument to be voluntary act and deed of the corporation, by it and by him
voluntarily executed.
_____________________________
Notary Public
page 19
<PAGE>
EXHIBIT "D"
-----------
ALLOCATION OF CONSIDERATION TO DIRECTORS, OFFICERS AND SHAREHOLDERS
-------------------------------------------------------------------
AGREEING TO EXECUTE COVENANTS NOT TO COMPETE AND CONFIDENTIALITY AGREEMENTS
---------------------------------------------------------------------------
Name Percentage of payment
---- ---------------------
Dennis W. Olson 31.25%
Marlow Lindblom 21.25%
Roland Haux 17.50%
Larry Scott 10.00%
Lance Olson 6.25%
James B. Qualls 6.25%
Edwin Dressler 2.50%
Randall Gowin 2.50%
Calvin "Kelly" Helgeson 2.50%
page 20
<PAGE>
EXHIBIT "E"
-----------
CONSENTS FROM CREDITORS
-----------------------
Bismark National Bank
322 East Main
Bismarck, ND 58531
The First National Bank
Biwabik Branch
P.O. Box 209
Biwabik, MN 55708
page 21
<PAGE>
EXHIBIT "F"
----------
AGREEMENTS WITH TELECOMMUNICATIONS CARRIERS
-------------------------------------------
(COPIES, OR EXPLANATIONS IF ORAL, ARE ATTACHED TO THIS EXHIBIT)
1. BEK Communications Cooperative
2. West River Telecommunications Cooperative
3. Midstate Telephone Co.
4. Northwest Communications Cooperative
5. Noonan Farmers Telephone Co.
6. Reservation Telephone Cooperative
7. Consolidated Telephone Cooperative
8.
9.
10.
page 22
<PAGE>
Exhibit 10.91
SALE AND PURCHASE AGREEMENT
---------------------------
THIS AGREEMENT is made and entered into this 27th day of February, between
McLeodUSA Publishing Company, an Iowa corporation ("McLeod"), and Indiana
Directories, Inc., a Michigan Corporation ("IDI"), John Morgan ("Morgan"), Hank
Meijer ("Meijer"), Jack Hendricks ("Hendricks"), Brad Nelson ("Nelson") and
Talking Directories, Inc., a Michigan corporation ("TDI").
RECITALS
--------
McLeod desires to purchase certain telephone directory business of IDI;
and,
IDI desires to sell certain of its telephone directory business to McLeod
under the terms and conditions set out below.
Morgan, Meijer, Hendricks, Nelson and TDI have an interest in concluding
the transactions contemplated by this Agreement and wish to facilitate this
Agreement and its contemplated transactions.
AGREEMENT
---------
In consideration of the terms, conditions, promises and mutual covenants in
this Agreement, McLeod, IDI, Morgan, Meijer, Hendricks, Nelson and TDI agree as
follows:
1. DIRECTORIES AND OTHER ASSETS TO BE PURCHASED
--------------------------------------------
1.1. IDI hereby sells and McLeod hereby purchases all of IDI's telephone
directories shown on the list of directories attached hereto as Exhibit "A"
and incorporated herein by this reference (the "Directories"), including
all product designs and drawings (subject to the rights of advertising
subscribers or third parties in such literary property), catalogs, data,
files, records, price lists, and other documents relating to suppliers of
IDI and all customer lists, contracts and catalogs and marketing materials
used by IDI in connection with the Directories. This transaction includes
any patents, trademarks, licenses, copyrights, directory names, brand
names, trade names, trade dress, propriety information and trade
1
<PAGE>
secrets, whether registered or subject to being registered, owned by IDI
and used in connection with the Directories, including specifically and not
by way of limitation the corporate and trade names "Info Indiana," "INFO
INDIANA," "Indiana Directories, Inc.," and "U.S. Directories, Inc.," and to
the extent any such property or rights are not owned by IDI, IDI will
assign its interest or right to use said property throughout the geographic
distribution area of the Directories to McLeod. IDI and McLeod will execute
any federal, state, local and/or other forms necessary to carry out the
transactions described in this Section.
1.2. The above described items relating to the Directories on Exhibit "A"
delivered to a printer for printing before Closing (as described in
Section 4 below) be delivered to McLeod on or before Closing. The above
described items relating to the Directories to be delivered to a printer
for printing after Closing shall be delivered to McLeod on the date each of
those Directories is delivered to a printer for printing. IDI shall deliver
to McLeod fifty (50) copies of each of the Directories within ten (10) days
after each such Directory is published. "Publish" and "publication" as used
throughout this Agreement means the sale of advertising, acquisition of
material and information, production of directories and primary
---
distribution of directories.
1.3. The purchase includes the equipment, including two audiotex equipment
systems, and furniture identified on the List of Equipment and Furniture
attached hereto as Exhibit "B" and incorporated herein by this reference.
IDI agrees to sell and McLeod agrees to buy the equipment and furniture
listed on Exhibit "B," pursuant to the terms of this Agreement and IDI will
deliver the equipment and furniture by providing a Bill of Sale, in the
form attached as Exhibit "C," at Closing and providing possession on April
1, 1997.
1.4. This transaction does not include any receivables of IDI, and McLeod
is not assuming any liabilities of IDI, except the obligations under the
leases specifically addressed in Section 12 below. IDI is entitled to all
receivables in connection with all editions of the Directories previously
published by IDI or to be published IDI with the Publication Dates shown on
Exhibit "A." If a receivable to which IDI is entitled is not collected by
IDI, through no fault, error or negligence on the part of IDI or reasonable
customer dissatisfaction, McLeod
2
<PAGE>
agrees not to permit the advertiser that generated such unpaid receivable
to advertise in the next edition of any of the Directories, to be published
by McLeod, provided IDI provides McLeod written notice of the name,
address, telephone number of the advertiser and the amount due no later
than 30 days prior to the Local Market Close date for such Directory, which
date will be provided by McLeod upon request. McLeod is entitled to all
receivables generated from the next editions of the Directors published
after the edition described on Exhibit "A."
2. CONSIDERATION
-------------
The consideration for this Agreement is estimated to be
$10,660,000.00 (which is 100% of the estimated Net Cash Revenue (as defined
below) of the Directories as shown on Exhibit "A," plus $150,000.00 for
equipment and furniture,) subject to any adjustments pursuant to Section 3
below. The consideration for this Agreement shall be allocated to the
various assets and the Covenant not to Compete and Confidentiality
Agreements described in Section 11 below as set forth on the Purchase Price
Allocation Schedule ("Allocations") attached as Exhibit "D" and
incorporated herein by this reference. IDI and McLeod shall file their
respective tax returns and required Internal Revenue Service forms in
accordance with the Allocations and shall not take any position
inconsistent with the Allocations. If an examination of the income tax
returns of IDI or McLeod by the Internal Revenue Service ("Service")
results in a different allocation of the consideration under Section 1060
of the Internal Revenue Code of 1986, as amended, however, IDI and McLeod
shall amend their federal, state and local income tax returns to conform to
the allocation determined by the Service. IDI and McLeod shall execute any
federal, state, local and/or other forms required to be filed with respect
to the Allocations. The consideration, subject to full and complete
satisfaction of all conditions set out in this Agreement, will be paid as
follows:
2.1. $4,880,000.00 to IDI, $30,000.00 to TDI, $30,000.00 to Morgan,
$30,000.00 to Meijer, $15,000.00 to Hendricks and $15,000.00 to Nelson, at
Closing;
3
<PAGE>
2.2. $1,000,000.00 into escrow upon execution of this Agreement pursuant
to the terms of the Escrow Agreement attached as Exhibit "E," and
incorporated herein by this reference, which will thereafter be paid out
and applied to the final payment due hereunder pursuant to said Escrow
Agreement;
2.3. $1,500,000.00 to IDI ten (10) days after IDI certifies to McLeod that
publication of those Directories listed on Exhibit "A" with a Publication
Date of February, 1997 has been completed in accordance with Section 5
below;
2.4. $500,000.00 to IDI ten (10) days after IDI certifies to McLeod that
publication of those Directories listed on Exhibit "A" with a Publication
Date of March, 1997 has been completed in accordance with Section 5 below;
2.5. $2,000,000.00 to IDI ten (10) days after IDI certifies to McLeod that
publication of those Directories listed on Exhibit "A" with a Publication
Date of April, 1997 has been completed in accordance with Section 5 below;
2.6. all remaining unpaid consideration to IDI after publication of all
Directories has been completed in accordance with Section 5 below, the
total Net Cash Revenue for all of the Directories combined has been
determined pursuant to Section 3 below and all terms and conditions of the
Escrow Agreement have been satisfied, with the final payment adjusted
pursuant to the provisions of Section 3 below.
3. NET CASH REVENUE REQUIREMENT
----------------------------
IDI represents and warrants that the total Net Cash Revenue of the
last edition of each of the Directories shown on Exhibit "A" published by
IDI (or to be published by IDI, as the case may be) shall be as shown as
estimated Net Cash Revenue on Exhibit "A." "Net Cash Revenue" shall include
all contracted for gross revenue in the form of cash paid or accounts
receivable, including national revenue, but shall exclude cancellations,
promotional
4
<PAGE>
discounts, payment plan discounts, cash discounts, and any revenue traded
for value other than cash or accounts receivables. If the total Net Cash
Revenue from all the Directories combined is more or less than
$10,510,000.00, the consideration paid by McLeod, as set out in Section 2
above, shall be increased or reduced accordingly by one dollar for each one
dollar the total Net Cash Revenue from the Directories is above or below
$10,510,000.00. McLeod and IDI shall determine the total net cash revenue
for the Directories on or before the due date for the final payment set out
in Section 2.6 above.
4. CLOSING
-------
Closing shall take place at McLeod's offices, 201 Third Avenue S.E.,
Suite 500, Cedar Rapids, Iowa, forty-eight (48) hours after complete
satisfaction of the conditions and contingencies described in Sections 7 and
10 below, but in no event prior to 11:00 a.m., on March 18, 1997 or later
than 2:00 p.m., on April 1, 1997, or at such other time, date, and place as
may be agreed by the parties ("Closing").
5. CONDUCT OF IDI
--------------
5.1. Publication of the editions of the Directories set out on Exhibit "A"
shall be (1) continued and completed by IDI in accordance with past
practices, (2) completed no later than the fifteenth day of the month
immediately following the Publication Date set out on Exhibit "A," and (3)
continued and completed in the same manner as the last published editions of
such Directories, including but not limited to, the number of Directories
printed and distributed (as set out on Exhibit "A"), the distribution area,
the pricing, the credit terms, the quality and size of print and paper, and
the past general production standards and practices, except as specifically
noted, described and agreed on Exhibit "F." IDI shall promptly pay all
sales and production expenses for editions of the Directories with the
Publication Dates as shown on Exhibit "A" and for all prior editions of the
Directories. The above requirements notwithstanding, [a] IDI will have the
Directories with a Publication Date of April, 1997 delivered to a printer
for printing no later than April 1, 1997, and [b] IDI will make every effort
to have the Directories with a Publication Date of May, 1997
5
<PAGE>
delivered to a printer for printing no later than April 1, 1997. If production
work remains on April 1, 1997, however, then McLeod will finish the remaining
production work at the LaPorte, Indiana facilities now occupied by IDI and IDI
will reimburse McLeod $60.00 per page for each page of said remaining production
work finished by McLeod, and IDI will distribute the directories upon
conclusion of said remaining production work. Performance by IDI under this
section shall be excused in the event of strike, interruption of mail or common
carrier service, fire, riot, disaster, act of God or other cause beyond the
reasonable and ordinary control of IDI.
5.2. IDI shall, at its cost, continue to provide all information, updates, data
and telephone lines for audiotex service described in, related to or associated
with any of the Directories for one year after the date each of the Directories
is published, in the same manner as provided in the prior edition of each such
Directory. IDI will have the right to continue to use the audiotex equipment
sold and transferred pursuant to this Agreement at no charge and McLeod, as
owner of said equipment, will service and maintain said equipment beginning on
April 1, 1997.
5.3. If McLeod determines that IDI has failed to complete publication of the
Directories and provision of all elements of audiotex service, as described in
Section 5.2 set out above, McLeod shall have, in addition to any other right it
may have, the right to notify IDI of such failure and request a full refund of
any and all amounts paid for each of the Directories with which such failure is
associated. Upon receipt of such notice IDI will have twenty (20) days to
correct such failure or to offer to compensate McLeod for such failure. If such
failure remains uncorrected after twenty (20) days and McLeod does not accept
any reasonable offer of compensation from IDI, then McLeod shall be entitled to
receive a refund of any and all amounts paid for each of the Directories with
which said remaining failure is associated.
5.4. Beginning on the date hereof, McLeod shall have the right to conduct an
investigation of IDI and its telephone directory business as McLeod deems
necessary. IDI shall cooperate fully with McLeod in such investigation.
6
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6. PRE-SALES
---------
IDI has made sales for editions of the Directories to be published by
McLeod ("Pre-Sales"). McLeod will have the right to review and approve any
such Pre-Sales, but such approval shall not be unreasonably withheld. All
approved receivables, contracts, cash, trade agreements, artwork, finished
copies and any other items held by IDI in connection with such approved
Pre-Sales will be delivered to McLeod on or before Closing, or as soon
thereafter as is commercially possible and McLeod will publish such Pre-
Sales. McLeod will pay IDI, in addition to the consideration set out in
Section 2 above, a commission equal to 15% of the Net Cash Revenue from
such approved Pre-Sales on or before the date of the last payment due under
Section 2 above.
7. REPRESENTATIONS AND WARRANTIES OF IDI
-------------------------------------
IDI hereby covenants, represents and warrants to McLeod that:
7.1. Due Organization. IDI is a corporation duly organized, validly
-----------------
existing, and in good standing under the laws of the state of Michigan and
has the power and authority, corporate and otherwise, to own its properties
and conduct the business in which it is presently engaged.
7.2. Authorization of Agreement. The execution and delivery of this
---------------------------
Agreement and consummation of the transactions contemplated by this
Agreement have been duly and validly authorized by all necessary corporate
action on the part of IDI and this Agreement constitutes a valid and
legally binding obligation of IDI enforceable according to its terms. The
execution and delivery of this Agreement, consummation of the transactions
contemplated by this Agreement and compliance by IDI with all the
provisions of this Agreement will not (i) violate any provision of the
terms of any applicable law, rule, or regulation of any governmental body
having jurisdiction; (ii) conflict with or result in a breach of any
provision of IDI's Articles of Incorporation or Bylaws or constitute a
default under any of the terms, conditions, or provisions of, or result in
the breach of, or accelerate or permit the acceleration of the performance
required by any note, bond, mortgage, indenture, license, agreement, or
other instrument or obligation of any nature whatsoever to
7
<PAGE>
which IDI is a party; or, (iii) violate any order, writ, injunction, or decree,
statute, rule or regulation applicable to IDI or any of its property or assets.
7.3. Payment of Taxes. IDI has filed all federal, state, and local tax returns
-----------------
required to be filed, and has made timely payment of all taxes shown by those
returns to be due and payable, or has timely filed the necessary documents to
contest the amount of tax due. All filed tax returns are complete, true and
correct in all material respects.
7.4. No Adverse Conditions. To the best of the knowledge of IDI and its
----------------------
officers, directors and shareholders, there are no adverse conditions or
circumstances that may interfere with Mcleod's use and enjoyment of or
opportunity to operate the directory business of IDI to be purchased by McLeod
pursuant to this Agreement.
7.5. No Omissions or Misrepresentations. To the best of the knowledge of IDI
-----------------------------------
and its officers, directors and shareholders, no representation, warranty, or
statement of IDI contains any misrepresentation or misstates any material fact
or omits to state any material fact necessary to make each representation or
warranty or statement in this Agreement, or in any certificates or other
instruments furnished or to be furnished to McLeod accurate and not misleading
in any material respect.
7.6. Investigation by McLeod. No investigation conducted by McLeod shall affect
------------------------
the representations and warranties of IDI herein, and each such representation
and warranty shall survive the execution hereof.
7.7. Consents. IDI has obtained any and all necessary consents with respect to
---------
the transaction contemplated by this Agreement.
7.8. Title and liens. IDI on the date of Closing will own and deliver good and
----------------
marketable fee title and all right, title and interest, free and clear of any
and all liens or encumbrances, or other interests, in and to all assets, rights,
property, equipment and furniture to be sold and delivered pursuant to this
Agreement.
7.9. Consent of Creditors. IDI has obtained, or will obtain before Closing, all
---------------------
necessary consents and releases with respect to the transactions contemplated by
this Agreement from IDI's lenders, said lenders have executed and recorded,
prior to Closing, releases of any and all liens or security interests covering
the Directories and other assets to being purchased by
8
<PAGE>
McLeod pursuant to this Agreement, and copies of such consents and releases
will be delivered by IDI to McLeod on or before Closing. A List of Lenders
prepared by IDI identifying all lenders from whom consents and releases are
needed is attached as Exhibit "G" and incorporated herein by this
reference. In the event the conditions set out in this section are not
satisfied, or are violated, McLeod will so notify IDI. Closing will be
postponed for a period of not more than fourteen (14) days and IDI will
satisfy the condition or correct the violation prior to the postponed
Closing. If the conditions remain unsatisfied or the violations remain
uncorrected for fourteen days after notice to IDI, McLeod may declare this
Agreement null and void and shall be entitled to an immediate return of all
amounts paid by it pursuant to this Agreement.
7.10. Employees. IDI will deliver a list of all current employees of IDI,
---------
and each employees job title or position and date of initial hiring by IDI,
to McLeod on the date of Public Announcement pursuant to Section 9 below.
7.11 Corporate Actions. IDI shall take such action and shall file all
-----------------
documents necessary to comply with all federal, state and local laws
regulations which may require shareholder or director consent or approval
of this Agreement or the transactions contemplated or required by this
Agreement.
8. REPRESENTATIONS AND WARRANTIES OF McLEOD
----------------------------------------
McLeod covenants, represents and warrants to IDI:
8.1. Due Organization. McLeod is a corporation duly organized, validly
----------------
existing, and in good standing under the laws of the state of Iowa and has
the power and authority, corporate and otherwise, to own its properties and
conduct the business in which it is presently engaged.
8.2 Authorization of Agreement. The execution and delivery of this
--------------------------
Agreement and consummation of the transactions contemplated by this
Agreement have been duly and validly authorized by all necessary corporate
action on the part of McLeod and this Agreement constitutes a valid and
legally binding obligation of McLeod enforceable according to its terms.
The execution and delivery of this Agreement, consummation of the
9
<PAGE>
transactions contemplated by this Agreement and compliance by McLeod with
all provisions of this Agreement will not (i) violate any provision of the
terms of any applicable law, rule, or regulation of any governmental body
having jurisdiction; (ii) conflict with result in a breach of any provision
of McLeod's Articles of Incorporation or Bylaws or constitute a default
under any of the terms, conditions, or provisions of, or result in the
breach of, or accelerate or permit the acceleration of the performance
required by any note, bond mortgage, indenture, license, agreement, or
other instrument or obligation of any nature whatsoever to which McLeod is
a party; or (iii) violate any order, writ, injunction, decree, statute,
rule, or regulation applicable to McLeod or any of its property or assets.
8.3. Authority to do Business. McLeod is a corporation duly authorized to
-------------------------
do business in Indiana, Michigan and Ohio and is currently in good standing
in those states.
8.4. No Omissions or Misrepresentations. To the best of the knowledge of
-----------------------------------
McLeod and its officers, no representation, warranty, or statement of
McLeod contains any misrepresentation or misstates any material fact or
omits to state any material fact necessary to make each representation or
warranty or statement in this Agreement, or in any certificates or other
instruments furnished or to be furnished to IDI accurate and not misleading
in any material respect.
9. PUBLIC ANNOUNCEMENT
-------------------
Except to the extent disclosure, filing, reporting or announcement of
this Agreement is required by law, including any rules or regulations of
any applicable governmental, regulatory or stock exchange agency or
authority, (i) no party shall make any announcement of this Agreement or
the transactions contemplated hereby to the press or general public prior
to 5:00 p.m., Eastern Time, Tuesday, March 4, 1997, and (ii) after that
date public announcement may be made only after notification the content of
such announcement has been approved by the other parties hereto, which
approval will not be unreasonably withheld.
10
<PAGE>
10. EMPLOYEES AND INDEPENDENT CONTRACTORS
-------------------------------------
10.1. Sales Employees of IDI. A list of employees of IDI who sell
-----------------------
advertising or manage those who sell advertising, excluding senior
executives, is attached as Exhibit "H" and incorporated herein by this
reference. Beginning upon execution of this Agreement, McLeod will have the
right and authority to interview all such employees. On the date of Public
Announcement pursuant to Section 9 above, IDI will provide a current and
up-to-date list of employees of IDI who sell advertising or manage those
who sell advertising, except senior executives, (collectively "the Sales
Force" and individually "member of the Sales Force") and McLeod will
subsequently offer to employ the Sales Force, pursuant to McLeod's standard
employment practices and benefits packages for sales employees and sales
management, and all of IDI's sales support staff. All members of the Sales
Force hired by McLeod and all sales support staff hired by McLeod will be
made available by IDI beginning April 1, 1997, or on such earlier dates as
may be feasible on an individual basis. Payment of any amount under this
Agreement is contingent on McLeod hiring, as described above, no less than
ninety percent (90%) of the Sales Force. In the event the conditions set
out in this section are not satisfied, or are violated in the sole opinion
of McLeod, McLeod may declare this Agreement null and void and shall be
entitled to an immediate return of all amounts paid by it pursuant to this
Agreement. Within ten (10) days after the date of Public Announcement
pursuant to Section 9 above, McLeod will notify IDI that (1) the conditions
are satisfied, (2) the conditions are waived, or (3) the conditions are not
satisfied and McLeod is declaring this Agreement null and void. If McLeod
declares this Agreement null and void and receives an immediate return of
all amounts paid by it, McLeod will not employ and any person who was an
employee of IDI on the date of Public Announcement pursuant to Section 9
above for a period of twelve (12) months following such declaration and
receipt.
10.2. Other Employees of IDI. IDI represents that it will cease all of its
-----------------------
directory production operations in Indiana, including, in particular, those
at its LaPorte, Indiana facility, and plans to discharge all production
employees effective April 1, 1997 and all distribution employees effective
upon completion of distribution of the last edition of the Directories
published by IDI. IDI will prepare and deliver, at its expense, all notices
11
<PAGE>
required by state or federal laws or regulations to be given prior to
closing or shutdown of a plant, including but not limited to those notices
required by the Worker Adjustment and Retraining Notification Act.
Beginning upon execution of this Agreement, McLeod has the right, in its
sole discretion, to interview, and to subsequently hire, any or all of
IDI's employees unrelated to sales, as McLeod chooses. All employees
unrelated to sales who are hired by McLeod will be made available by IDI
beginning no later than April 1, 1997, except employees involved in
distribution who will be made available upon conclusion of distribution of
those directories remaining to be distributed on April 1, 1997, but in no
event later than June 16, 1997.
10.3. All Employees of IDI. McLeod is not, as a term or condition of this
---------------------
Agreement, assuming any of IDI's obligations with respect to employment
contracts or independent contractor contracts, or other agreements with its
employees, whether written or oral. IDI will assist McLeod in the
interviewing and hiring of IDI employees by McLeod. IDI, Morgan, Meijer,
Hendricks, Nelson and TDI will not, without the prior written consent of
McLeod, interview, offer new employment positions to, or offer to continue
employment of, IDI's employees who are members of the Sales Force or sales
support staff, (1) during the interview and hiring process of McLeod; or
(2) who McLeod hires, or desires to hire, pursuant to this section, for a
period of three years after April 1, 1997.
11. NON-COMPETE AGREEMENTS
----------------------
11.1. In consideration of McLeod's purchase of the Directories and payment
of cash consideration, IDI, Morgan, Meijer, TDI and all officers,
directors, shareholders and equity holders of IDI and TDI shall execute a
Covenant Not to Compete and Confidentiality Agreement at Closing
substantially in the form attached hereto as Exhibit "I." In consideration
of McLeod's purchase of the Directories and payment of cash consideration,
Hendricks and Nelson shall execute a Covenant Not to Compete and
Confidentiality Agreement at Closing substantially in the form attached
hereto as Exhibit "J."
11.2. IDI will assign to McLeod, by Assignment in the form attached hereto
as Exhibit "K," all of IDI's rights under its Consulting and
Non-Competition Agreement with Norman
12
<PAGE>
H. and Barbara A. Steigely, dated November 10, 1994, a copy of which is
attached as Exhibit "L,"
11.3. IDI will obtain and deliver to McLeod a Consent to the assignment of
the Consulting and Non-Competition Agreement with Norman H. and Barbara A.
Steigely, in the form attached as Exhibit "M," executed by Norman H. and
Barbara A. Steigely, in accordance with Section 15 of said Consulting and
Non-Competition Agreement.
11.4. In the event it becomes necessary for McLeod to take any action to
enforce the terms of any of the non-compete agreements, other than those
executed by IDI, IDI will use its best efforts to assist McLeod in proving
that full and adequate consideration for the non-compete agreements was
paid to and received by the parties making the agreement not to compete.
12. LEASES
------
12.1. IDI and U. S. Directories, Inc. ("USD") are parties to a lease of
property commonly known as 333 Bosserman Street, LaPorte, Indiana (the
"LaPorte premises"). IDI represents and warrants it is the sole owner and
holder of an assignable leasehold interest in the LaPorte premises, free
and clear of all liens and encumbrances. IDI will assign it's interest in
its current lease with USD to McLeod and McLeod will negotiate with USD to
reach a new lease of the premises under terms acceptable to McLeod and
which will allow IDI to be completely released from all further obligations
under it's current lease with USD. This Agreement and all transactions
contemplated hereby are contingent upon IDI, McLeod and USD reaching [a] an
agreement for the termination of the existing lease between IDI and USD and
[b] new lease agreement between McLeod and USD on or before April 1, 1997.
In the event this contingency is not timely satisfied, McLeod will accept
assignment of the lease from IDI and will assume all of IDI's obligations
under the lease referred to above.
12.2. Flashes Publishers, Inc. and James Z. and Christine E. Sieradzki are
parties to a lease of property commonly known as Cambridge Office Plaza
Suite D, 230 Catalpa Road, Suite D, Mishawaka, Indiana (the "Mishawaka
premises"). IDI represents and warrants it now owns and controls all right,
title and interest of Flashes Publishers, Inc. in, to and under said lease
and is the sole holder of an assignable leasehold interest in the Mishawaka
premises,
13
<PAGE>
free and clear of all liens and encumbrances. IDI will assign it's interest in
the current lease of the Mishawaka premises to McLeod. McLeod will accept
assignment of the lease from IDI and will assume all of IDI's obligations
under the lease referred to above.
12.3. Flashes Publishers, Inc. and Muncie Gateway Center Limited Partnership
are parties to a lease of approximately 1500 square feet of space in the
property commonly known as 400 N. High, Suite 302, Muncie, Indiana (the "Muncie
premises"). IDI represents and warrants it now owns and controls all right,
title and interest of Flashes Publishers, Inc. in, to and under said lease and
is the sole holder of an assignable leasehold interest in the Muncie premises,
free and clear of all liens and encumbrances. IDI will assign it's interest in
the current lease of the Muncie premises to McLeod. McLeod will accept
assignment of the lease from IDI and will assume all of IDI's obligations under
the lease referred to above.
12.4. INFO America Phone Books, Inc. and OPN Systems, Inc. are parties to a
lease of property commonly known as 6208-B Constitution Drive, Ft. Wayne,
Indiana (the "Ft. Wayne premises"). IDI represents and warrants it now owns and
controls all right, title and interest of INFO America Phone Books, Inc. in, to
and under said lease and is the sole holder of an assignable leasehold interest
in the Ft. Wayne premises, free and clear of all liens and encumbrances. IDI
will assign it's interest in the current lease of the Ft. Wayne premises to
McLeod. McLeod will accept assignment of the lease from IDI and will assume all
of IDI's obligations under the lease referred to above.
12.5 IDI and Brite Voice are parties to a lease of in the audiotex equipment
systems described on Exhibit "N" (the "leased audiotex equipment"). IDI
represents and warrants that it is the sole owner and holder of an assignable
leasehold interest in the leased audiotex equipment, free and clear of all liens
and encumbrances. IDI will assign it's interest in the current lease of the
leased audiotex equipment to McLeod. McLeod will accept assignment of said
lease from IDI and will assume all of IDI's obligations under said lease, except
as provided in Section 5.2 above.
14
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13. INDEMNIFICATION OF McLEOD
-------------------------
IDI hereby indemnifies and saves McLeod harmless from and against
any and all costs, liability, or expenses, including reasonable attorney's
fees arising out of (i) any material breach of warranty, covenant,
agreement, or representation made by IDI, Morgan, Meijer or TDI, (ii) any
material nonfulfillment of any agreement of IDI, Morgan, Meijer or TDI
under this Agreement or any misrepresentation in or omission from this
Agreement or from any certificates or other instrument furnished or to be
furnished to McLeod, (iii) any cause of action or expense directly or
indirectly related to IDI's publication of the editions of the Directories
published by IDI; and (iv) all actions, suits, proceedings, demands,
assessments, judgments, costs, and expenses incident to any of the
foregoing.
14. INDEMNIFICATION OF IDI
----------------------
McLeod hereby indemnifies and saves IDI harmless from and against
any and all costs, liability, or expenses, including reasonable attorney's
fees, arising out of (i) any material breach of warranty, covenant,
agreement, or representation made by McLeod; (ii) any material
nonfulfillment of any agreement of McLeod under this Agreement or any
misrepresentation in or omission from this Agreement or from any
certificates or other instrument furnished or to be furnished to IDI; and
(iii) any cause of action or expense directly or indirectly related to
McLeod's publication of the editions of the Directories published by
McLeod; and (iv) all actions, suits, proceedings, demands, assessments,
judgments, costs, and expenses incident to any of the foregoing.
15. CONFIDENTIAL INFORMATION
------------------------
15.1. Definition. For Purposes of this Section, "Confidential
----------
Information" means any information or compilation of information not
generally known, which is propriety to the business, and includes, without
limitation, trade secrets, inventions, and information pertaining to
development, marketing sales, accounting, and licensing of the business
products and services, customer information contained in federal state tax
returns, and the financial terms of this transaction. Information shall be
treated as Confidential Information
15
<PAGE>
irrespective of its source and all information that is identified as being
"confidential," "trade secret," or is identified or marked with any similar
reference, or any information that IDI treats as confidential or McLeod
should know is being treated by IDI as confidential, shall be presumed to
be Confidential Information.
15.2. Convenants by Parties. McLeod, IDI, Morgan, Meijer, Hendricks,
---------------------
Nelson and TDI agree and covenant with respect to all Confidential
Information received or learned by either of them as follows:
15.2.1. that they will treat as confidential all Confidential
Information made available to them or any of their employees, agents
or representatives;
15.2.2. that they will maintain the same in a secure place and limit
access to the Confidential Information to those employees, agents
and representatives to whom it is necessary to disclose the
Confidential Information in furtherance of the transactions
contemplated by this Agreement;
15.2.3. that they and their employees, agents and representatives
will not copy any Confidential Information (unless authorized),
disclose any Confidential Information to any unauthorized party, or
use any Confidential Information for any purpose other than
publication of directories by McLeod, including competition with the
other party or solicitation of the other party's customers; and,
15.2.4. that each party will assume liability for any breach of this
paragraph by it or any of its employees, agents, or representatives.
16. MISCELLANEOUS
-------------
16.1 Broker or Finder. The parties represent to each other that no
----------------
person is entitled to any brokerage commission, finder's fee, or any other
like payment in connection with any
16
<PAGE>
transaction contemplated by this Agreement by reason of the action of any party
to this Agreement.
16.2. Failure by McLeod. In the event McLeod fails to complete the Closing
-----------------
of this Agreement as described above through no fault on the part of IDI and
unrelated to any failure of any condition or postponement described in this
Agreement and not as the result of a breach of this Agreement by McLeod, McLeod
will pay to IDI the $1,000,000.00 paid into escrow pursuant to Section 2.2
above, pursuant to the terms of the Escrow Agreement attached as Exhibit "E."
IDI agrees that this payment shall be its sole and exclusive remedy for a
material breach by and failure by McLeod to complete the transactions
contemplated by the Agreement.
16.3. Severability. If any provisions of this Agreement is held for any
------------
reason to be unenforceable by a court of competent jurisdiction, the remainder
of this Agreement shall, nevertheless, remain in full force and effect.
16.4. Applicable Law. This Agreement shall be construed in accordance with
--------------
the laws selected by choice of law provisions of the state of venue described
below. Venue for any action to enforce this Agreement brought by McLeod shall be
in Kent County, Michigan and venue for any action to enforce this Agreement by
any other party shall be in Linn County, Iowa.
16.5. Notices. Any notices or other communications required or permitted
-------
under this Agreement shall be sufficiently given if sent by certified mail,
return receipt requested, addressed as follows:
McLeod: McLeodUSA Publishing Company
P.O. Box 3162
Cedar Rapids, IA 52406-3162
Attn: Arthur L. Christoffersen, President
IDI: Indiana Directories, Inc.
c/o Talking Directories, Inc.
5311 Clyde Park Avenue, S.W.
Grand Rapids, MI 49509
Attn: John Morgan
17
<PAGE>
TDI: Talking Directories, Inc.
5311 Clyde Park Avenue, S.W.
Grand Rapids, MI 49509
Attn: John Morgan
Morgan: John Morgan
1615 Beard Drive, S.E.
Grand Rapids, Michigan 49509
Meijer: Hank Meijer
c/o Talking Directories, Inc.
5311 Clyde Park Avenue, S.W.
Grand Rapids, Michigan 49509
Nelson: Brad Nelson
c/o Talking Directories, Inc.
5311 Clyde Park Avenue, S.W.
Grand Rapids, Michigan 49509
Hendricks: Jack Hendricks
c/o Talking Directories, Inc.
5311 Clyde Park Avenue, S.W.
Grand Rapids, Michigan 49509
16.6. Captions. The captions in this Agreement are for convenience of reference
--------
only and shall not limit or otherwise affect the meaning hereof.
16.7. Signatures. The parties hereto expressly consent to the use of facsimile
----------
signatures and agree that such facsimile signatures shall be binding as
originals. The parties hereto expressly consent to the use of multiple
counterparts each of which shall constitute and original and all of which
together will constitute one and the same instrument.
16.8. Survival. Each and every provision of this Agreement shall survive the
--------
execution hereof and shall remain binding on the parties hereto until all
performance called for hereunder is complete.
16.9. Binding Effect. This Agreement and all of the provisions hereof shall be
--------------
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that no party hereto may make any
assignment of this
18
<PAGE>
Agreement or any interest herein without the prior written consent of the
other parties hereto. Assignments without such consent shall be void.
McLeodUSA Publishing Company Indiana Directories, Inc.
By: /s/ Arthur L. Christoffersen By: /s/ John P. Morgan
------------------------------------ --------------------------
Arthur L. Christoffersen, President John P. Morgan, President
Talking Directories, Inc.
By: /s/ John P. Morgan
--------------------------
/s/ John P. Morgan /s/ Hendrik G. Meijer
- ----------------------------- ----------------------------
John P. Morgan Hendrik G. Meijer
/s/ Jack E. Hendricks /s/ Brad Nelson
- ----------------------------- ----------------------------
Jack E. Hendricks Brad Nelson
19
<PAGE>
Exhibit "A"
<TABLE>
<CAPTION>
Last IDI Minimum Est. Net
Publication Sales End Number Cash Rev
Directory Date Date Distributed (in 000's)
- --------- -------------- -------- ----------- ----------
<S> <C> <C> <C> <C>
1. Boone February, 1997 12/31/96 21,000 79
2. St. Joseph (South Bend) February, 1997 12/27/96 205,000 1,060
3. Delaware February, 1997 01/10/97 70,000 659
4. Huntington* March, 1997 02/14/97 23,000 111
5. Kosciusko March, 1997 01/21/97 47,000 364
6. Whitley* March, 1997 02/14/97 18,000 85
7. Allen Co. (Ft. Wayne) April, 1997 02/03/97 200,000 1,800
8. Henry April, 1997 02/21/97 29,000 116
9. LaPorte April, 1997 02/26/97 90,000 912
10. Grant (Marion) April, 1997 03/11/97 51,000 215
11. Marshall May, 1997 03/28/97 27,000 255
12. Wells/Adams May, 1997 03/31/97** 22,000 151
13. Jay-Randolph May, 1997 03/31/97** 13,000 68
- -----------------------------------------------------------------------------------------------
<CAPTION>
First McLeod
Sales Start Date
----------------
<S> <C> <C> <C> <C>
14. Fulton June, 1996 04/01/97** 16,000 119
15. Starke June, 1996 04/01/97** 16,000 90
16. Porter July, 1996 04/01/97** 97,000 446
17. Cass, MI July, 1996 04/01/97** 25,000 140
18. Miami/Wabash September, 1996 05/01/97 42,000 317
19. DeKalb/Noble September, 1996 04/01/97** 42,000 228
20. Madison September, 1996 04/01/97** 80,000 536
21. Cass, IN October, 1996 04/01/97** 28,000 313
22. Elkhart November, 1996 05/01/97 100,000 586
23. Howard/Tipton November, 1996 07/01/97 78,000 498
24. Berrien, MI November, 1996 04/01/97** 100,000 1,000
25. Allen/Auglaize, OH December, 1996 08/01/97 85,000 246
26. Darke/Mercer, OH December, 1996 07/01/97 30,000 116
--------- ------
TOTALS 1,555,000 10,510
</TABLE>
* combined into one directory in 1997
** estimated dates
<PAGE>
Exhibit "C"
Bill of Sale
------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Indiana
Directories, Inc., a Michigan corporation ("IDI"), for and in consideration of
Ten Dollars ($10.00) and other good and valuable consideration, the receipt of
which is hereby acknowledged, does hereby bargain, sell, grant, convey, assign
and transfer to McLeodUSA Publishing Company, an Iowa corporation ("McLeod"),
its successors and assigns forever, all of the IDI's right, title and interest
in and to the property described on Exhibit "A," attached to this Bill of Sale
and made a part hereof for all purposes.
IDI covenants and agrees that it is the lawful owner of the above
described property, free and clear of all liens, claims, charges or other
encumbrances, and that IDI will warrant and defend title to said property
against any and every person claiming rights therein.
IDI further covenants and agrees that if it shall be necessary or
desirable at any time after the date hereof to do, execute, acknowledge or
deliver any further acts, deeds, assignments, transfers, conveyances, powers of
attorney, or other assurances, to bargain, sell, grant, convey, transfer or
assign to McLeodUSA the property transferred hereby, McLeod shall be empowered
as IDI's attorney-in-fact to do, execute, acknowledge, and deliver any and such
further acts, deeds, assignments, transfers, conveyances, powers of attorney, or
other assurances for and on behalf of IDI. IDI acknowledges that the foregoing
power is coupled with an interest and shall be irrevocable.
Dated: March _____, 1997.
Indiana Directories, Inc.
By:
---------------------------------
John P. Morgan, President
STATE OF )
--------------------
)ss:
COUNTY OF )
-------------------
On this ____th day of March, 1997, before me, the undersigned, a Notary
Public in and for the State of _____________________, personally appeared John
P. Morgan, to me personally known, who being by me duly sworn, did say that he
is the president, of the corporation executing the within and foregoing
instrument, that no seal has been procured by the corporation; that said
instrument was signed on behalf of the corporation by authority of its Board of
Directors; and that he as such officer acknowledged the execution of the
foregoing instrument to be voluntary act and deed of the corporation, by it and
by him voluntarily executed.
---------------------------------
Notary Public
<PAGE>
Exhibit "D"
Purchase Price Allocation Schedule
----------------------------------
Purchase Price Allocation Under IRC Section 1060
Purchase Price $10,660,000
1.) Paid to Indiana Directories, Inc.
Class I Assets
No Class I assets purchased
Class II assets purchased
No Class II assets purchased
Class III Assets
Machinery & Equipment and Furniture and Fixtures $ 150,000
-----------
Remaining Purchase Price $10,510,000
Class IV Assets
Product designs and drawings, catalogs, data, files, records,
price lists, and other documents relating to suppliers, customer
lists, contracts, catalogs, marketing materials, patents,
trademarks, licenses, copyrights, directory names, brand names,
trade dress, propriety information and trade secrets, existing
non-compete agreements and all other section 197 intangible assets
listed in the purchase agreement. $10,390,000
-----------
Remaining Purchase Price $ 120,000
2.) Paid to others for Covenant not to Compete and Confidentiality
Agreements
Talking Directories, Inc. $ 30,000
John P. Morgan 30,000
Hendrik Meijer 30,000
Brad Nelson 15,000
Jack Hendricks 15,000
Remaining Purchase Price $ -0-
<PAGE>
Exhibit "E"
Escrow Agreement
----------------
THIS AGREEMENT is by and between Norwest Bank Iowa, N.A., Cedar Rapids, Iowa
(the "Escrow Agent"), McLeodUSA Publishing Company, an Iowa corporation
("McLeod"), and Indiana Directories, Inc., a Michigan corporation ("IDI"):
WHEREAS, McLeod has, of even date herewith, purchased certain telephone
directory business from IDI pursuant to a Sale and Purchase Agreement between
McLeod and IDI dated February 21, 1997 (the "Sale Agreement"); and
WHEREAS, pursuant to the Sale Agreement $1,000,000.00 of the purchase
price has been deposited in escrow with the terms set out below; and
WHEREAS, the Escrow Agent is willing to hold and disburse such funds, in
accordance with this Agreement.
NOW THEREFORE, the parties hereto agree as follows:
1. McLeod has established, with Escrow Agent, Escrow Account No.
4030507660, (the "Escrow Account") and has, even date herewith, deposited the
sum of $1,000,000.00 into the Escrow Account in accordance with the terms of the
Sale Agreement.
2. If IDI notifies the Escrow Agent that McLeod failed to complete the
Closing of the Sale Agreement through no fault or breach on the part of IDI and
unrelated to any failure of any condition or postponement described in this
Agreement and not as the result of a breach of this Agreement by McLeod, the
Escrow Agent shall disburse the entire balance in the Escrow Account to IDI;
provided, however, before a disbursement is made to McLeod due to any such
notice, McLeod shall be given written notice and shall have (10) days to notify
the Escrow Agent that it disputes such disbursement. In such event, no
distribution shall be made to IDI and Section 8 below shall control the dispute.
3. Subject to Section 4 below, the balance in the Escrow Account,
including interest, shall be paid directly to IDI or its designee within fifteen
(15) days after McLeod and IDI jointly certify that all invoices for all
expenses of the Directories have been submitted for payment and paid and that
primary distribution of the Directories has been completed pursuant to the Sale
Agreement. All invoices and any other necessary documentation shall be
presented to James Haddad of McLeod, who shall direct the Escrow Agent to
advance funds for payment of same.
4. Pursuant to the Sale Agreement, if the net cash revenue for the
Directories is less than $10,510,000.00, the consideration paid by McLeod to IDI
for the Directory shall reduce in a dollar-for-dollar basis. Any such reduction
is to be repaid to McLeod from the balance remaining in the escrow account after
payment of all printing and distribution costs for the Directories. Therefore,
if McLeod notifies the Escrow Agent that the consideration to be paid to IDI
should reduce pursuant to the terms of the Sales Agreement, the amount of such
reduction shall be disbursed from the escrow
<PAGE>
account to McLeod after payment of all printing and distribution costs for the
Directory; provided, however, before a disbursement is made to McLeod due to any
such notice of a reduction in the consideration to be paid to IDI, IDI shall be
given written notice of a reduction and shall have ten (10) days to notify the
Escrow Agent that it disputes such disbursement. In such event, no distribution
shall be made to McLeod and Section 8 below shall control the dispute.
5. During the time the funds are held in the Escrow Account, the
Escrow Agent shall, at the direction of McLeod and IDI, invest such funds in
savings or time deposits, U.S. government securities, securities guaranteed by
the United States, Certificates of Deposit with maturities approved by McLeod
and IDI, or shares of a Money Market Fund, and all accrued interest shall be
paid to IDI together with the last disbursement to IDI under this Escrow
Agreement.
6. The Escrow Agent shall not be liable for any error in judgment
or for any act done or omitted by it in good faith, or for anything that it may,
in good faith, do or refrain from doing in connection herewith, nor will any
liability be incurred by the Escrow Agent if, in the event of any dispute or
question as to the construction of this Agreement, it acts in accordance with
the written opinion of its legal counsel.
7. The Escrow Agent is authorized to act upon any document believed
by it to be genuine and signed by the proper party or parties and will incur no
liability in so acting.
8. If either party disputes any disbursement by the Escrow Agent
under this Agreement, the Escrow Agent shall promptly refer the dispute to the
American Arbitration Association for Settlement by arbitration in accordance
with the Association's rules, unless it is settled by mutual agreement of McLeod
and IDI. As part of any such arbitration award, the arbitrator may establish
his fee and expenses in connection therewith, which the unsuccessful party shall
pay. Any award shall be a conclusive determination of the matter and shall be
binding upon all parties. Arbitration proceedings shall be held in Cedar
Rapids, Iowa, unless the parties hereto agree on another location.
9. IDI and McLeod hereby agree to hold the Escrow Agent harmless
from any and all claims, liabilities, losses, actions, suits or proceedings at
law or in equity, or any other expenses, fees or charges of any character or
nature, that it may incur or with which it may be threatened by reason of its
acting as Escrow Agent, and against any and all expenses, including attorney
fees and the cost of defending any action, suit or proceeding or resisting any
claim, interpleader or otherwise, or any other expenses, that may be incurred by
the Escrow Agent by reason of disputes arising under this Escrow Agreement.
10. Any notices or other communications required or permitted under
this Agreement shall be sufficiently given if sent by certified mail, return
receipt requested, addressed as follows:
McLeod: McLeodUSA Publishing Company
P.O. Box 3162
Cedar Rapids, IA 52406-3162
Attn: Arthur L. Christoffersen, President
<PAGE>
IDI: Indiana Directories, Inc.
c/o Talking Directories, Inc.
5311 Clyde Park Avenue, S.W.
Grand Rapids, MI 49509
Attn: John Morgan
Escrow Agent: Norwest Bank Iowa, N.A.
P.O. Box 1967
Cedar Rapids, IA 52406
Attn: Greg Neumeyer
11. The Escrow Agent shall be entitled to a fee of $250.00 per year
for service as Escrow Agent, to be paid to McLeod.
Dated this 27th day of February, 1997.
McLeodUSA Publishing Company Indiana Directories, Inc.
By: By:
------------------------------------- -----------------------------------
Arthur L. Christoffersen, President John Morgan, President
Norwest Bank Iowa, N.A.
By:
-------------------------------------
Gregory W. Neumeyer, Vice President
<PAGE>
Exhibit "I"
Covenant not to Compete and Confidentiality Agreement
-----------------------------------------------------
McLeodUSA Publishing Company, an Iowa corporation, ("McLeod"), Indiana
Directories, Inc., a Michigan Corporation ("IDI"), John Morgan ("Morgan"), Hank
Meijer ("Meijer"), Jack Hendricks ("Hendricks"), Brad Nelson ("Nelson") and
Talking Directories, Inc., a Michigan corporation ("TDI") have entered into a
Sale and Purchase Agreement dated February 21, 1997 ("the Agreement") which
provides for the execution of this Covenant not to Compete and Confidentiality
Agreement.
In fulfillment of the terms of the Agreement, adequate, good and valuable
consideration recited herein, ______________, IDI and TDI, jointly and
severally, (referred to hereafter as "the undersigned," meaning any one, some or
all of them) enter into this agreement with McLeod, as follows:
1. For a period of ten (10) years from the date hereof, the undersigned shall
not, within the distribution area of any directory purchased by McLeod from IDI
pursuant to the Agreement, (a) directly or indirectly, as a shareholder,
proprietor, partner, consultant, employee, agent, officer, director, associate,
lender, investor or in any other capacity, engage in the telephone directory
business in competition with McLeod, nor (b) invest in, lend money to, guarantee
loans of, make gifts to, advise or by any other means assist or contract with
any other person or entity in the telephone directory business or to so compete
with McLeod.
2. The undersigned will not disclose any Confidential Information to others
outside McLeod or use same for any unauthorized purposes without written
approval from an officer of McLeod. "Confidential Information" means any
information or compilation of information not generally known, that is
proprietary to the business of McLeod or IDI or related to McLeod's publication
of any directory which is a subject of the Agreement, and includes, without
limitation, trade secrets, inventions, information pertaining to development,
marketing, sales, accounting, and licensing of the business products and
services, customer lists and contracts, customer information contained in
or related to customer records, papers, correspondence or files and all
financial information contained in federal and state tax returns. Confidential
Information does not include information that is independently developed or
received from a third party unrelated to McLeod or IDI, or information that IDI
or TDI currently uses for or in directories published in other markets by IDI,
_______ or TDI. In addition, the undersigned shall not be in default under this
agreement if the undersigned's disclosure of Confidential Information is
pursuant to a subpoena or other court order.
3. The parties acknowledge and agree that customer lists and contracts,
customer information and customer trust and good will are the primary assets of
McLeod, are the primary assets previously purchased by McLeod from IDI and are
the primary assets being purchased pursuant to the Agreement. The parties
desire and agree to protect these interests, assets and information in order to
maintain the adequacy of the consideration for the Agreement, for this agreement
and for the payments made by McLeod pursuant to the Agreement.
<PAGE>
4. The undersigned acknowledges that (i) McLeod is paying substantial and
valuable consideration for this agreement, (ii) the undersigned will directly
benefit from the transactions contemplated by the Agreement and the terms of the
Agreement, described above, including the receipt of adequate cash consideration
from McLeod for this Covenant not to Compete and Confidentiality Agreement,
(iii) all officers, directors, shareholders and equity holders of IDI and TDI
will benefit directly and financially from the Agreement, (iv) that the terms of
this agreement are reasonable and necessary to protect the legitimate interest
of McLeod and (vi) competition by the undersigned as herein prohibited would
cause substantial loss and expense, irreparable damage and harm to McLeod, its
assignees or successors, which cannot be fully compensated by monetary award.
5. The parties agree that in the event the provisions of this agreement should
ever be adjudicated to exceed the time or geographic limitations permitted by
law, then such provisions shall be deemed reformed by the parties to this
agreement pursuant to this sentence to the maximum time and geographic
limitation allowed by law.
6. The undersigned agree that upon a violation of this agreement, McLeod or an
assignee or successor in interest to it, shall have the following rights, which
are cumulative, separate causes of action that may be asserted against the
undersigned, jointly and severally. McLeod, its successors or assigns, in the
event of violation by the undersigned of this agreement, may:
6.1. Commence an action to secure an injunction to enjoin the undersigned
from violating this agreement;
6.2. Commence an action to require the undersigned to specifically perform
this agreement;
6.3. Commence an action to secure a judgment for monetary damages for
violation of this agreement, including, if applicable, punitive
damages; or
6.4. Commence an action to assert any and all of the rights that McLeod,
or its successor or assign, may have against the undersigned at such
time because of any breach of this agreement.
6.5. In addition, McLeod, its successor or assignee, may secure reasonable
attorney's fees and costs incurred as a result of judgment, order or
injunction being rendered against the undersigned.
7. No delay or omission by McLeod in exercising any right under this agreement
shall operate as a waiver of that or any other right. A waiver or consent given
by McLeod on any one occasion shall be effective only in that instance and shall
not be construed as a bar or waiver of any right on any other occasion. In case
any provision of this agreement shall be invalid, illegal, or otherwise
unenforceable, the parties shall negotiate in good faith with respect to a
substitute provision, such unenforceable provision will be deemed severable and
all remaining provisions will remain in full force and effect.
8. The parties hereto expressly consent to the use of multiple counterparts
each of which shall constitute an original and all of which together will
constitute one and the same instrument.
<PAGE>
9. This agreement shall be governed by and construed in accordance of the laws
of the State of Iowa.
Dated: March __, 1997
McLeodUSA Publishing Company Indiana Directories, Inc.
By: By:
--------------------------- -------------------------------
Talking Directories, Inc.
By:
- ----------------------------------- -------------------------------
name
<PAGE>
Exhibit "J"
Covenant not to Compete and Confidentiality Agreement
-----------------------------------------------------
McleodUSA Publishing Company, an Iowa corporation, ("McLeod"), Indiana
Directories, Inc., a Michigan Corporation ("IDI"), John Morgan ("Morgan"), Hank
Meijer ("Meijer"), Jack Hendricks ("Hendricks"), Brad Nelson ("Nelson") and
Talking Directories, Inc., a Michigan corporation ("TDI") have entered into a
Sale and Purchase Agreement dated February 21, 1997 ("the Agreement") which
provides for the execution of this Covenant not to Compete and Confidentiality
Agreement.
In fulfillment of the terms of the Agreement, adequate, good and valuable
consideration recited herein, _________________ enters into this agreement with
McLeod, as follows:
1. For a period of five (5) years from the date hereof, the undersigned shall
not, within the distribution area of any directory currently being published by
McLeod upon conclusion of the transactions described in the Agreement, including
those being purchased by McLeod from IDI pursuant to the Agreement, (a) directly
or indirectly, as a shareholder, proprietor, partner, consultant, employee,
agent, officer, director, associate, lender, investor or in any other capacity,
engage in the telephone directory business in competition with McLeod, nor (b)
invest in, lend money to, guarantee loans of, make gifts to, advise or by any
other means assist or contract with any other person or entity in the telephone
directory business or to so compete with McLeod.
2. The undersigned will not disclose any Confidential Information to others
outside McLeod or use same for any unauthorized purposes without written
approval from an officer of McLeod. "Confidential Information" means any
information or compilation of information not generally known, that is
proprietary to the business of McLeod or IDI or related to McLeod's publication
of any directory which is a subject of the Agreement, and includes, without
limitation, trade secrets, inventions, information pertaining to development,
marketing, sales, accounting, and licensing of the business products and
services, customer lists and contracts, customer information contained in or
related to customer records, papers, correspondence or files and all financial
information contained in federal and state tax returns. Confidential Information
does not include information that is independently developed or received from a
third party unrelated to McLeod or IDI, or information that IDI or TDI currently
uses for or in directories published in other markets by IDI or TDI. In
addition, the undersigned shall not be in default under this agreement if the
undersigned's disclosure of Confidential Information is pursuant to a subpoena
or other court order.
3. The parties acknowledge and agree that customer lists and contracts,
customer information and customer trust and good will are the primary assets of
McLeod, are the primary assets previously purchased by McLeod from IDI and are
the primary assets being purchased pursuant to the Agreement. The parties desire
and agree to protect these interests, assets and information in order to
maintain the adequacy of the consideration for the Agreement, for this agreement
and for the payments made by McLeod pursuant to the Agreement.
<PAGE>
4. The undersigned acknowledges that (i) McLeod is paying substantial and
valuable consideration for this agreement, (ii) the undersigned will directly
benefit from the transactions contemplated by the Agreement and the terms of the
Agreement, described above, (iii) the undersigned will receive adequate cash
consideration from McLeod for this Covenant not to Compete and Confidentiality
Agreement, (iv) the undersigned will receive substantial additional cash
consideration from IDI as the result of the undersigned facilitating and
participating in the conclusion of the transactions contemplated by the
Agreement, including, specifically, the execution of this Covenant not to
Compete and Confidentiality Agreement, (v) that the terms of this agreement are
reasonable and necessary to protect the legitimate interests of McLeod and (vi)
competition by the undersigned as herein prohibited would cause substantial loss
and expense, irreparable damage and harm to McLeod, its assignees or successors,
which cannot be fully compensated by monetary award.
5. The parties agree that in the event the provisions of this agreement
should ever be adjudicated to exceed the time or geographic limitations
permitted by law, then such provisions shall be deemed reformed by the parties
to this agreement pursuant to this sentence to the maximum time and geographic
limitation allowed by law.
6. The undersigned agree that upon a violation of this agreement , McLeod or
an assignee or successor in interest to it, shall have the following
rights, which are cumulative, separate causes of action that may be asserted
against the undersigned, jointly and severally. McLeod, its successors or
assigns, in the event of violation by the undersigned of this agreement, may:
6.1 Commence an action to secure an injunction to enjoin the undersigned
from violating this agreement;
6.2 Commence an action to require the undersigned to specifically perform
this agreement;
6.3 Commence an action to secure a judgment for monetary damages for
violation of this agreement, including, if applicable, punitive damages;
or
6.4 Commence an action to assert any and all of the rights that McLeod,
or its successor or assign, may have against the undersigned at such time
because of any breach of this agreement.
6.5 In addition, McLeod, its successor or assignee, may secure reasonable
attorney's fees and costs incurred as a result of judgment, order or
injunction being rendered against the undersigned.
7. No delay or omission by McLeod in exercising any right under this
agreement shall operate as a waiver of that or any other right. A waiver or
consent given by McLeod on any one occasion shall be effective only in that
instance and shall not be construed as a bar or waiver of any right on any other
occasion. In case any provision of this agreement shall be invalid, illegal, or
otherwise unenforceable, the parties shall negotiate in good faith with respect
to a substitute provision, such unenforceable provision will be deemed severable
and all remaining provisions will remain in full force and effect.
8. The parties hereto expressly consent to the use of multiple counterparts
each of which shall constitute an original and all of which together will
constitute one and the same instrument.
<PAGE>
9. This agreement shall be governed by and construed in accordance of the
laws of the State of Iowa.
Dated: March_________, 1997
McLeodUSA Publishing Company
By:_________________________ ___________________________
name
<PAGE>
Exhibit 10.92
February 28, 1997
Arthur L. Christoffersen, President
McLeod USA Publishing Company
P.O. Box 3162
Cedar Rapids, Iowa 52406-3162
Dear Art:
When this letter is signed by you in the space provided below, it
will constitute an amendment to the Sale and Purchase Agreement ("Agreement")
between Mcleod USA Publishing Company ("McLeod") and Indiana Directories, Inc.
("IDI"), John P. Morgan, Hendrik G. Meijer, Jack Hendricks and Brad Nelson. This
Amendment is necessary because we have received indications from Norm Steigely
and his attorney that they are not going to cooperate with any potential
assignment of any of his agreements with IDI.
In order for IDI to fulfill its obligations to Mr. Steigely, IDI
and McLeod agree to the following amendments to the Agreement:
(1) After the Closing and through receipt of the December 31,
2001 financial statements, McLeod agrees to use its best
efforts to provide IDI with complete financial disclosure
regarding all of the telephone directories which IDI
previously purchased from Mr. Steigely, which are identified
on Exhibit "A" as:
(a) Boone (h) Fulton
(b) Huntington (i) Starke
(c) Kosciusko (j) Cass, Michigan
(d) Whitley (k) Cass, Indiana
(e) Henry (l) Elkhart
(f) LaPorte (m) Berrien
(g) Marshall
This disclosure will include all information necessary in
order for IDI to calculate any potential "earn-out" payments
due to Mr. Steigely, to the extent McLeod has such
information.
(2) In the event that Mr. and Mrs. Steigely refuse to consent to
the assignment of their Consulting and Non-Competition
Agreement
<PAGE>
Arthur L. Christoffersen
Page 2
February 28, 1997
- ------------------------------------
to McLeod, it is agreed that IDI will continue to make all
payments required by the Consulting and Non-Competition Agreement
and shall enforce, at IDI's cost, any violations of that
agreement by the Steigelys, and IDI will allow McLeod to
participate in such enforcement at McLeod's cost.
(3) Prior to Closing, IDI will completely pay the promissory note to
21st Century Concepts, Inc. f/k/a U.S. Directories, Inc. ("21st
Century"), dated November 10, 1994. This amount constitutes the
entire "Indebtness" secured by the Security Agreement between IDI
and 21st Century, dated November 10, 1994. In the event that said
note is paid in full, evidence of payment is provided to McLeod,
and 21st Century refuses to release its financing statement(s)
currently on file, McLeod agrees to close the transactions with
IDI contemplated by the Agreement and IDI will indemnify and hold
McLeod harmless from and against any costs or expenses McLeod may
incur as a direct result of 21st Century's refusal to release its
lien.
(4) In the event that 21st Century refuses to consent to an
assignment of the Lease, dated November 10, 1994, between IDI and
21st Century for the property at 333 Bosserman Street, LaPorte,
Indiana 46352, McLeod agrees to sublet the property from IDI
under the same terms and conditions as set forth in the Lease.
(5) IDI is a party to or beneficiary of a covenant not to compete
with South Bend Tribune Corp. IDI will assign to McLeod, by
assignment in the form attached to the agreement as Exhibit "K",
all of IDI's rights and interest in, to and under said covenant.
(6) McLeod will assume the liability for the accrued vacation of all
IDI employees subsequently hired by McLeod, as that liability is
calculated by IDI and stated to McLeod at Closing, however, IDI
will make a reimbursement payment to Mcleod of any amounts of
such liability in excess of $18,000.00.
<PAGE>
Arthur L. Christoffersen
Page 3
February 28, 1997
- -----------------------------------------
(7) Except as noted above and except as necessary to conform the
Agreement with the facts described above, all other provisions of
the Agreement are ratified by the parties and shall remain in
full force and effect.
If you agree with these changes, please sign and date this letter in the
space provided below.
Very truly yours,
INDIANA DIRECTORS, INC.
By /s/ John P. Morgan, Pres.
------------------------------
John P. Morgan
By /s/ Arthur J. Christoffersen
-------------------------------------------
Arthur J. Christoffersen, President
<PAGE>
EXHIBIT 10.93
AMERITECH(R) CENTREX SERVICE
CONFIRMATION OF SERVICE ORDER
Customer hereby acknowledges its order for Ameritech Centrex Service
(the "Service"). Shown below is the period of Service selected by Customer (the
"Service Term") and Line Capacity Commitment. Customer authorizes the Authorized
Sales Representative designated below to obtain copies of network service and
billing records and to order and negotiate for the initial installation and
coordination of the Service provided by Ameritech.
This Order is intended to serve as a confirmation of Customer's selection of the
Service, Service Term and Line Capacity Commitment offered by Ameritech. The
rates, terms and conditions under which the Service is provided, including
applicable termination charges, are controlled by tariff except in Michigan
where the Service is provided under the terms and conditions in the Agreement
attached to this Order.
The monthly recurring rates which correspond to the Service and Service Term
will apply for the time period shown below and will not be subject to Ameritech
initiated increases during the Service Term.
Upon expiration of the Service Term, Customer may negotiate a new Service Term
at the then-current rates for any Service terms available at such time. If
Customer chooses not to negotiate a new Service Agreement and does not request
discontinuance of the Service, the rates will revert to the month-to-month basis
rates then in effect for the Service.
If any or all of the Service ordered herein is canceled prior to installation or
if the Service is terminated prior to the expiration of the Service Term, then
the applicable cancellation or termination charges are due and payable. The
termination charges are dependent upon the Service Term and Line Capacity
Commitment designated by Customer.
SERVICE TERM: ___ month-to-month ___ 36 months ___ 60 months X 84 months
-
LINE CAPACITY COMMITMENT: ___ 2 lines X 7 lines ___ 25 lines
-
___ 50 lines ___100 lines ___200 lines
Ameritech Information Industry Services,
a division of Ameritech Services, Inc.
McLeod Telemanagement By: /s/ Maria Capoccia
- --------------------------- --------------------------------------
Company Name Signature of Ameritech
* See Attachment A Maria Capoccia
- --------------------------- --------------------------------------
Billing Telephone Number Printed Name
By: General Manager-Sales
- --------------------------- ---------------------------------------
Signature of Customer Title
/s/ T.M. Parrin 8/21/96
- --------------------------- ---------------------------------------
Printed Name Date
/s/ T.M. Parrin Sharmaine Summerville
- --------------------------- ---------------------------------------
Title Sales Representation
Sr. V.P. - OPs Ameritech Information Industry Services
- --------------------------- ---------------------------------------
Date 7/29/96 Company Name
ATTACHMENTS: ___ SERVICE GUARANTEE ___ SINGLE PAYMENT OPTION ___ DEFERRED
PAYMENT OPTION
_____________________
As used herein, Ameritech means Illinois Bell Telephone Company in Illinois,
Indiana Bell Telephone Company, incorporated in Indiana, Michigan Bell Telephone
Company in Michigan, The Ohio Bell Telephone in Ohio, and Wisconsin Bell Inc.
in Wisconsin.
FORM DISTRIBUTION
- -----------------
C. Center
Ameritech Customer Authorized Sales Representative (8-94)
*The Central Office location for the centrex common blocks covered under this
agreement are shown on Attachment A hereto.
<PAGE>
ATTACHMENT A
PAGE 1 OF 2
CLLI ADDRESS
AURRILAEDSO 1020 New York Ave.
AURRILAWRS SW Crn Orchd/Ind Tr
AURRILARDSO 82 Stolp Ave
NPVLILSWRSO Rte 59 and 111th Street
NPVLILNADSO 111 W Franklin
NPVLILNEDSO 25 W 21 Ridgeland
ELGNILELDSO 255 E Chicago St.
JOLTILJODS1 65 W Webster
JOLTILJWDSO 1414 W Jefferson
WKGNILWKDS 10 N Utica St
SKOKILSKDSO 8231 Niles Center
OKLWILOLDS 4918 W 95 St
BGBKILBKDS 1000 Lily Cache Ln
ORPKILORDS 15248 Ravinia
ORPKILOWRS 14741 Parker RD
TNPKILTPDSO 6730 W 174th Pl
PALTILPADSO 20 S Brockway St
CMCYILCCDS 859 Burnham Ave
CMCYILCCDS 859 Burnham Ave
NCHCILNCDS 2205 Hervey
CHHGILCHDS 1628 Vincennes
NBRKILNBDSO 2029 Walters Av
WLNGILWGDS 50 E Dundee Rd
HRVYILHADSO 15321 Ctr
KNKKILKKDS1 475 E Oak
HGPKILHPDSO 1866 Second St
WLMTILWIDSO 737 12th St
CICRILCICGO 6125 W 26th St
SCBGILCODS 700 Mall Dr
WHTNILWHDS 225 W Wesley
DWGVILDGCG 4924 Forest Ave
DWGVILDGDS 4924 Forest Ave
HFESILWLDS1 1325 N Jones Rd
EMHRILETDSO 152 S York
LBRDILLMDS1 20 N Main
LBRDILLMDSO 20 N Main
EGVGILEGDS 10 N Scott
EGVGILEGDS 10 N Scott
BRTLILBTDSO 200 S Main
CRLKILCKDSO 486 Virginia St
GLELILGEDSO 444 Pennsylvania
PKFSILPFDSO 20 S Orchard Dr
MRGVILMGDS 6601 Dempster
<PAGE>
ATTACHMENT A
PAGE 2 OF 2
<TABLE>
<CAPTION>
CLLI ADDRESS
<S> <C>
BLISILBIDSO 2427 Union St
RSLLILRZDSO 10 E Irving Park
ZIONILZNDSO 2517 Lewis Av
HMWDILHODS 18214 Dixie Hwy
LBVLILLIDSO 117 E Church St
LKFRILLFDSO 165 E Deerpath Av
OTWAILOTDS 707 Fulton
MCHNILMYDS 1311 Court St
DRFDILDFDSO 812 Deerfield Rd
LKZRILLZDSO 40 S Old Rand Rd
BNSVILEVDSO 7 W Green St
HNDLILHIDDSO 120 S Lincoln St
GLVWILGVDS 225 Main St
WCHCILWCD 225 Main St
RVDLILRDDSO 75 E 137th St
RMVLILRMDS 217 Romeo Rd
GENVILGNDS 110 James
ALGNILAQDSO 50 Berg St 312
HCHLILHHDSO 7900 W 95th St
CARYILCADSO 9 W Main St
WNTKILWNDS 794 Oak St
WNVLILWVRS Manning Warren
NWLNILNLDSO 205 Cedar Rd
MRRSILMSDS 210 E Jefferson St
SCPKILSPDSO 9659 W Soreng
LCPTILLPDSO 123 E 10th St
SMMTILSMDS 7410 W 63rd St
RVGVILRGDS 8436 W Grand Av
BNTOILBADSO 430 E main
BNTOILAGDSO 2000 E Ameritech Dr
LEMTILLNDSO Lemont Rd 97th St
LEMTILLEDSO 310 Lemont St
MOKNILMERS 19007 Wolf Rd
FXLKILFKDSO 277 E Grand Ave
MTVRILMVDS 817 Main St
CAHKILAADSO 1000 Mildred St
CENLILCEDSO 210 N Locust
BTHLILB ODSO 343 S Prairie
GLCRILGCRSO N Side of Main
CNTNILCNDSO 75 W Pine
LSLLILLSDSO 237 Hennepin St
</TABLE>
<PAGE>
WISCONSIN
AMERITECH(R) CENTREX SERVICE
CONFIRMATION OF SERVICE ORDER
Customer hereby acknowledges its order for Ameritech Centrex Service
(the "Service"). Shown below is the period of Service selected by Customer (the
"Service Term") and Line Capacity Commitment. Customer authorizes the Authorized
Sales Representative designated below to obtain copies of network service and
billing records and to order and negotiate for the initial installation and
coordination of the Service provided by Ameritech.
This Order is intended to serve as a confirmation of Customer's selection of the
Service, Service Term and Line Capacity Commitment offered by Ameritech. The
rates, terms and conditions under which the Service is provided, including
applicable termination charges, are controlled by tariff except in Michigan
where the Service is provided under the terms and conditions in the Agreement
attached to this Order.
The monthly recurring rates which correspond to the Service and Service Term
will apply for the time period shown below and will not be subject to Ameritech
initiated increases during the Service Term.
Upon expiration of the Service Term, Customer may negotiate a new Service Term
at the then-current rates for any Service terms available at such time. If
Customer chooses not to negotiate a new Service Agreement and does not request
discontinuance of the Service, the rates will revert to the month-to-month basis
rates then in effect for the Service.
If any or all of the Service ordered herein is canceled prior to installation or
if the Service is terminated prior to the expiration of the Service Term, then
the applicable cancellation or termination charges are due and payable. The
termination charges are dependent upon the Service Term and Line Capacity
Commitment designated by Customer.
SERVICE TERM: ___ month-to-month ___ 36 months ___ 60 months X 84 months
-
LINE CAPACITY COMMITMENT: ___ 2 lines X 7 lines ___ 25 lines
-
___ 50 lines ___100 lines ___200 lines
Ameritech Information Industry Services,
a division of Ameritech Services, Inc.
McLeod Telemanagement By: /s/ Maria Capoccia
- --------------------------- --------------------------------------
Company Name Signature of Ameritech
* See Attachment A Maria Capoccia
- --------------------------- --------------------------------------
Billing Telephone Number Printed Name
By: General Manager-Sales
- --------------------------- ---------------------------------------
Signature of Customer Title
/s/ T.M. Parrin 8/21/96
- --------------------------- ---------------------------------------
Printed Name Date
/s/ T.M. Parrin Sharmaine Summerville
- --------------------------- ---------------------------------------
Title Sales Representation
Sr. V.P. - OPs Ameritech Information Industry Services
- --------------------------- ---------------------------------------
Date 7/29/96 Company Name
ATTACHMENTS: ___ SERVICE GUARANTEE ___ SINGLE PAYMENT OPTION ___ DEFERRED
PAYMENT OPTION
_____________________
As used herein, Ameritech means Illinois Bell Telephone Company in Illinois,
Indiana Bell Telephone Company, incorporated in Indiana, Michigan Bell Telephone
Company in Michigan, The Ohio Bell Telephone in Ohio, and Wisconsin Bell Inc.
in Wisconsin.
FORM DISTRIBUTION
- -----------------
C. Center
Ameritech Customer Authorized Sales Representative (8-94)
*The Central Office location for the centrex common blocks covered under this
agreement are shown on Attachment A hereto.
<PAGE>
ATTACHMENT A
PAGE 1 OF 2
<TABLE>
<CAPTION>
CLLI Address City Zip Type City Pop Switch LEC ID Region Date
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MDSNWI11DS 122 W MAIN ST MADISON 53703 Dedicate 194586 DMH 5220 South 1/01/96
MDSNWI14DS 805 PFLAUM RD MADISON 53716 Dedicate 194586 DE4 5220 South 1/01/96
MDSNWI16DS 4901 BLACK OAK DR MADISON 53711 Dedicate 194586 DMH 5220 South 1/01/96
MDSNWI11DS 122 W MAIN ST MADISON 53703 Dedicate 194586 5E 5220 South 1/01/96
MDSNWI12DS 215 KEDZIE ST MADISON 53704 Dedicate 194586 DE5 5220 South 1/01/96
MDSNWI11CG 122 W MAIN ST MADISON 53703 Dedicate 194596 1AE 5220 South 1/01/96
MDSNWI1161T 122 W MAIN ST MADISON 53703 Dedicate 194586 5E 5220 South 1/01/96
MDSNWI13DS 3700 SYLVAN AV MADISON 53705 Dedicate 194586 DMH 5220 South 1/01/96
GNBYWIO1DS 205 S JEFFERSON GREEN BAY 54301 Dedicate 102708 DMH 5220 North 1/01/96
GNBYWIO1DS 205 S JEFFERSON GREEN BAY 54301 Dedicate 102708 5E 5220 North 1/01/96
GNBYWI12RS 155 HUTH AV GREEN BAY 54302 Dedicate 102708 5ER 5220 North 1/01/96
GNBYWI12DS 155 HUTH AV GREEN BAY 54301 Dedicate 102708 DMH 5220 North 1/01/96
GNBYWIO161T 205 S JEFFERSON GREEN BAY 54301 Dedicate 102708 5E 5220 North 1/01/96
GNBYWI11RS 703 S RIDGE RD GREEN BAY 54304 Dedicate 102708 5ER 5220 North 1/01/96
RACHWI01DS 411 7TH ST RACINE 53403 Dedicate 86014 5E 5220 South 1/01/96
KENOWI01DS 5906 10th AV KENOSHA 53140 Dedicate 85122 DE5 5220 South 1/01/96
APPLWI01CGO 221 W WASHINGTON APPLETON 54911 Dedicate 69594 1AE 5220 North 1/01/96
APPLWI0161T 221 W WASHINGTON APPLETON 54911 Dedicate 69594 5E 5220 North 1/01/96
EUICLWI01DS0 304 S DEWEY ST EAU CLAIRE 54701 Dedicate 58476 D12 5220 North 1/01/96
EUICLWI012ED 304 S DEWEY ST EAU CLAIRE 54701 Dedicate 58476 5E 5220 North 1/01/96
EUICLWI0161T 304 S DEWEY EAU CLAIRE 54701 Dedicate 58476 DM2 5220 North 1/01/96
JNVLWI01DSA 301 E MILWAUKEE ST JANESVILLE 53545 Dedicate 56862 5E 5220 South 1/01/96
BELTWI01DSO 415 PROSPECT ST BELOIT 53511 Dedicate 36644 DE5 5220 South 1/01/96
SPRRWI13RS S1 HWY 36 SUPERIOR 54880 Dedicate 27546 RSC 5220 North 1/01/96
MILWWI13CG 722 N BROADWAY MILWAUKEE 53202 Switched 617044 1AE 5220 South 1/01/96
MILWWI22DS0 1830 E CAPITAL DR MILWAUKEE 53211 Switched 617044 DE5 5220 South 1/01/96
MILWWI13RS0 740 N BROADWAY MILWAUKEE 53202 Switched 617044 5ER 5220 South 1/01/96
MILWWI34CG 1612 S 26TH ST MILWAUKEE 53204 Switched 617044 1AE 5220 South 1/01/96
MILWWI13CG 722 N BROADWAY MILWAUKEE 53202 Switched 617044 1AE 5220 South 1/01/96
MILWWI23DS0 110 E GOOD HOPE R MILWAUKEE 53217 Switched 617044 DE5 5220 South 1/01/96
MILWWI13DS0 722 N BROADWAY MILWAUKEE 53202 Switched 617044 OMH 5220 South 1/01/96
MILWWI42DS0 3044 S LOGAN AV MILWAUKEE 53207 Switched 617044 DE5 5220 South 1/01/96
MILWWI17CG 335 W WRIGHT MILWAUKEE 53212 Switched 617044 1AE 5220 South 1/01/96
MILWWI22RS0 1830 E CAPITOL DR MILWAUKEE 53211 Switched 617044 5ER 5220 South 1/01/96
MILWWI12CG 6812 AETNA CT MILWAUKEE 53213 Switched 617044 1AE 5220 South 1/01/96
MILWWI12DS2 6812 AETNA CT MILWAUKEE 53213 Switched 617044 DMH 5220 South 1/01/96
MILWWI482CO 918 N. 26 MILWAUKEE 53233 Switched 617044 1AE 5220 South 1/01/96
</TABLE>
<PAGE>
ATTACHMENT A
PAGE 2 OF 2
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MILWWI148CG 918 N 26TH ST MILWAUKEE 53233 Switched 617044 1AE 5220 South 1/01/96
MILWWI12DS0 6812 AETNA CT MILWAUKEE 53213 Switched 617044 5E 5220 South 1/01/96
MILWWI1251T 6812 AETNA CT MILWAUKEE 53213 Switched 617044 5E 5220 South 1/01/96
MILWWI130CG 2665 S 72ND ST MILWAUKEE 53219 Switched 617044 1AE 5220 South 1/01/96
MILWWI16DS0 7404 COUNTY LINE R MILWAUKEE 53223 Switched 617044 DMH 5220 South 1/01/96
MILWWI27CG 3281 N 41ST ST MILWAUKEE 53216 Switched 617044 1AE 5220 South 1/01/96
MILWWI34DS1 1612 S 26TH ST MILWAUKEE 53204 Switched 617044 DE5 5220 South 1/01/96
SHBYWI01DS0 631 NEW YORK AV SHEBOYGAH 53081 Switched 50368 DE5 5220 North 1/01/96
FDULWI01OS0 70 E DIVISION ST FOND DU LAC 54935 Switched 39340 DMH 5220 North 1/01/96
BRFDWI11RS2 5N 180W WOEFEL RD BROOKFIELD 53005 Switched 36814 RSC 5220 South 1/01/96
MILWWI45CG 405 FAIRWAY DR BROOKFIELD 53005 Switched 36814 1AE 5220 South 1/01/96
MNTWWI01DS 820 BUFFALO ST MANITOWOC 54220 Switched 33076 DE5 5220 North 1/01/96
MILWWI31OS0 W 156 N4969 PLGRM MENOMONEE FAL 53052 Switched 28448 5E 5220 South 1/01/96
WBNDWI01DS 344 S 6TH AV WEST BEND 53095 Switched 27216 5E 5220 South 1/01/96
NENHWI1IDS 117 S COMMERCIAL NEENAH 54956 Switched 24378 DMH 5220 North 1/01/96
STPTWI01DS0 1045 CLARK ST STEVENS POINT 54451 Switched 21269 D12 5220 North 1/01/96
MILWWI56DS0 7737 S HOWELL AVE SOUTH MILWAUKEE 53154 Switched 20206 DE5 5220 South 1/01/96
DEPRWI11DS 119 S MICHIGAN DE PERE 54115 Switched 18576 DMH 5220 North 1/01/96
MNMNWI11DS 720 3RD ST MENOMONIE 54751 Switched 14929 DMH 5220 North 1/01/96
WHWRWII1D 305 W CTR WHITEWATER 53190 Switched 13670 5EH 5220 South 1/01/96
PLPRWI11RS0 7830 104TH PLEASANT PRAIRIE 53158 Switched 13345 5ER 5220 South 1/01/96
MRNTWI01DS 1727 STEPHENSEN S MARINETTE 54143 Switched 12266 5E 5220 North 1/01/96
KAUKWI11RS0 135 W WISCONSIN AV KAUKAUNA 54130 Switched 11910 5ER 5220 North 1/01/96
OCNMWI11DS 45 S MAIN ST OCONOMOWOC 53066 Switched 11776 DMH 5220 South 1/01/96
FTATWI11RS0 201 MILWAUKEE ST FORT ATKINSON 53538 Switched 11201 5ER 5220 South 1/01/96
SGTNWI11DS 321 S FORREST ST STOUGHTON 53589 Switched 10319 DMH 5220 South 1/01/96
PTWAWI11RS 301 W GRAND AV PORT WASHINGT 53074 Switched 9950 5ER 5220 South 1/01/96
LCHTWI11RS0 GRAND AND CANAL LITTLE CHUTE 54140 Switched 9843 5ER 5220 North 1/01/96
STBYWI11RS0 55 S 3RD ST STURGEON BAY 54235 Switched 9442 5ER 5220 North 1/01/96
WAPNWI11RS 221E JEFFERSON ST WAUPUN 53963 Switched 9190 5ER 5220 North 1/01/96
BURLWI11RS0 125 E WASH BURLINGTON 53105 Switched 9184 5ER 5220 South 1/01/96
HRFRWI11RS 103 E SUMMER ST HARTFORD 53027 Switched 8956 5ER 5220 South 1/01/96
</TABLE>
<PAGE>
EXHIBIT 11.1
MCLEOD, INC.
COMPUTATION OF LOSS PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996
---------------- --------------- ---------------
<S> <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...................... 11,993,760 14,455,981 15,387,981
Common shares, Class B,
outstanding at the beginning
of the period...................... 5,625,000 7,670,457 15,625,929
Weighted average number of
shares issued during the
period(C).......................... 3,859,959 -- 8,473,219
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 --
Common equivalent shares
attributable to stock options
granted(B)......................... 5,018,605 5,018,605 2,509,303
Common stock issued(C)............... 9,887,510 9,887,510 23,438
---------------- --------------- ---------------
Weighted average number of
common and common equivalent
shares............................. 36,369,916 37,054,744 43,018,970
================ =============== ===============
Net loss............................. $(11,425,963) $(11,328,939) $(22,346,479)
================ =============== ===============
Loss per common and common
equivalent share................... $ (0.31) $ (0.31) $ (0.52)
================ =============== ===============
</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 filed in connection with the Company's initial public
offering have been included in the calculation of common stock equivalent shares
as if they were outstanding for all periods through June 30, 1996, the quarter
in which the initial public offering was declared effective.
(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 year ended December 31, 1996, the shares of Class A and B
common stock issued during the year ended December 31, 1995 are shown as shares
outstanding at the beginning of the period.
<PAGE>
[McGLADREY & PULLEN, LLP LETTERHEAD]
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
We were previously the independent accountants for McLeod, Inc., and on January
31, 1997 we reported on the consolidated financial statements of McLeod, Inc.
and subsidiaries as of and for the three years ended December 31, 1996. On
March 27, 1997, we were dismissed as independent accountants of McLeod, Inc. We
have read McLeod, Inc.'s statements included under Item 9 of its Form 10-K filed
March 31, 1997, and we agree with such statements.
McGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
March 31, 1997
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF MCLEOD, INC.
<TABLE>
<CAPTION>
State of
Name Incorporation
- ---- -------------
<S> <C>
McLeodUSA Telecommunications Services, Inc. Iowa
McLeodUSA Media Group, Inc. Iowa
McLeodUSA Publishing Company Iowa
McLeodUSA Diversified, Inc. Iowa
McLeodUSA Network Services, Inc. Iowa
McLeodUSA Maintenance Services, Inc. Iowa
Ruffalo, Cody & Associates, Inc. Iowa
Digital Communications of Iowa, Inc. Iowa
</TABLE>
<PAGE>
[McGLADREY & PULLEN, LLP LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
McLeod, Inc.
Cedar Rapids, Iowa
We hereby consent to the incorporation of our report, dated January 31, 1997,
except for the first paragraph of Note 13, as to which the date is March 4,
1997, in this Form 10-K and in the previously filed Registration Statements of
McLeod, Inc. on Form S-8 (No. 333-07809).
McGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
March 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF MCLEOD, INC. AND SUBSIDIARIES FOR THE THREE
YEARS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 96,480,000
<SECURITIES> 127,992,000
<RECEIVABLES> 31,459,000
<ALLOWANCES> 3,899,000
<INVENTORY> 1,600,000
<CURRENT-ASSETS> 224,401,000
<PP&E> 98,173,000
<DEPRECIATION> 6,050,000
<TOTAL-ASSETS> 452,994,000
<CURRENT-LIABILITIES> 38,433,000
<BONDS> 2,573,000
0
0
<COMMON> 518,000
<OTHER-SE> 402,911,000
<TOTAL-LIABILITY-AND-EQUITY> 452,994,000
<SALES> 81,323,000
<TOTAL-REVENUES> 81,323,000
<CGS> 52,624,000
<TOTAL-COSTS> 52,624,000
<OTHER-EXPENSES> 55,997,000
<LOSS-PROVISION> 912,000
<INTEREST-EXPENSE> 665,000
<INCOME-PRETAX> (22,346,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,346,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,346,000)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
